"15-Year Fixed Mortgage is Usually Preferable to 30"

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Murray Boyd
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"15-Year Fixed Mortgage is Usually Preferable to 30"

Post by Murray Boyd » Fri Aug 23, 2013 9:16 pm

Just throwing this one out there:

http://richardhserlin.blogspot.com/2013 ... le-to.html
My opinion on this is that usually 30 years is too long, at least for most college graduates with a decent income. And if it's a Wal-Mart worker couple, they should be very careful about buying any home they can just barely afford with a 30 year mortgage. The focus should really be about trying to upgrade their skills and education, and especially the education of their children, so as not to be a Wal-Mart couple.

Usually the 15-year fixed is best (and even then it's often best to make additional payments to end it even sooner). The interest rate is lower; the payments aren't that much higher (due to the surprising exponential nature of compound interest over long periods of time – Try comparing the monthly payments and see.), and it so valuable with the country so financially unsecure for families to get to no mortgage as quickly as possible.

In addition, as usual, positional/context/prestige externalities are profound and huge. When a family thinks 15 year mortgage, they are likely to buy a smaller home, not get so much wood, granite, and stainless steel, buy less large and expensive vehicles, etc. But because they get used to that level -- and don't start getting used to a higher level of position, prestige, etc., the decreased utility is not that much, and the increased security of having no mortgage right when the kids are setting off for college can be huge. And in any case, the buying a smaller home, cars, etc., can mean that total payments aren't even higher.

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JamesSFO
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by JamesSFO » Fri Aug 23, 2013 9:26 pm

I think that is a provacative and also well thought out piece, but I also don't think one size can fit all.

Serlin's points are well taken, but someone who can get into a house in a 30 year mortgage at the start of their career and aggressively pays down might end up just as well off.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by grabiner » Fri Aug 23, 2013 9:28 pm

JamesSFO wrote:I think that is a provacative and also well thought out piece, but I also don't think one size can fit all.

Serlin's points are well taken, but someone who can get into a house in a 30 year mortgage at the start of their career and aggressively pays down might end up just as well off.
If you plan to pay off a 30-year mortgage in 15 years, you should get the 15-year mortgage from the start, as you will pay less in interest. (If the bank won't qualify you for a 15-year mortgage because the payments are too high for your income, then you may have to start out with a 30-year and refinance to 10 or 15 years later.)
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by momar » Fri Aug 23, 2013 9:30 pm

His point about consuming less house is irrelevant to whether a 15 or 30 year mortgage is preferable.
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by JamesSFO » Fri Aug 23, 2013 9:40 pm

grabiner wrote: If you plan to pay off a 30-year mortgage in 15 years, you should get the 15-year mortgage from the start, as you will pay less in interest. (If the bank won't qualify you for a 15-year mortgage because the payments are too high for your income, then you may have to start out with a 30-year and refinance to 10 or 15 years later.)
Correct. And I would argue that given my mortgage was less than rent when I started and stayed less than rent for comparable units as time passed the main "loss" was opportunity cost from the original downpayment.

(Disclosure, I paid off my mortgage last friday at age 40, 15 years in, started @ 30 yr mortgage at the start of my career and the payments on a 15 year mortgage would have been too high. As my income rose, but housing costs fell in relative terms, I was able to refinance into a 15 and then a 10 and then a 5, each time lowering rates by at least 100 basis points (1%, starting rate in 1998 was 7.625%, last rate was 1.99% with PENFED) and in each case paying down extra because I planned to stay.)

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by epilnk » Fri Aug 23, 2013 9:53 pm

JamesSFO wrote: Serlin's points are well taken, but someone who can get into a house in a 30 year mortgage at the start of their career and aggressively pays down might end up just as well off.
As may the person who pays it off over 30 years while saving aggressively. If there were a guaranteed best outcome there would be no discussion. But generations of prudent homeowners have used 30 year mortgages successfully.

In a strictly hypothetical situation where everything goes as planned, paying down the mortgage more quickly is simply reduces total interest paid. In the real world where people lose jobs or get hit with huge unanticipated medical bills, a high minimum monthly payment carries a risk of it's own. It is not always wise to limit your options by locking in a high repayment rate.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by MitchC » Fri Aug 23, 2013 11:51 pm

Not sure how this may apply, but just read an article on Morningstar by Samuel Lee re: "Excess Cash" but he mentions 30Yr mortgage in the article:

Exerpt:

" My best idea isn't even related to ETFs. I think you should look into taking out a 30-year fixed-rate mortgage and buying property (at a reasonable price, of course). Warren Buffett says the dumbest investment right now is the long-term government bond. If that's the case, then the smartest investment is shorting it--borrowing lots of money at a fixed-rate for a long time. I first urged subscribers buy a house back in December, assuming the need and ability to do so without overextending one's balance sheet. My advice still stands.

A 30-year fixed-rate mortgage has several appealing qualities. First, after expected inflation and the mortgage-interest tax subsidy, the expected real interest rate on the loan is close to zero and may even be negative. Second, it's a natural inflation hedge and to a lesser extent a hedge against rising real interest rates. Third, it's not callable. There's no need to stump up a ton of cash at a moment's notice (usually the worst time possible) to satisfy a lender's margin calls. In this respect, it's a lot safer than traditional forms of leverage, because you can ride out mark-to-market losses without having to liquidate assets at fire sale prices.

If you already have a mortgage, take your sweet time paying it off. If you have young-adult children with decent credit and stable jobs, and you intend to leave a bequest, help them with a home down payment instead. And whatever you do, please don't extend Uncle Sam too many fixed-rate loans."

http://news.morningstar.com/articlenet/ ... ?id=603087

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by BrandonBogle » Sat Aug 24, 2013 12:08 am

I like the side-effect concept. This works for a good portion of the population that doesn't manage their money well and forces them not to overspend and string along for decades, just barely making it and never saving for emergencies or retirement.

But it's hardly a one size fits all and nothing stops you from accomplishing such a plan with a 30 year mortgage.

I'm personally in this boat now. 2.75% fixed, 28 years more to go, 25% fed bracket. I could easily pay my mortgage off in less than 30 years (or even tomorrow if I liquidated some taxable holdings), but I feel that I would do better for myself to stick with the payments and put the extra funds into my taxable investments.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by BrandonBogle » Sat Aug 24, 2013 12:14 am

grabiner wrote:
JamesSFO wrote:I think that is a provacative and also well thought out piece, but I also don't think one size can fit all.

Serlin's points are well taken, but someone who can get into a house in a 30 year mortgage at the start of their career and aggressively pays down might end up just as well off.
If you plan to pay off a 30-year mortgage in 15 years, you should get the 15-year mortgage from the start, as you will pay less in interest. (If the bank won't qualify you for a 15-year mortgage because the payments are too high for your income, then you may have to start out with a 30-year and refinance to 10 or 15 years later.)
David, I normally take your posts without question, but I'm confused on this one. A 15 year, 2.75% $100k mortgage with no overpayments is about (per Bankrate.com's calculator) $678.62 / mo and $22,151.89 of interest over the life of the loan. A 30 year, 2.75% $100k mortgage is $408.24 / mo. Add the $270.38 each month to get the same payment as the 15 year and the interest over the life of the loan is $22,151.91. Only a $0.02 different after 15 years.

So a 30 year paid off treated and paid as a 15 year would only result in more interest paid if the interest rate was higher than the 15 year option.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by czeckers » Sat Aug 24, 2013 12:23 am

True but interest rates for 15 and 30 year mortgages are usually not the same
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by BrandonBogle » Sat Aug 24, 2013 12:35 am

czeckers wrote:True but interest rates for 15 and 30 year mortgages are usually not the same
Perhaps usually, but not always. When I got my mortgage, the 15 year and 30 year had the same rate with 1/8 point (for 15-year that took it down 1/8 %, for 30-year, it took it down 1/4 %), but the 15-year had a 1% origination fee and the 30 year had no such fee. Both mortgages had a promo going that waived all other closing costs except for title insurance. Totally was MUCH more worthwhile for me to get the 30 year.

Just food for thought that sometimes, it pays to looking into "limited" points. I used to only look at 0 points before, but in this case the 1/8 point was totally worth it.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by G-Money » Sat Aug 24, 2013 12:37 am

BrandonBogle wrote:So a 30 year paid off treated and paid as a 15 year would only result in more interest paid if the interest rate was higher than the 15 year option.
Which has almost always been the case. Current spread between 15- and 30-year is about 100 bp.

All else equal, if you get an offer for the same rate for different terms, you should choose the longer one, since it would mean you enjoy the benefit of a longer term without paying a te premium.
Don't assume I know what I'm talking about.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by pop77 » Sat Aug 24, 2013 7:08 am

David, I normally take your posts without question, but I'm confused on this one. A 15 year, 2.75% $100k mortgage with no overpayments is about (per Bankrate.com's calculator) $678.62 / mo and $22,151.89 of interest over the life of the loan. A 30 year, 2.75% $100k mortgage is $408.24 / mo. Add the $270.38 each month to get the same payment as the 15 year and the interest over the life of the loan is $22,151.91. Only a $0.02 different after 15 years.

So a 30 year paid off treated and paid as a 15 year would only result in more interest paid if the interest rate was higher than the 15 year option.
I have been watching the mortgage market for the past several years (got a 15 year fixed at 2.75% last year), I have NEVER SEEN 30 year @2.75%. Can you confirm that it ever existed? Is it a plain vanilla 30 year fixed or a 5/1 or a 7/1 ARM with 30 year amortization? Also I would like to know where you got your mortgage so that I can watch them if at all rates fall and I need to refinance (1% probability perhaps).

Having analyzed and lived through buying house and getting mortgage, I would agree with wbern. After getting the house, you start thinking I should buy all this new furniture, paint the whole house, get custom made closets, finish basement etc and the 15 year is keeping me at check. Yes I could potentially take a 30 year and pay down aggressively but given a choice how sure are you that you won't be tempted for 15 years?

Also as others have pointed out 15 years is always cheaper than 30 years.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by momar » Sat Aug 24, 2013 8:02 am

BrandonBogle wrote:
czeckers wrote:True but interest rates for 15 and 30 year mortgages are usually not the same
Perhaps usually, but not always. When I got my mortgage, the 15 year and 30 year had the same rate with 1/8 point (for 15-year that took it down 1/8 %, for 30-year, it took it down 1/4 %), but the 15-year had a 1% origination fee and the 30 year had no such fee. Both mortgages had a promo going that waived all other closing costs except for title insurance. Totally was MUCH more worthwhile for me to get the 30 year.

Just food for thought that sometimes, it pays to looking into "limited" points. I used to only look at 0 points before, but in this case the 1/8 point was totally worth it.
I'm not doubting you, but this is almost unbelievable and should not be used as the basis for any kind of analysis of a normal situation.
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by JamesSFO » Sat Aug 24, 2013 8:04 am

momar wrote: I'm not doubting you, but this is almost unbelievable and should not be used as the basis for any kind of analysis of a normal situation.
I tend to concur @momar, it's not a good way to look at the situations people are likely to encounter every day. That said, in this low interest rate environment, many banks made creative choices to attract mortgages and funds.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by rr2 » Sat Aug 24, 2013 8:06 am

grabiner wrote: (If the bank won't qualify you for a 15-year mortgage because the payments are too high for your income, then you may have to start out with a 30-year and refinance to 10 or 15 years later.)
This works if interest rates are going down. My existing 30 year fixed rate mortgage has a lower interest rate than what I would get if I refinanced today to a 15 year FRM.
Yes, at the time we got the mortgage the 15 year FRM had a rate that was about 0.625% better than the 30 year FRM.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by thx1138 » Sat Aug 24, 2013 8:33 am

The advice completely ignores the significant liquidity advantage of 30 yr amortization. It also ignores ARM products. Broad brushes usually paint over important details and that is exactly what has happened here.

30 yr fixed is a product heavily subsidized by the government. In many cases taking the subsidy is advantageous.

30 yr amortization reduces annual obligations and thus is lower risk than a 15 yr amortization.

For many people because of the tax treatment for mortgage interest and the spread between investment returns and mortgage interest the opportunity cost in paying on 15 year amortization is a disadvantage (a.k.a. the liquidity premium for 30 yr amortization is worth it).

The 15 yr spread has little to do with the amortization, it has to do with interest rate risk. You can get the liquidity advantage of thirty year amortization with the advantage of the interest rate risk spread by going with a ARM product (5/5, 5/1, 7/1, 10/1). In fact many people who are buying 15 and 30 yr fixed rates should actually be buying ARMs. Don't buy more interest rate protection than you need.

The sound advice here, which is confusingly and irrelevantly wrapped in a discussion of mortgage terms, is don't buy too much house. Couching that with 15 yr monthly payments is sort of silly. The real take "home" is that your home is not an investment, it is an expense, whether you rent or own. Control your housing costs. If you do that you most likely can pay down on a 15 year amortization, but for the reasons stated above that may not actually be the best option.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by grabiner » Sat Aug 24, 2013 8:38 am

G-Money wrote:
BrandonBogle wrote:So a 30 year paid off treated and paid as a 15 year would only result in more interest paid if the interest rate was higher than the 15 year option.
Which has almost always been the case. Current spread between 15- and 30-year is about 100 bp.
And there's a good reason for that. If the 15-year and 30-year rates are the same, then the 30-year loan gives the borrower a free option; he can pay on a 15-year amortization schedule if he chooses, or make lower payments if interest rates rise and there is an alternative use of the money.

The same type of optionality applies to callable bonds. A 30-year municipal bond callable at par after 10 years must have a higher interest rate than a 10-year non-callable municipal bond from the same issuer. Otherwise, the borrower will make exactly the same payments if the 30-year bond is called, and retains the option to keep the callable bond for an additional 20 years; at those rates, nobody would buy the 30-year.
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by Investing is boring » Sat Aug 24, 2013 9:00 am

Viewing mortgages in a silo lead to miss-leading conclusions. Are rates low? Yes. Awesome. But there is much evidence that suggests that a doubling in interest rates leads to a ~15% decline in housing prices with a 2-3 year lag. The average home owner stays in their home for 7.5 years. With this context, it is a very BAD idea to buy a home now. If you are planning on staying 30 years, then the depression of home values caused by raising rates wont matter to you - the long term costs of the utility of shelter is far more meaningful.

The conclusion still remains - buy a home if you have the means, need, and desire.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by pop77 » Sat Aug 24, 2013 9:24 am

thx1138 wrote:The advice completely ignores the significant liquidity advantage of 30 yr amortization. It also ignores ARM products. Broad brushes usually paint over important details and that is exactly what has happened here.

30 yr fixed is a product heavily subsidized by the government. In many cases taking the subsidy is advantageous.

30 yr amortization reduces annual obligations and thus is lower risk than a 15 yr amortization.

For many people because of the tax treatment for mortgage interest and the spread between investment returns and mortgage interest the opportunity cost in paying on 15 year amortization is a disadvantage (a.k.a. the liquidity premium for 30 yr amortization is worth it).

The 15 yr spread has little to do with the amortization, it has to do with interest rate risk. You can get the liquidity advantage of thirty year amortization with the advantage of the interest rate risk spread by going with a ARM product (5/5, 5/1, 7/1, 10/1). In fact many people who are buying 15 and 30 yr fixed rates should actually be buying ARMs. Don't buy more interest rate protection than you need.

The sound advice here, which is confusingly and irrelevantly wrapped in a discussion of mortgage terms, is don't buy too much house. Couching that with 15 yr monthly payments is sort of silly. The real take "home" is that your home is not an investment, it is an expense, whether you rent or own. Control your housing costs. If you do that you most likely can pay down on a 15 year amortization, but for the reasons stated above that may not actually be the best option.

Thetis some truth to the argument that you could find alternative opportunities that returns more than mortgage rate. However you should compare it to guaranteed return investments as savings on interest on 15 year is GUARANTEED. Tax subsidies on mortgage interest is often overplayed by real estate industry in my opinion. They do not calculate tax savings taking standard deduction as an alternative. In many high tax states standard deduction is close to property and state taxes so all the mortgage interest is subsidized. However this is not true for everyone else. You can use the following calculator to see what rate of return you should get GUARANTEED if you choose 30 year over 15 year. More importantly you should have the discipline to invest the difference not put back into your home on improvements.

http://www.mtgprofessor.com/calculators ... or15b.html

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by BrandonBogle » Sat Aug 24, 2013 9:38 am

momar wrote:
BrandonBogle wrote:
czeckers wrote:True but interest rates for 15 and 30 year mortgages are usually not the same
Perhaps usually, but not always. When I got my mortgage, the 15 year and 30 year had the same rate with 1/8 point (for 15-year that took it down 1/8 %, for 30-year, it took it down 1/4 %), but the 15-year had a 1% origination fee and the 30 year had no such fee. Both mortgages had a promo going that waived all other closing costs except for title insurance. Totally was MUCH more worthwhile for me to get the 30 year.

Just food for thought that sometimes, it pays to looking into "limited" points. I used to only look at 0 points before, but in this case the 1/8 point was totally worth it.
I'm not doubting you, but this is almost unbelievable and should not be used as the basis for any kind of analysis of a normal situation.
I will grant you that it's not normal. But I would say the basis for consideration would be the mortgage (that you can afford and get approved for) with the best terms overall -- that way we aren't eliminating the possibility.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by BrandonBogle » Sat Aug 24, 2013 9:41 am

pop77 wrote:I have been watching the mortgage market for the past several years (got a 15 year fixed at 2.75% last year), I have NEVER SEEN 30 year @2.75%. Can you confirm that it ever existed? Is it a plain vanilla 30 year fixed or a 5/1 or a 7/1 ARM with 30 year amortization? Also I would like to know where you got your mortgage so that I can watch them if at all rates fall and I need to refinance (1% probability perhaps).
Straight 30 year 2.75% plain vanilla loan from State Employees Credit Union of North Carolina rate locked between Christmas 2010 and New Years 2011. The seller of the house counter-offered and I accepted the modified purchase contract on Christmas Day.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by steve r » Sat Aug 24, 2013 12:19 pm

BrandonBogle wrote: Straight 30 year 2.75% plain vanilla loan from State Employees Credit Union of North Carolina rate locked between Christmas 2010 and New Years 2011. The seller of the house counter-offered and I accepted the modified purchase contract on Christmas Day.
Wow ... was the credit union the home seller? That rate is amazing. Lower than the ten year yield at the time. Good for you.

http://www.marketwatch.com/investing/bo ... ear/charts

In any event ..... some competitive internet rates today .. about 80+ basis points difference between 15 year and 30 on APR. It was a smaller difference when I refied in December (and another time) ... based on memory I would say about 50 basis points.

On the discussion ... that 50 basis points applies to the ENTIRE LOAN BALANCE. So, if you have stable income ... and can swing it ... the 15 year loan will save you over the 30 year .... by a wide margin .... if for example you invest the lower payment amount you would need one heck of a return on your investments to make up the difference.

http://www.aimloan.com/
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by pheleven » Sat Aug 24, 2013 1:12 pm

momar wrote:
BrandonBogle wrote:
czeckers wrote:True but interest rates for 15 and 30 year mortgages are usually not the same
Perhaps usually, but not always. When I got my mortgage, the 15 year and 30 year had the same rate with 1/8 point (for 15-year that took it down 1/8 %, for 30-year, it took it down 1/4 %), but the 15-year had a 1% origination fee and the 30 year had no such fee. Both mortgages had a promo going that waived all other closing costs except for title insurance. Totally was MUCH more worthwhile for me to get the 30 year.

Just food for thought that sometimes, it pays to looking into "limited" points. I used to only look at 0 points before, but in this case the 1/8 point was totally worth it.
I'm not doubting you, but this is almost unbelievable and should not be used as the basis for any kind of analysis of a normal situation.
My mortgage was similar. It was going to cost me about 1.25% (more) to go 15yr than 30yr. It had to do with the "excessively small" loan @ $90k (in CA).

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by epilnk » Sat Aug 24, 2013 1:40 pm

G-Money wrote:
BrandonBogle wrote:So a 30 year paid off treated and paid as a 15 year would only result in more interest paid if the interest rate was higher than the 15 year option.
Which has almost always been the case. Current spread between 15- and 30-year is about 100 bp.

All else equal, if you get an offer for the same rate for different terms, you should choose the longer one, since it would mean you enjoy the benefit of a longer term without paying a te premium.
The one time I planned to refi to a 15 the spread was only 0.125%. Even though we no longer had a need to manage cash flow, that was just too narrow a spread to tempt me away from the 30.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by marbleous » Sat Aug 24, 2013 2:38 pm

What's a "Wal-Mart Worker Couple"?

A pair of star-crossed lovers who met in the paper towel aisle?

This is a very lame descriptor of apparently a class of millions of Americans.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by BrandonBogle » Sat Aug 24, 2013 3:30 pm

epilnk wrote:
G-Money wrote:
BrandonBogle wrote:So a 30 year paid off treated and paid as a 15 year would only result in more interest paid if the interest rate was higher than the 15 year option.
Which has almost always been the case. Current spread between 15- and 30-year is about 100 bp.

All else equal, if you get an offer for the same rate for different terms, you should choose the longer one, since it would mean you enjoy the benefit of a longer term without paying a te premium.
The one time I planned to refi to a 15 the spread was only 0.125%. Even though we no longer had a need to manage cash flow, that was just too narrow a spread to tempt me away from the 30.
In my specific case, there was a spread at 0 points and I was not about to pay a full point or anything. But the change from a 1/8 pt was different on the two loans, making the 30 year match the 15 year. Even if I was going to do the 15 year, the 1/8 pt was something I probably would have paid.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by BrandonBogle » Sat Aug 24, 2013 3:39 pm

steve r wrote:Wow ... was the credit union the home seller?
Nope, private seller. It was one of those "the stars and moons aligned" situations. I saw it about ten days before Christmas, loved it, but was naive. The property had been vacant and on the market for two years (seller kept dropping the price, but every time was still 10-20k above market), so I lowballed the offer and didn't even get a counteroffer. My realtor said I probably pissed them off. Meanwhile, I flew back home to spend Christmas with the family. A snowstorm hit the area and the market basically stopped. This is not an area that often gets snow, and even then it's inches. This time it was about two feet of snow and shut down the city. Unbeknownst to me at the time, the seller was facing bankruptcy and desperate. So on Christmas mid-day, I hear back from my realtor of a counter offer only $5k above my initial offer. Found out at the closing at the end of Jan that bankruptcy proceedings were going to start in February, so she decided to take my lowball offer to avoid that and the extra $5k was just to "save face". Turns out her deceased husband had taken care of the finances and even though she did not own anything on the house, his medical bills left her nothing much left. A lesson to me in long-term planning for my family!

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by momar » Sat Aug 24, 2013 4:06 pm

BrandonBogle wrote:
steve r wrote:Wow ... was the credit union the home seller?
Nope, private seller. It was one of those "the stars and moons aligned" situations. I saw it about ten days before Christmas, loved it, but was naive. The property had been vacant and on the market for two years (seller kept dropping the price, but every time was still 10-20k above market), so I lowballed the offer and didn't even get a counteroffer. My realtor said I probably pissed them off. Meanwhile, I flew back home to spend Christmas with the family. A snowstorm hit the area and the market basically stopped. This is not an area that often gets snow, and even then it's inches. This time it was about two feet of snow and shut down the city. Unbeknownst to me at the time, the seller was facing bankruptcy and desperate. So on Christmas mid-day, I hear back from my realtor of a counter offer only $5k above my initial offer. Found out at the closing at the end of Jan that bankruptcy proceedings were going to start in February, so she decided to take my lowball offer to avoid that and the extra $5k was just to "save face". Turns out her deceased husband had taken care of the finances and even though she did not own anything on the house, his medical bills left her nothing much left. A lesson to me in long-term planning for my family!
His confusion stems from the fact that mortgages were averaging 4.71% for a 30 year when you got your mortgage.
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by Falco » Sat Aug 24, 2013 4:24 pm

BrandonBogle wrote:
czeckers wrote:True but interest rates for 15 and 30 year mortgages are usually not the same
Perhaps usually, but not always. When I got my mortgage, the 15 year and 30 year had the same rate with 1/8 point (for 15-year that took it down 1/8 %, for 30-year, it took it down 1/4 %), but the 15-year had a 1% origination fee and the 30 year had no such fee. Both mortgages had a promo going that waived all other closing costs except for title insurance. Totally was MUCH more worthwhile for me to get the 30 year.

Just food for thought that sometimes, it pays to looking into "limited" points. I used to only look at 0 points before, but in this case the 1/8 point was totally worth it.
Keep in mind that origination fee of 1% was the same as a discount point. So rates on the 30 and 15 were not the same.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by BrandonBogle » Sat Aug 24, 2013 8:08 pm

momar wrote: His confusion stems from the fact that mortgages were averaging 4.71% for a 30 year when you got your mortgage.
Momar and all, thank you for pushing me to recheck my memory. I must apologize, as I must have had some sort of brain fart. As I now look at my paperwork, my mortgage in Dec 2010 was 3.75% for a 30-year with 1/8 pt (4% no pt). I did a rate modification in Dec 2011 that brought it to 2.75%. My apologies for getting these mixed up.

Side note: Somehow totally forgotting about doing the rate modification on this loan really scares me.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by wander » Sat Aug 24, 2013 8:23 pm

The shorter you pay your mortgage, the more money you put in your pocket than sending to the bank.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by Dandy » Sun Aug 25, 2013 8:26 am

If you can get the house you want and can afford the higher monthly payments then the 15 yr might be best. The 30 yr has a higher interest rate but gives more flexibility. For many first home buyers it is hard to estimate what the real cost of home ownership will be. Younger couples may have a child or two at time of purchase or soon after. With today's prices, even with the drop in values over the last few years, 20% down often leaves a very large mortgage loan.

So, for some taking the 30 year mortgage with the slightly higher rate but lower payments might make sense. If expenses rise more than expected or earnings don't grow as expected they have some wiggle room. They can make additional payments on the mortgage or use the money to pay unanticipated expenses. The "risk" is that they will decide to easily to defer paying down the mortgage. If inflation rears it's ugly head a 30 year will have the benefit of paying off in cheaper dollars.

If you can swing it, a 15 year saves a lot of money though.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by steve r » Sun Aug 25, 2013 12:39 pm

Back to the discussion

Today - a good 15 year rate no points is 3.375
A good rate for 30 year no points is 4.25


This time in 2028 (15 years) the 30 year loan has a balance over $65,000.
On $100,000 loan, payments are $492 and 709 respectively - a difference of $217. If you put this difference in the mattress every months for 180 months you would have $39,000. Over $25,000 less

You would need to earn about 6.5 percent interest on your monthly $217 deposits to get to $65,000 in 15 years.

While this may be possible with risk - there is no way to do this risk free.

Thus, if you can afford the 15 year mortgage - it is probably better. I concur that you need stable income and a good handle on expenses (which I did not have when I had young kids).

A 10 year loan may also be better ... but payments shoot up to $257 to $966 per month. The 15 year mortgage has a balance of $39,000 in ten years. If you saved $257 per month for ten years you would need to earn about 4.5 percent to get to $39,0000 in ten years. The benefit of such a loan over the 15 year mortgage is less obvious than the benefits of a 15 year over a 30 year mortgage.

The interest tax deductions complicates the analysis. Zero mortgage likely means people likely take the standard deduction. Thus, the tax benefit of the deductability of interest payments only applies to what you get beyond standard deduction. At the same time, interest earned is taxed unless you have tax preferred saving options that you otherwise would not be able to take advantage of unless you had lower mortgage payments.
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by grabiner » Sun Aug 25, 2013 12:58 pm

steve r wrote:Back to the discussion

Today - a good 15 year rate no points is 3.375
A good rate for 30 year no points is 4.25

This time in 2028 (15 years) the 30 year loan has a balance over $65,000.
On $100,000 loan, payments are $492 and 709 respectively - a difference of $217. If you put this difference in the mattress every months for 180 months you would have $39,000. Over $25,000 less

You would need to earn about 6.5 percent interest on your monthly $217 deposits to get to $65,000 in 15 years.

While this may be possible with risk - there is no way to do this risk free.
Here's another look at the math. You can pay $492 a month for 30 years, or $709 a month for 15 years. Thus, if you take the 30-year mortgage, you need the $217 for the first 15 years to grow to $492 for the next 15. That is a 5.6% return, long-term but risk-free, by taking out the shorter-term mortgage. (The 6.5% figure above assumes that you pay off the mortgage in 15 years with your savings, not benefiting from the fact that the remaining balance grows at only 4.25% while your hypothetical savings grow at 5.6% in my example.)
The interest tax deductions complicates the analysis. Zero mortgage likely means people likely take the standard deduction. Thus, the tax benefit of the deductability of interest payments only applies to what you get beyond standard deduction. At the same time, interest earned is taxed unless you have tax preferred saving options that you otherwise would not be able to take advantage of unless you had lower mortgage payments
And while the tax deduction makes things more complicated, the last comment is important; if you can contribute the entire payment savings to your 401(k), and deduct the extra mortgage interest, it's likely to be better to take the longer-term mortgage. You get more money growing tax-deferred, and the tax deferral lasts even after the mortgage is gone. If you are already maxing out your IRA and 401(k), or will be taking the standard deduction for most of the mortgage term anyway, the shorter-term mortgage is likely to be better.
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by MnD » Sun Aug 25, 2013 1:19 pm

I consider not getting a 15-year when we bought our current house to be one of my biggest financial mistakes.
We would have qualified easily but we wanted "flexibility" which ended up costing us a lot.
After refinancing to a couple of new 30-year, we finally went to a 15, then to a 5-year and will pay it off in 25 years total.

Ending our house payment 4 years before our oldest starting college would have been the outcome of starting at 15 years and refinancing to loans that did not extend the term beyond the remaining term. That would have been nice. Shoulda, coulda, woulda........

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by steve r » Sun Aug 25, 2013 1:40 pm

grabiner wrote: Here's another look at the math. You can pay $492 a month for 30 years, or $709 a month for 15 years. Thus, if you take the 30-year mortgage, you need the $217 for the first 15 years to grow to $492 for the next 15. That is a 5.6% return, long-term but risk-free, by taking out the shorter-term mortgage. (The 6.5% figure above assumes that you pay off the mortgage in 15 years with your savings, not benefiting from the fact that the remaining balance grows at only 4.25% while your hypothetical savings grow at 5.6% in my example.)
Either way ... such risk-free returns are not likely. Of course your analysis assumes on stays in their home for 30 years and does not refinance at some point.
grabiner wrote: And while the tax deduction makes things more complicated, the last comment is important; if you can contribute the entire payment savings to your 401(k), and deduct the extra mortgage interest, it's likely to be better to take the longer-term mortgage. You get more money growing tax-deferred, and the tax deferral lasts even after the mortgage is gone. If you are already maxing out your IRA and 401(k), or will be taking the standard deduction for most of the mortgage term anyway, the shorter-term mortgage is likely to be better.
Agreed ... if you cannot max out your tax preferred savings with a 15 year mortgage you probably cannot afford the higher payment of the 15 year mortgage. I do not agree necessarily with the he math / analysis. It depends on the 15 year 30 year spread ... what returns you earn going forward ... years in tax deferered space before withdrawal ... the rate your taxable investments are taxed ... what your tax rate of 401k is at withdrawal ... how your asset allocation changes if you have a mortgage versus what it would be with either no mortgage or a smaller mortgage (I decreased my bond holdings when I got a 15 year). My guess is you would be hard press to come out ahead with a 30 year unless the risk free rate goes back to historic norms .... that is to say with the risk free rates being soooooooo low .... that said going back to historic norms does not strike me as unlikely/implausable. IDK.

To me ... the most compelling rationale for a 30 year mortgage for people who can afford a 15 year mortgage is that in 15 years rates (on savings or for borrowing) may be significantly higher ... thus locking in a low borrowing rate for 3 decades makes sense. In the end, I went a different direction ... but I thought a lot about that possibility.
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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by epilnk » Sun Aug 25, 2013 5:48 pm

MnD wrote:I consider not getting a 15-year when we bought our current house to be one of my biggest financial mistakes.
We would have qualified easily but we wanted "flexibility" which ended up costing us a lot.
After refinancing to a couple of new 30-year, we finally went to a 15, then to a 5-year and will pay it off in 25 years total.

Ending our house payment 4 years before our oldest starting college would have been the outcome of starting at 15 years and refinancing to loans that did not extend the term beyond the remaining term. That would have been nice. Shoulda, coulda, woulda........
Why didn't you pay it off in 15 years?

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by MnD » Mon Aug 26, 2013 12:14 am

epilnk wrote:
MnD wrote:I consider not getting a 15-year when we bought our current house to be one of my biggest financial mistakes.
We would have qualified easily but we wanted "flexibility" which ended up costing us a lot.
After refinancing to a couple of new 30-year, we finally went to a 15, then to a 5-year and will pay it off in 25 years total.

Ending our house payment 4 years before our oldest starting college would have been the outcome of starting at 15 years and refinancing to loans that did not extend the term beyond the remaining term. That would have been nice. Shoulda, coulda, woulda........
Why didn't you pay it off in 15 years?
Weakness - lack of discipline......

It's not a perfect analogy but suppose you decided contributing 20% to your 401-K would be optimal.
But suppose you set it to 10% automatic, you have the option to manually pay in extra, and you intend on putting in 20%.

What are the odds that you'll end up putting in the full 20% - month after month and year after year?
Maybe some people will do that, but I'd suspect in a real world experiment, what gets put in under the "flexibility" option is a bit more than 10%, but not that much more.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by rixer » Mon Aug 26, 2013 11:55 am

I wanted to pay off the mortgage early but was self employed and never knew how much income I was going to have. I kept my 30 year mortgage because I could send in extra dollars to be taken off the principle without interest being taken from it. Then if the economy got tight and my income dropped, I would have the option of sending a lower payment than if I had taken a 15 year mortgage.

As it turned out, I sent in extra every month till I finally paid it off. I don't know which way is best but this felt less stressful to me.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by TareNeko » Mon Aug 26, 2013 12:00 pm

thx1138 wrote:The sound advice here, which is confusingly and irrelevantly wrapped in a discussion of mortgage terms, is don't buy too much house. Couching that with 15 yr monthly payments is sort of silly. The real take "home" is that your home is not an investment, it is an expense, whether you rent or own. Control your housing costs. If you do that you most likely can pay down on a 15 year amortization, but for the reasons stated above that may not actually be the best option.
+1

It is so easy to buy too much house, and then upgrade it too much...

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by epilnk » Mon Aug 26, 2013 1:47 pm

MnD wrote:
epilnk wrote:
MnD wrote:I consider not getting a 15-year when we bought our current house to be one of my biggest financial mistakes.
We would have qualified easily but we wanted "flexibility" which ended up costing us a lot.
After refinancing to a couple of new 30-year, we finally went to a 15, then to a 5-year and will pay it off in 25 years total.

Ending our house payment 4 years before our oldest starting college would have been the outcome of starting at 15 years and refinancing to loans that did not extend the term beyond the remaining term. That would have been nice. Shoulda, coulda, woulda........
Why didn't you pay it off in 15 years?
Weakness - lack of discipline......

It's not a perfect analogy but suppose you decided contributing 20% to your 401-K would be optimal.
But suppose you set it to 10% automatic, you have the option to manually pay in extra, and you intend on putting in 20%.

What are the odds that you'll end up putting in the full 20% - month after month and year after year?
Maybe some people will do that, but I'd suspect in a real world experiment, what gets put in under the "flexibility" option is a bit more than 10%, but not that much more.
I don't think the 401K is a valid analogy. It would be a lot more difficult to do that every month, simply because the 401k is designed to be set it and forget it - you don't normally log into your 401K account every month and make a mandatory transaction. I probably wouldn't do this, even though I obviously did have the discipline to pay my 30 year mortgage off in less than 15 years. On the other hand I'd be free to contribute 20% to the 401k automatically with no risk, because I could halt that immediately if cash flow got tight. There's no reason to avoid committing to 20% if your cash flow can handle it, because it's not locked in. The 15 year mortgage is risker because once you set a minimum you can't change that without the bank's permission. No thanks - I'll make my own decisions.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by sls239 » Mon Aug 26, 2013 3:47 pm

30 year with a 20% down payment I see no problem with.
15 year with small down payment (5%) I see no problem with - it may even be preferable, so as to get the lower interest rate when the balance is the highest

30 year with small down payment... problem. The problem being that set-up makes it much more likely that they will be upside down when they want or need to sell - which is likely to be just a few years from when they bought the house.

Our economy has changed since the 50's, a person cannot expect to start a job with a company and stay there until retirement. Now, in many cases, staying with the same job or the same company for 10 years is seen as a negative, not a positive.

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by dr_g » Wed Aug 28, 2013 12:16 am

15 year mortgages carry a lower interest rate than 30 year mortgages. The rest is fluff, since you pay yourself the principle and closing costs, taxes and insurance are fixed.

Bottom line: if you won't stay in the house for more than 15 years and your debt to income ratio qualifies you, grab the 15 year lower rate.

Done!

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by Murray Boyd » Thu Aug 29, 2013 10:19 pm

The author updated the post. I can't remember the old post well enough to tell the difference though!

http://richardhserlin.blogspot.com/2013 ... le-to.html

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Re: "15-Year Fixed Mortgage is Usually Preferable to 30"

Post by thx1138 » Thu Aug 29, 2013 10:38 pm

I have trouble remembering the original post as well, but this version seems more focused on the potential behavioral advantages of the 15 year (forces you to buy less house) which are sensible. The middle section about paying off early being good because of risk is a little wobbly. For a rational person risk would mean a greater preference for liquidity and hence a 30 year. But if we accept the behavioral considerations of over purchasing and under saving with a 30 year then I'll grant his point hangs together.

I think he also is on to something with the government and industry push for 30 year to get more people to buy or buy too big being the wrong behavior incentive.

Anyway, on reading this version I like it more than on my first reading. Honestly I can't know how much is what he changed or what is a more nuanced reading on my part with a second look.

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