30 Year vs 15 Year Mortgage

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NathanDH
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30 Year vs 15 Year Mortgage

Post by NathanDH » Tue Jul 10, 2018 10:40 am

Good morning,

We are relocating very soon.
I am looking into getting pre-approved for a mortgage in the near future. My wife and I are trying to make the decision between a 30 and 15 year mortgage. I guess I am just not sure what all factors I should be considering and I am looking for advice.

Me:
Sign on bonus of $20k first year. $5k relocation bonus.
Base Salary (W2) of $160k, with matching and benefits. Bring in an additional $10k as a military reservist.
I can pick up extra work at about $100-140/hr, regularly, with a constant need in the area.

Wife:

Not currently working. However, she will make at least $80k base salary. The plan is for her to start shortly after relocating. However, we are not considering her income for this purpose.

The homes we are looking at are in the $400k range. The one we are very seriously considering is actually listed at $399k. Typically what we have seen is that the homes are selling for less than asking price.

I guess I am trying to see what makes the most sense for us financially.

Thanks for all your help in advance.

il0kin
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Re: 30 Year vs 15 Year Mortgage

Post by il0kin » Tue Jul 10, 2018 10:43 am

I would almost always advise to get a 30 year mortgage and pay it off at an advanced speed, assuming you are maxing your retirement accounts and have a healthy emergency fund. A lower monthly mortgage may come in handy at some point in the future should you be laid off or run into other financial issues such as getting sick or having to take long term disability that eats away at your savings. You can always pay more on a 30, the only way to make it lower on a 15 is to refinance.

Rupert
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Re: 30 Year vs 15 Year Mortgage

Post by Rupert » Tue Jul 10, 2018 10:44 am

You can always pay a 30-year mortgage off early and even on a 15-year schedule if you wish. So there's really no downside to choosing the 30-year, especially if you are reaching a bit to afford the house. The 30-year gives you some breathing room. If you're not certain you'll be in this job/community long-term, that argues even more for the 30-year.

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mhc
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Re: 30 Year vs 15 Year Mortgage

Post by mhc » Tue Jul 10, 2018 10:46 am

What is the interest rate difference between the two loans? How long do you plan on carrying the loan?

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Tue Jul 10, 2018 10:48 am

OP,

1) What is your portfolio size in relationship to the house price?

2) How old are you?

3) When will you retire?

4) Any kids? Do you plan to pay for their college education?

5) In general, I would say 30 years mortgage with 20% down payment.

A) Do not tie up too much of your money into the house.

B) Do not end up taking a more expensive student loan for your kids after paying off the mortgage.

C) Mortgage interest rate is low now. And, it is going higher. Ditto on inflation. So, 30 years fixed rate mortgage is a good deal in term of interest rate and inflation rate hedge.

D) If you have too much money, you could always pay it off in one lump sum later.

KlangFool

NathanDH
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Joined: Thu Aug 03, 2017 5:49 pm

Re: 30 Year vs 15 Year Mortgage

Post by NathanDH » Tue Jul 10, 2018 10:49 am

Sorry, I should have made it clear that we are already maxing out retirement.

6 Month emergency fund.

Enough for 20% down payment and closing costs.

Also, very stable job. Employer pays for long-term disability.

I guess I am just wondering if it is worth the small savings in interest. Or am I missing any considerations. Am I still able to deduct mortgage interest? What has changed with the new tax bill?

Rupert
Posts: 3626
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Re: 30 Year vs 15 Year Mortgage

Post by Rupert » Tue Jul 10, 2018 10:50 am

NathanDH wrote:
Tue Jul 10, 2018 10:49 am
Am I still able to deduct mortgage interest? What has changed with the new tax bill?
The new standard deduction for a married couple filing jointly is $24,000. So most people won't be itemizing and deducting mortgage interest any longer.

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Tue Jul 10, 2018 10:52 am

NathanDH wrote:
Tue Jul 10, 2018 10:49 am
Sorry, I should have made it clear that we are already maxing out retirement.

6 Month emergency fund.

Enough for 20% down payment and closing costs.

Also, very stable job. Employer pays for long-term disability.

I guess I am just wondering if it is worth the small savings in interest. Or am I missing any considerations. Am I still able to deduct mortgage interest? What has changed with the new tax bill?
NathanDH,

<<Sorry, I should have made it clear that we are already maxing out retirement.>>

At your income and expense level, maxing out retirement account does not necessarily mean that your retirement is fully funded. The exception could be you have a fully vested pension.

KlangFool

NathanDH
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Re: 30 Year vs 15 Year Mortgage

Post by NathanDH » Tue Jul 10, 2018 10:53 am

KlangFool wrote:
Tue Jul 10, 2018 10:48 am
OP,

1) What is your portfolio size in relationship to the house price?

Portfolio currently $250k

2) How old are you?

30


3) When will you retire?

Goal is to have the funds to retire in 15 years. However, I will continue to work. I love what I do and will likely work part-time to cover living expenses while nest egg grows.

4) Any kids? Do you plan to pay for their college education?

2 kids. College is fully-funded for both already.

5) In general, I would say 30 years mortgage with 20% down payment.

A) Do not tie up too much of your money into the house.

B) Do not end up taking a more expensive student loan for your kids after paying off the mortgage.

C) Mortgage interest rate is low now. And, it is going higher. Ditto on inflation. So, 30 years fixed rate mortgage is a good deal in term of interest rate and inflation rate hedge.

D) If you have too much money, you could always pay it off in one lump sum later.

KlangFool

a5ehren
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Re: 30 Year vs 15 Year Mortgage

Post by a5ehren » Tue Jul 10, 2018 10:54 am

Takes a lot of discipline to stay on a 15-year schedule on a 30-year note if you don't have to.

I personally couldn't make myself do it, so I re-fied to a 15-year to save the interest. It sucks now, but I'll feel way better about it in 2030, when I would have otherwise had another 12 years to go.
Last edited by a5ehren on Tue Jul 10, 2018 10:55 am, edited 1 time in total.

NathanDH
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Re: 30 Year vs 15 Year Mortgage

Post by NathanDH » Tue Jul 10, 2018 10:54 am

KlangFool wrote:
Tue Jul 10, 2018 10:52 am
NathanDH wrote:
Tue Jul 10, 2018 10:49 am
Sorry, I should have made it clear that we are already maxing out retirement.

6 Month emergency fund.

Enough for 20% down payment and closing costs.

Also, very stable job. Employer pays for long-term disability.

I guess I am just wondering if it is worth the small savings in interest. Or am I missing any considerations. Am I still able to deduct mortgage interest? What has changed with the new tax bill?
NathanDH,

<<Sorry, I should have made it clear that we are already maxing out retirement.>>

At your income and expense level, maxing out retirement account does not necessarily mean that your retirement is fully funded. The exception could be you have a fully vested pension.

KlangFool
I meant that I am maxing pre-tax retirement savings. Overall, our savings rate is approximately 50%.

bhsince87
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Re: 30 Year vs 15 Year Mortgage

Post by bhsince87 » Tue Jul 10, 2018 11:00 am

I am a fan of the 30 year fixed rate approach. It's one of the best hedges against inflation available to most people.

If inflation and interest rates rise, you're golden. If they drop, you can refinance. If you want to pay it off early, you can. Plus it gives you more liquidity.
Retirement: When you reach a point where you have enough. Or when you've had enough.

daheld
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Re: 30 Year vs 15 Year Mortgage

Post by daheld » Tue Jul 10, 2018 11:01 am

30 year. You can always turn a 30 year loan into a 15 year. It is impossible to know what may happen over the next couple decades in regards to your jobs, your health, your kids' health (if you have them), family dynamics, etc. There are so many unknowns that could result in you needing a few hundred extra bucks per month for an extended period of time. The flexibility of being able to cut back a mortgage payment to the minimum is a huge deal to me personally. We're kind of in a similar situation and are planning on paying our 30 year note off in 20 years. The amount we would've saved in interest rate between 30 year and 15 is so minimal, it did not justify the risk of taking on the extra amount in payments each month.

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Tue Jul 10, 2018 11:03 am

NathanDH wrote:
Tue Jul 10, 2018 10:54 am
KlangFool wrote:
Tue Jul 10, 2018 10:52 am
NathanDH wrote:
Tue Jul 10, 2018 10:49 am
Sorry, I should have made it clear that we are already maxing out retirement.

6 Month emergency fund.

Enough for 20% down payment and closing costs.

Also, very stable job. Employer pays for long-term disability.

I guess I am just wondering if it is worth the small savings in interest. Or am I missing any considerations. Am I still able to deduct mortgage interest? What has changed with the new tax bill?
NathanDH,

<<Sorry, I should have made it clear that we are already maxing out retirement.>>

At your income and expense level, maxing out retirement account does not necessarily mean that your retirement is fully funded. The exception could be you have a fully vested pension.

KlangFool
I meant that I am maxing pre-tax retirement savings. Overall, our savings rate is approximately 50%.
NathanDH,

50% of what? A better measurement would be X% of your current annual expense.

KlangFool

soccerrules
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Re: 30 Year vs 15 Year Mortgage

Post by soccerrules » Tue Jul 10, 2018 11:05 am

Saving rate of 50% is solid
Good EF
Stable Job

what is the monthly housing cost "all-in" for the mortgage, insurance, taxes and utilities compared to your current housing cost ?
If you taking a big step forward going from renting a small apt to 4bd/2bath house in a state with high property taxes, increase in associates costs around insurances, utilities, maintenance and HOA-- be mindful. I would model it out.

It is easy to have your monthly expenses creep higher with a move like this.

I have had 15 year mortgages and also itemized tax returns each year. If I was younger and getting a mortgage now, I would lean toward 30 years but consider paying off in the 15-20 range assuming I was saving at the appropriate levels.
Don't let your outflow exceed your income or your upkeep will be your downfall.

SagaciousTraveler
Posts: 123
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Re: 30 Year vs 15 Year Mortgage

Post by SagaciousTraveler » Tue Jul 10, 2018 11:09 am

I will always advise on the 10 or 15 year mortgage. Also not a fan of the advice to take on a 30 year and pay it off on a 15 year schedule. People tend to think you pay the same amount of interest as taking out a 15 year mortgage, which isn't true.

02nz
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Re: 30 Year vs 15 Year Mortgage

Post by 02nz » Tue Jul 10, 2018 11:10 am

The house doesn't appear to be a stretch financially, and payments on a 15-year mortgage should be easily doable for OP. I'd do the 15-year mortgage to get the lower rate and chip away at the principal more quickly.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Tue Jul 10, 2018 11:13 am

NathanDH wrote:
Tue Jul 10, 2018 10:53 am
KlangFool wrote:
Tue Jul 10, 2018 10:48 am
OP,

1) What is your portfolio size in relationship to the house price?

Portfolio currently $250k

2) How old are you?

30


3) When will you retire?

Goal is to have the funds to retire in 15 years. However, I will continue to work. I love what I do and will likely work part-time to cover living expenses while nest egg grows.

4) Any kids? Do you plan to pay for their college education?

2 kids. College is fully-funded for both already.

5) In general, I would say 30 years mortgage with 20% down payment.

A) Do not tie up too much of your money into the house.

B) Do not end up taking a more expensive student loan for your kids after paying off the mortgage.

C) Mortgage interest rate is low now. And, it is going higher. Ditto on inflation. So, 30 years fixed rate mortgage is a good deal in term of interest rate and inflation rate hedge.

D) If you have too much money, you could always pay it off in one lump sum later.

KlangFool
NathanDH,

1) In general, at 30 years old, folks believe that they will work forever and they would like to work part-time when they retire in the 40+. But, they may change their mind when they are 40+. Life happened.

So, it is better to give yourself options when you are at 40+.

2) Can you keep your current saving rate after you bought the house?

3) Go with 30 years fixed rate mortgage. It gives you additional flexibility. Your portfolio is only 250K now. You will tie up too much your money in the house with the 15 years mortgage.

4) Pay off the mortgage in one lump sum when your portfolio is much larger.

KlangFool

DVMResident
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Re: 30 Year vs 15 Year Mortgage

Post by DVMResident » Tue Jul 10, 2018 11:17 am

I'll echo what everyone else has said: the interest paid is primarily driven by the amortization schedule, i.e. how long you take to pay back the loan. The interest has a surprisingly small impact. Putting some numbers to it...

Right now, the spread between a 15 year vs a 30 year is ~0.25%. On a $319,200 loan (assuming 20% down on a $399k house):
-4.5% 30 year note paid in 30 years, the total interest paid is $263,042 with a minimum payment of $1,617.34 (just PI, not TI)
-4.5% 30 year note paid in 15 years, the total interest paid is $120,334 with a minimum payment of $1,617.34 (just PI, not TI)
-4.25% 15 year note paid in 15 years, the total interest paid is $113,029 with a minimum payment of $2,401 (just PI, not TI)

Those are before inflation numbers (nominal) and ignores taxes. It's about $40/month (nominal) to get a 30 year note and pay in 15 year vs getting a straight 15 year note. Is $40/month worth keeping the flexibility?

DVMResident
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Re: 30 Year vs 15 Year Mortgage

Post by DVMResident » Tue Jul 10, 2018 11:18 am

SagaciousTraveler wrote:
Tue Jul 10, 2018 11:09 am
I will always advise on the 10 or 15 year mortgage. Also not a fan of the advice to take on a 30 year and pay it off on a 15 year schedule. People tend to think you pay the same amount of interest as taking out a 15 year mortgage, which isn't true.
I disagree in spirit, but it's technically correct you pay more. My opinion is it's slight and not enough to worry about, but that's a matter of opinion. See my post above for numbers.

SagaciousTraveler
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Re: 30 Year vs 15 Year Mortgage

Post by SagaciousTraveler » Tue Jul 10, 2018 11:23 am

DVMResident wrote:
Tue Jul 10, 2018 11:17 am
I'll echo what everyone else has said: the interest paid is primarily driven by the amortization schedule, i.e. how long you take to pay back the loan. The interest has a surprisingly small impact. Putting some numbers to it...

Right now, the spread between a 15 year vs a 30 year is ~0.25%. On a $319,200 loan (assuming 20% down on a $399k house):
-4.5% 30 year note paid in 30 years, the total interest paid is $263,042 with a minimum payment of $1,617.34 (just PI, not TI)
-4.5% 30 year note paid in 15 years, the total interest paid is $120,334 with a minimum payment of $1,617.34 (just PI, not TI)
-4.25% 15 year note paid in 15 years, the total interest paid is $113,029 with a minimum payment of $2,401 (just PI, not TI)

Those are before inflation numbers (nominal) and ignores taxes. It's about $40/month (nominal) to get a 30 year note and pay in 15 year vs getting a straight 15 year note. Is $40/month worth keeping the flexibility?
Thanks for the totals.

I'd love to find out how many people who take out a 30 but plan to pay it off in 15, actually do so.

$40 dollars a month invested over the 15 years with a return of 5% can bring your total to over $10,000. not huge money but still.

JoeRetire
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Re: 30 Year vs 15 Year Mortgage

Post by JoeRetire » Tue Jul 10, 2018 11:27 am

NathanDH wrote:
Tue Jul 10, 2018 10:40 am
I am looking into getting pre-approved for a mortgage in the near future. My wife and I are trying to make the decision between a 30 and 15 year mortgage.

I guess I am trying to see what makes the most sense for us financially.
Get a 30 year mortgage as soon as you can.

With rising rates, you'll be very happy in a few years down the road at how little you are paying.

SagaciousTraveler
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Re: 30 Year vs 15 Year Mortgage

Post by SagaciousTraveler » Tue Jul 10, 2018 11:27 am

bhsince87 wrote:
Tue Jul 10, 2018 11:00 am
I am a fan of the 30 year fixed rate approach. It's one of the best hedges against inflation available to most people.

If inflation and interest rates rise, you're golden. If they drop, you can refinance. If you want to pay it off early, you can. Plus it gives you more liquidity.
I can understand your approach but you are potentially paying a ton of extra money here. The total interest between and 15 and 30 and then the amount spent on the refinance. Also, some people will be susceptible to refinancing a higher dollar amount just because they can or because they want that new kitchen, thus increasing the cost of all of this.

Id rather keep it simple. Get the lower interest rate and get a smaller time frame for obligation.

Full disclosure, I do not like debt. So my opinions are reflected by this.

foo.c
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Re: 30 Year vs 15 Year Mortgage

Post by foo.c » Tue Jul 10, 2018 11:32 am

If you can afford it and have savings set aside, then 15. I have at least a couple years worth of expenses including mortgage payments saved up otherwise I wouldn't have done it.

My credit union is offering jumbo CD's that pay higher interest than my mortgage, which is kinda neat.

crake
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Re: 30 Year vs 15 Year Mortgage

Post by crake » Tue Jul 10, 2018 11:34 am

DVMResident wrote:
Tue Jul 10, 2018 11:17 am
I'll echo what everyone else has said: the interest paid is primarily driven by the amortization schedule, i.e. how long you take to pay back the loan. The interest has a surprisingly small impact. Putting some numbers to it...

Right now, the spread between a 15 year vs a 30 year is ~0.25%. On a $319,200 loan (assuming 20% down on a $399k house):
-4.5% 30 year note paid in 30 years, the total interest paid is $263,042 with a minimum payment of $1,617.34 (just PI, not TI)
-4.5% 30 year note paid in 15 years, the total interest paid is $120,334 with a minimum payment of $1,617.34 (just PI, not TI)
-4.25% 15 year note paid in 15 years, the total interest paid is $113,029 with a minimum payment of $2,401 (just PI, not TI)

Those are before inflation numbers (nominal) and ignores taxes. It's about $40/month (nominal) to get a 30 year note and pay in 15 year vs getting a straight 15 year note. Is $40/month worth keeping the flexibility?
Your math is correct but according to Zillow right now I am seeing a .75% spread between a 15 and 30 year mortgage. Perhaps it is location based. If I redo your numbers with a .75% spread I get. :

-4.5% 30 year note paid in 30 years, the total interest paid is $263,042 with a minimum payment of $1,617.34 (just PI, not TI)
-4.5% 30 year note paid in 15 years, the total interest paid is $120,334 with a minimum payment of $1,617.34 (just PI, not TI)
-3.75% 15 year note paid in 15 years, the total interest paid is $98,633 with a minimum payment of $2,321 (just PI, not TI)

Given the above you are saving about $120/month for the 15 year term of your mortgage or $21,701 total by going with a 15 year mortgage at a lower rate. Is $120/month worth keeping the flexibility? It wasn't to me so I opted for a 15 year mortgage.

bhsince87
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Re: 30 Year vs 15 Year Mortgage

Post by bhsince87 » Tue Jul 10, 2018 11:38 am

SagaciousTraveler wrote:
Tue Jul 10, 2018 11:27 am
bhsince87 wrote:
Tue Jul 10, 2018 11:00 am
I am a fan of the 30 year fixed rate approach. It's one of the best hedges against inflation available to most people.

If inflation and interest rates rise, you're golden. If they drop, you can refinance. If you want to pay it off early, you can. Plus it gives you more liquidity.
I can understand your approach but you are potentially paying a ton of extra money here. The total interest between and 15 and 30 and then the amount spent on the refinance. Also, some people will be susceptible to refinancing a higher dollar amount just because they can or because they want that new kitchen, thus increasing the cost of all of this.

Id rather keep it simple. Get the lower interest rate and get a smaller time frame for obligation.

Full disclosure, I do not like debt. So my opinions are reflected by this.
If inflation goes above the mortgage rate, , you might actually pay less total on a 30 year.

That being said, see my previous post. i paid off my loan early.

I'm toying with the idea of remortgaging in a few years when i get a small pension. The pension is fixed, and that is one way to get some inflation protection for it.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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vineviz
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Re: 30 Year vs 15 Year Mortgage

Post by vineviz » Tue Jul 10, 2018 12:32 pm

crake wrote:
Tue Jul 10, 2018 11:34 am
Your math is correct but according to Zillow right now I am seeing a .75% spread between a 15 and 30 year mortgage.
The spread at our credit union is 50 bps between 30 year fixed and 15 year fixed, which seems to be on the low side. I know the spread varies a bit by region (it is highest in southern New England and lowest in the South and Midwest), but I haven't found any banks with a spread as quite as wide as Zillow reports. In the vast majority of states I looked at the spread between 30 year fixed and 15 year fixed was between 55 bps to 65 bps.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

NextMil
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Re: 30 Year vs 15 Year Mortgage

Post by NextMil » Tue Jul 10, 2018 1:18 pm

I have a 15 year note. Highly recommend it. The difference in payment really isn't that much different, but you pay it off in at least half of the time. I would run the numbers to see what the payment difference is and if you feel you can reasonably handle the delta in payment. FWIW - the default and serious delinquency rates on mortgages even at their height was less than 5% of mortgages. Obviously everyone has a different situation, but its worth understanding actual risk that even in the worst of times, 95% of people were not in default or seriously delinquent - according to the feds.

That said, regardless of what you decide I would spend my time trying to steal a property if you can. The money is made at the buy as they say.

NathanDH
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Re: 30 Year vs 15 Year Mortgage

Post by NathanDH » Tue Jul 10, 2018 1:19 pm

It sounds like the general consensus is that we should go with a 30 year mortgage. Pay off as a 15 year, the extra interest is simply a penalty for flexibility. What about the idea of paying it over 30 years and putting the difference of what a 15 year payment would be into a taxable investment account, then depending on the situation, paying it as a lump sum with that money later when our net worth is higher? I believe Klangfool mentioned this.

Likely we will be able to purchase this home for less than asking price. Additionally, currently our rent is $1850/mo, and it appears with a 30 year fixed, our PITI will be about $2050/mo. No HOA fees.

Now the next question is, any advice for choosing a lender? Navy Federal is offering 5% down with no PMI, but an origination fee of 1% and likely 1 point purchased. Which seems like high fees.

As far as savings rate goes, what I was essentially trying to say, is that we spend about as much as we save each month. So if I spend $5000 a month, I am saving $5000, approximately. This will be more consistently true when my wife starts working again. We have been out of school for less than 4 years and have paid off cars and students loans. No other debt. Additionally we have saved about $250,000. I think this is pretty good overall, given the timeline.

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Toons
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Re: 30 Year vs 15 Year Mortgage

Post by Toons » Tue Jul 10, 2018 1:50 pm

15 year
Pay it off early.



:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Tue Jul 10, 2018 1:58 pm

NathanDH wrote:
Tue Jul 10, 2018 1:19 pm

It sounds like the general consensus is that we should go with a 30 year mortgage. Pay off as a 15 year, the extra interest is simply a penalty for flexibility. What about the idea of paying it over 30 years and putting the difference of what a 15 year payment would be into a taxable investment account, then depending on the situation, paying it as a lump sum with that money later when our net worth is higher? I believe Klangfool mentioned this.
NathanDH,

That is my plan. My house is around 400K. My mortgage is around 300K. I have around 500K in my taxable account. I am paying for my kids' college education out of my annual savings. When my kids graduated from college in a few years, I could pay off the mortgage whenever I choose to.

My mortgage is 30 years 3.49%. It is easy to beat this number with my 61/39 portfolio. But, if and when the number is not as good, I could pay it off in one lump sum.

KlangFool

niceguy7376
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Re: 30 Year vs 15 Year Mortgage

Post by niceguy7376 » Tue Jul 10, 2018 2:04 pm

30 year old with 160K salary and opportunity at $100/hr+ for extra income for a 400K home? go for 15. You should be able to afford it.
You already covered your 2 kids 529. Based on price of home relative to your salary , this is not HCOL. So you could definitely afford 15 year.

In my case, I couldn't afforded the 15 year risk and thus took 30 year but has been paying a bit more (more like 22 year loan) since we bought it 4 years ago.

IRT
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Re: 30 Year vs 15 Year Mortgage

Post by IRT » Tue Jul 10, 2018 2:14 pm

The NY Times rent v buy calculator can be useful for this type of exercise:
https://www.nytimes.com/interactive/201 ... lator.html

It's pretty comprehensive... Just run it twice for the 15 v 30 mortgage rates. You can also play around with different assumptions with investment returns, etc.

Note: It was built using old tax laws-- not sure that bit has been updated.

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Tue Jul 10, 2018 2:17 pm

OP,

The issue has nothing to do with income. It has to do with asset diversification. You have 250K investment and 400K house. You have more house than your investment. At your saving rate, in a few years, you will have the saving to pay off the mortgage if you want to. It will not take 15 years to get there. But, in the meantime, it is not safe to put most of your money into a single illiquid asset aka the house.

KlangFool

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greg24
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Re: 30 Year vs 15 Year Mortgage

Post by greg24 » Tue Jul 10, 2018 2:22 pm

This post by forum denizen TheFinanceBuff shows how the 30 year is financially advantageous compared to the 15:

https://thefinancebuff.com/borrow-30-ye ... rence.html

bhsince87
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Re: 30 Year vs 15 Year Mortgage

Post by bhsince87 » Tue Jul 10, 2018 2:29 pm

KlangFool wrote:
Tue Jul 10, 2018 1:58 pm
NathanDH wrote:
Tue Jul 10, 2018 1:19 pm

It sounds like the general consensus is that we should go with a 30 year mortgage. Pay off as a 15 year, the extra interest is simply a penalty for flexibility. What about the idea of paying it over 30 years and putting the difference of what a 15 year payment would be into a taxable investment account, then depending on the situation, paying it as a lump sum with that money later when our net worth is higher? I believe Klangfool mentioned this.
NathanDH,

That is my plan. My house is around 400K. My mortgage is around 300K. I have around 500K in my taxable account. I am paying for my kids' college education out of my annual savings. When my kids graduated from college in a few years, I could pay off the mortgage whenever I choose to.

My mortgage is 30 years 3.49%. It is easy to beat this number with my 61/39 portfolio. But, if and when the number is not as good, I could pay it off in one lump sum.

KlangFool
This is what we did too. I was expecting to pay it off in a lump sum in 15-20 years. But we saved so much and had such nice investment returns that we pad it off with a lump sum in 13-14 years. The payoff was about 10% of our after tax account value, and 5% of our networth. At that point we didn't need teh liquidy option any longer.
Retirement: When you reach a point where you have enough. Or when you've had enough.

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vineviz
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Re: 30 Year vs 15 Year Mortgage

Post by vineviz » Tue Jul 10, 2018 2:47 pm

NathanDH wrote:
Tue Jul 10, 2018 1:19 pm
What about the idea of paying it over 30 years and putting the difference of what a 15 year payment would be into a taxable investment account, then depending on the situation, paying it as a lump sum with that money later when our net worth is higher?
That probably depends almost entirely on whether the mortgage interest will be deductible for you (i.e. do you have enough deductions to itemize) and your tax bracket.

My bet, though, is that paying down the mortgage is the better investment. It's a guaranteed (risk-free) return of between 3.5% and 4.6% depending on the factors I mentioned. 30 year treasuries are yielding less than 3%.
NathanDH wrote:
Tue Jul 10, 2018 1:19 pm
Now the next question is, any advice for choosing a lender? Navy Federal is offering 5% down with no PMI, but an origination fee of 1% and likely 1 point purchased. Which seems like high fees.
I've always found credit unions to have extremely competitive fees, and suspect these are reasonable for your situation and area. I don't usually recommend paying discount points to young couples (especially if you expect to accelerate payment on the mortgage), but you know your situation better than I do.

I would not recommend buying a house with only a 5% down payment, however. The old days of 20% down payments are gone, I guess, but with 95% loan-to-value ratio it wouldn't take much depreciation to put your loan under water. Bigger down payments have historically been viewed as protecting the lender more than borrowers, but preserving the ability to refinance or sell without having to find additional cash seems smart to me. A 10% down payment strikes me as much more prudent, as long as it still leaves you with cash for emergencies.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Murgatroyd
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Re: 30 Year vs 15 Year Mortgage

Post by Murgatroyd » Tue Jul 10, 2018 3:20 pm

OP, if you choose the 30 year be very careful with the lender. Be absolutely certain what their policies and practices are for extra payments. Some want a separate check, some one larger check and there are lenders that do not allow extra payments. THEN, search the internet for complaints about homeowners who’ve had problems with that lender properly crediting their extra payments.

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willthrill81
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Re: 30 Year vs 15 Year Mortgage

Post by willthrill81 » Tue Jul 10, 2018 3:55 pm

Rupert wrote:
Tue Jul 10, 2018 10:44 am
You can always pay a 30-year mortgage off early and even on a 15-year schedule if you wish. So there's really no downside to choosing the 30-year, especially if you are reaching a bit to afford the house.
Yes, there is a big downside that has been pointed out: the interest rate spread between a 15 year and 30 year mortgage. When I crunched the numbers using rates current at the time early last year, it was enough that paying off a 30 year mortgage in 15 years cost about $7k more interest for every $100k borrowed compared to the 15 year mortgage. That seems like a high price to pay for the flexibility of reduced mortgage payments if needed.

I'm not saying that the 15 year mortgage is a slam dunk over the 30 year, but there absolutely is a downside to 'pay off a 30 year mortgage in 15 years'.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

hightower
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Re: 30 Year vs 15 Year Mortgage

Post by hightower » Tue Jul 10, 2018 4:51 pm

NathanDH wrote:
Tue Jul 10, 2018 1:19 pm
It sounds like the general consensus is that we should go with a 30 year mortgage. Pay off as a 15 year, the extra interest is simply a penalty for flexibility. What about the idea of paying it over 30 years and putting the difference of what a 15 year payment would be into a taxable investment account, then depending on the situation, paying it as a lump sum with that money later when our net worth is higher? I believe Klangfool mentioned this.

Likely we will be able to purchase this home for less than asking price. Additionally, currently our rent is $1850/mo, and it appears with a 30 year fixed, our PITI will be about $2050/mo. No HOA fees.

Now the next question is, any advice for choosing a lender? Navy Federal is offering 5% down with no PMI, but an origination fee of 1% and likely 1 point purchased. Which seems like high fees.

As far as savings rate goes, what I was essentially trying to say, is that we spend about as much as we save each month. So if I spend $5000 a month, I am saving $5000, approximately. This will be more consistently true when my wife starts working again. We have been out of school for less than 4 years and have paid off cars and students loans. No other debt. Additionally we have saved about $250,000. I think this is pretty good overall, given the timeline.
We just refinanced earlier this year to a 15 year at 3.25%. I'm super glad so far. I love seeing the balance drop by so much each month as opposed to so much of my payment going to interest. I am not a fan of long term debt anymore. The difference in interest paid on a 15 vs 30 year over the life of the loan is pretty dramatic. Just investing the difference in P/I between the two might not be that lucrative depending on how well your investments grow. There's no guarantees in the stock market, but there sure is a guarantee with paying interest to a mortgage company.
I'd personally rather have 15 extra years of freedom from debt. But, that's just me. Some people aren't as bothered by the servitude of debt.

InvisibleAerobar
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Re: 30 Year vs 15 Year Mortgage

Post by InvisibleAerobar » Tue Jul 10, 2018 4:55 pm

SagaciousTraveler wrote:
Tue Jul 10, 2018 11:23 am
DVMResident wrote:
Tue Jul 10, 2018 11:17 am
I'll echo what everyone else has said: the interest paid is primarily driven by the amortization schedule, i.e. how long you take to pay back the loan. The interest has a surprisingly small impact. Putting some numbers to it...

Right now, the spread between a 15 year vs a 30 year is ~0.25%. On a $319,200 loan (assuming 20% down on a $399k house):
-4.5% 30 year note paid in 30 years, the total interest paid is $263,042 with a minimum payment of $1,617.34 (just PI, not TI)
-4.5% 30 year note paid in 15 years, the total interest paid is $120,334 with a minimum payment of $1,617.34 (just PI, not TI)
-4.25% 15 year note paid in 15 years, the total interest paid is $113,029 with a minimum payment of $2,401 (just PI, not TI)

Those are before inflation numbers (nominal) and ignores taxes. It's about $40/month (nominal) to get a 30 year note and pay in 15 year vs getting a straight 15 year note. Is $40/month worth keeping the flexibility?
Thanks for the totals.

I'd love to find out how many people who take out a 30 but plan to pay it off in 15, actually do so.

$40 dollars a month invested over the 15 years with a return of 5% can bring your total to over $10,000. not huge money but still.
I've ran the numbers, and it comes out to be ~$10k (I was looking at a house of similar purchase price). The way I look at it, it's a $10k insurance policy spread out over 15 years, knowing that one would have less to worry about mortgage payment should something untoward happens. The downside to not being able to pay the mortgage on a 15-year note isn't $10k or even $50k; rather, one could get served a foreclosure notice and lose the property.

The difference in monthly PITI is $800 (as shown in the quotes above). This probably doesn't apply to the OP, as the OP's position appears to be very stable. But that $800 makes a big difference when one is out of a job; it's probably enough to feed a family of four...

Similar to the OP, I have a very stable job (working for Uncle Sam); however, if I were to take a job in the greener pasture of private sector, I would need to have a much larger rainy day fund to account for possible lay-offs. A difference of $10k a year goes a long way in making sure that one would be secure when out of a job...

indexonlyplease
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Re: 30 Year vs 15 Year Mortgage

Post by indexonlyplease » Tue Jul 10, 2018 5:09 pm

Get the 15 year fixed rate.

Why
Better rate
You will have a paid off house 15 years early
When you have a paid off house you will be less likely to get into another mortgage
You will save a lot of money on interest
The interest you save is guaranteed
Most with 30 year mortgage never pay it down in 15 years. Or will start but not finish.

Everyone has some fancy reason not to use the 15 year. But I never heard someone complain about having the house paid for. Also, it is a really good feeling. So while you now have a stable job pay it off sooner.

There is nothing good about holding debt unless you are some business person that uses debt to make money. But most of us are not.

It's like buying a new car and paying on the car for 7 years. But you could of paid it off in 3 but you didn't. Also, you can afford the car payment for 7 year term but not the car payment for 3 years. So, maybe you just bought to expensive car or in this case house.

MindBogler
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Re: 30 Year vs 15 Year Mortgage

Post by MindBogler » Tue Jul 10, 2018 8:04 pm

Go with a 30 year and don't even accelerate the payments. Put your accelerated payments in a taxable account and then when you have the liquidity to pay it off (or not) make your decision. For everyone telling you the 15 year is a slam dunk, I have to respectfully disagree. That advice is couched in a hundred different assumptions. The likelihood that you will fall on hard times, lose your job, become ill or disabled in the next 15-30 years becomes increasingly likely. When times get tight would you rather have 8 years left on your more expensive obligatory mortgage or 7 years of those extra payments and a lower monthly obligation in a taxable account? I know which one I chose...

nura
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Re: 30 Year vs 15 Year Mortgage

Post by nura » Tue Jul 10, 2018 10:52 pm

indexonlyplease wrote:
Tue Jul 10, 2018 5:09 pm

Everyone has some fancy reason not to use the 15 year. But I never heard someone complain about having the house paid for. Also, it is a really good feeling.
I have 3% 15 year mortgage to which I made a few months worth of extra payments in addition to paying off a 1.5% 60 month auto loan. Neither rates are no longer offered. Looking back, it would have been better of investing extra $50k in after-tax 401k or brokerage account.

Jablean
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Re: 30 Year vs 15 Year Mortgage

Post by Jablean » Wed Jul 11, 2018 12:06 am

Hmm, looking back at my spreadsheets. House purchased in 99 for $125,000 now may be worth almost $400,000. Didn't have anything near the stable jobs the OP does and insurance only covered half of the pregnancy for newborn. 30 yr rate must have been around 7% as we refinanced in 03 for a 5.25% and then again in 12 to a 3%. It's possible the last one was for 15 yrs. I'll have it paid off by the end of this year. Over the years I've ran spreadsheets - should I pay more to mortgage or fund the 529 or the IRA. Looking at college FAFSA to see if better to have the house paid off and less money in the bank. All those things. Having the flexibility to pay more or less anytime I wanted for one extra month or for a year was peace of mind to me. Best bank was my credit union.

So I didn't make it in 15 years but under 20 isn't bad. I recommend the 30 yr for flexibility.

indexonlyplease
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Re: 30 Year vs 15 Year Mortgage

Post by indexonlyplease » Wed Jul 11, 2018 5:44 am

nura wrote:
Tue Jul 10, 2018 10:52 pm
indexonlyplease wrote:
Tue Jul 10, 2018 5:09 pm

Everyone has some fancy reason not to use the 15 year. But I never heard someone complain about having the house paid for. Also, it is a really good feeling.
I have 3% 15 year mortgage to which I made a few months worth of extra payments in addition to paying off a 1.5% 60 month auto loan. Neither rates are no longer offered. Looking back, it would have been better of investing extra $50k in after-tax 401k or brokerage account.
Sure you can say that now looking back. But lets see if you think the same in the next few years if we have a market correction or the market stays flat. The great thing about paying off debt it is something you can control. You can't control what the market will do. Also, in 15 year when you are debt free, I dout you will say "I wish I had a mortgage".

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Tamarind
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Re: 30 Year vs 15 Year Mortgage

Post by Tamarind » Wed Jul 11, 2018 5:55 am

I agree the 30-year probably comes out ahead provided one invests the difference between monthly payments. I prefer a 15-year because I will have a paid off house when I'm 40. There's a lot of peace of mind there for me. I will also no longer be itemizing as of 2018 so home mortgage interest just got less attractive to me.

Bacchus01
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Re: 30 Year vs 15 Year Mortgage

Post by Bacchus01 » Wed Jul 11, 2018 5:57 am

bhsince87 wrote:
Tue Jul 10, 2018 11:00 am
I am a fan of the 30 year fixed rate approach. It's one of the best hedges against inflation available to most people.

If inflation and interest rates rise, you're golden. If they drop, you can refinance. If you want to pay it off early, you can. Plus it gives you more liquidity.
I have always done this and agree.

However, the last time I refinanced (last year) the rate difference between 15 and 30 was huge, so we went to a 15 for the first time. I don’t know where rates are now, but really compare.

rich126
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Re: 30 Year vs 15 Year Mortgage

Post by rich126 » Wed Jul 11, 2018 6:17 am

If you are doing the 30 yr path then the best way to ensure you pay extra each month is to set up an auto pay from your bank account. I'm not a huge fan of auto bill pay but for mortgages/car loans I can see its use.

I've had anything from 10 yr to 30 yr to adjustable loans and it all depends on the rates and your situation. Most people don't live in the same house for more than ~7 yrs. I'm on my 4th house in 30 yrs. I'm also not sure of how interest and the new tax laws work. Check out the numbers and see what you are comfortable with.

I've seen people cutting it too close financially and then when something unexpected happens (lay off, company unexpectedly going bankrupt, medical issues, divorce, etc.) they are in deep trouble. Many years ago someone told me "People are always willing to lend you money when you don't need it, but when you do need it, often you can't get it". That has always stuck with me.

Good luck.

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car733
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Re: 30 Year vs 15 Year Mortgage

Post by car733 » Wed Jul 11, 2018 7:27 am

I would shop for rates and decide.
In my case, I got a low 15 years rate so I went with that.

Make sure you get a feeling of the monthly payment. For us, the value of the monthly payment of the 30 years was about the same as the rent. It would have been nice to keep the same monthly finances. Doing the 15 years required some adjustments but I feel they were worth it.

Good luck!

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