30 Year vs 15 Year Mortgage

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dknightd
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Re: 30 Year vs 15 Year Mortgage

Post by dknightd » Wed Jul 11, 2018 7:28 am

Just make sure it is a fixed rate loan. You don't want any surprises.
30 vs 15 year is partially a judgement call, and partially what you feel comfortable with, or makes you happy.
On my house (bought about 28 years ago) I did 30, then 30, then 30, then maybe another 30, then 15 year (each time the rates went down enough so it made sense).
I still have 8 years of payments to go. So my original 30 year loan has turned into a 36 year loan.
I've never been in a big rush to pay it off. Sure I pay more interest to the bank, but it has also allowed me to invest more for me.
I'm comfortable with that. When I started I stretched a bit to buy a house that let me walk to work.
I'm still in the same house, and same job. Yes, I paid a lot of money in interest, but it worked for me.
I could pay my mortgage, and have a place to live. Now I could pay it off in full if I wanted, but I don't see an advantage to doing that.
If you feel you can comfortably pay off in 15 years, then do 15 year.
If you are not sure then do 30 year.
The equation has changed this year. In the past I've always been able to deduct interest. I won't be doing that any more it seems.

If I was in your shoes - 30 years old - 2 kids - good job, I probably do a tradition 20% down 30 year fixed rate loan. Yes you'll likely pay more interest, but for me the goal has always been to be comfortable (I'd rather be comfortable, and not worry about money) than try to maximize the amount of money I might have one day. YMMV

Do what you feel is comfortable for you. I probably paid $50k more in interest than I had to (or maybe more than $50k, I'd almost rather not know). That is what I was happy with. You may not be happy paying interest, so might prefer a faster pay off path.

BradJ
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Re: 30 Year vs 15 Year Mortgage

Post by BradJ » Wed Jul 11, 2018 8:05 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.
I really don't think there is a bad approach listed here, but I am going to echo back what the user said above, keep it simple. I have a hard time understanding the inflation argument, when I would think the ultimate tool against inflation would be a zero debt lifestyle. My wife and I bought a big, nice home on a 30 year mortgage that was right at 25% of take home pay. We decided to downsize so she could stay home and we could be debt free in 10 years, I did the math the other day and found out that we would pay more in interest on the 30 year loan than the total loan of our new, smaller house. Things like that speak volumes to me, but I understand that isn't a big deal to others.

FPS_dapdap
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Re: 30 Year vs 15 Year Mortgage

Post by FPS_dapdap » Wed Jul 11, 2018 8:32 am

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. 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.
Why would being uncertain long-term argue more for a 30 year loan? I'm not questioning you, I'm just curious.

rixer
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Re: 30 Year vs 15 Year Mortgage

Post by rixer » Wed Jul 11, 2018 9:34 am

I was self employed and my income was always variable. The winter months, things were lean. I preferred the 30 year mortgage because it gave me breathing room if business was slow. I did pay it off much earlier with extra payments and saved a lot of money, not to mention the benefit of having a paid off house in retirement.
For me, the option of being able to send in a smaller payment if necessary was important to me as a safety net, so to speak.

InvisibleAerobar
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Re: 30 Year vs 15 Year Mortgage

Post by InvisibleAerobar » Wed Jul 11, 2018 9:50 am

FPS_dapdap wrote:
Wed Jul 11, 2018 8:32 am
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. 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.
Why would being uncertain long-term argue more for a 30 year loan? I'm not questioning you, I'm just curious.
Cashflow in hard times

I think people here advocates for 1-year worth of expenses saved up in a rainy-day fund. What if it takes more than one year to get a job after being laid off? What if you have to take a drastic pay-cut in that next job to even be employed? In professions where age discrimination is rampant, this could very well happen (then again, for a 15 year mortgage, cumulative chance of being laid off during term of the mortgage is reduced).

foo.c
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Re: 30 Year vs 15 Year Mortgage

Post by foo.c » Wed Jul 11, 2018 10:08 am

The term of the mortgage is irrelevant. If you have 12 months of expenses saved up, you're obviously broke after 12 months.

At least with the 15 you will have more equity if that does happen. You could potentially walk away with some tax free earnings too.

NextMil
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Re: 30 Year vs 15 Year Mortgage

Post by NextMil » Wed Jul 11, 2018 10:09 am

I don't understand why people think that the delta between the 30 year and the 15 year payment is much less riskier when its not exponentially more expensive, and the default rate is so low on mortgages writ large. Admittedly in the past, I have recasted my mortgage to lower the payment on my 15 year, but having looked at the data it seems like the risk is really unfounded, particularly when you factor in a strong emergency fund, and cash in investment accounts both taxable and pre-tax. Its not like the payment is double.

I buy the arguments on investing the difference if that is your cup of tea, but the risk side of the equation just seems to be unfounded when you look at the data.

alex_686
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Re: 30 Year vs 15 Year Mortgage

Post by alex_686 » Wed Jul 11, 2018 10:15 am

a5ehren wrote:
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.
I would take the opposite side. If you make 1/2 payments bi-weekly you basically convert a 30 year mortgage into a 15 year. And since many people are paid bi-weekly this is not much of a stretch but a very simple form of discipline.

I also modestly advocate for the 30 year mortgage. It is a bit more expensive but it gives you a bit more flexibility in terms of cash flow.

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Wed Jul 11, 2018 10:18 am

foo.c wrote:
Wed Jul 11, 2018 10:08 am
The term of the mortgage is irrelevant. If you have 12 months of expenses saved up, you're obviously broke after 12 months.

At least with the 15 you will have more equity if that does happen. You could potentially walk away with some tax free earnings too.
foo.c,

<< The term of the mortgage is irrelevant. If you have 12 months of expenses saved up, you're obviously broke after 12 months.>>

Not true. When a person is broke, the difference of $800 per month of the mortgage payment is significant. It is $800 less per month that he/she need to find in order to feed the family.

<<At least with the 15 you will have more equity if that does happen.>>

1) It took a while to sell the house. And, it is the worst time to sell in a recession.

2) The house's value may drop to a level that the equity is wiped out.

KlangFool

foo.c
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Re: 30 Year vs 15 Year Mortgage

Post by foo.c » Wed Jul 11, 2018 10:20 am

Klang, I guess we have different definitions of broke.

If you have no money and no income it really doesn't matter what the payment is. If you have some kind of temporary reduced income then I agree it does make a difference.

InvisibleAerobar
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Re: 30 Year vs 15 Year Mortgage

Post by InvisibleAerobar » Wed Jul 11, 2018 10:21 am

foo.c wrote:
Wed Jul 11, 2018 10:08 am
The term of the mortgage is irrelevant. If you have 12 months of expenses saved up, you're obviously broke after 12 months.

At least with the 15 you will have more equity if that does happen. You could potentially walk away with some tax free earnings too.
Not arguing here for paying 30-yr as a 30-yr, rather that 30-yr be paid off sooner (in 15-yr or 17-yr)

the difference in equity btwn 30-yr paid in 17-yr (which is the result of making add'l payment equal to the difference btwn 15-yr and 30-yr) and 15-yr is minimal (assuming the same amount of time has elapsed). Obviously more equity for the 15-yr, and obviously less interest on the 15-yr, but it's on the order of $700-800/yr for a $300-350k mortgage.

You lose your job, you have your 12-month expense plus severance (if any) and unemployment benefits. A lower minimal required monthly payment would surely allow you to stay in the home longer and ride out the storm. If your 12-month rainy day fund is based on the expense needed for 15-yr, then when you lose your job, that rainy day fund can go quite a bit further. For the aforementioned $300-350k mortgage, it will allow you to be on schedule for payments for another 4 months.
Last edited by InvisibleAerobar on Wed Jul 11, 2018 10:26 am, edited 1 time in total.

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Wed Jul 11, 2018 10:22 am

NextMil wrote:
Wed Jul 11, 2018 10:09 am
I don't understand why people think that the delta between the 30 year and the 15 year payment is much less riskier when its not exponentially more expensive, and the default rate is so low on mortgages writ large. Admittedly in the past, I have recasted my mortgage to lower the payment on my 15 year, but having looked at the data it seems like the risk is really unfounded, particularly when you factor in a strong emergency fund, and cash in investment accounts both taxable and pre-tax. Its not like the payment is double.

I buy the arguments on investing the difference if that is your cup of tea, but the risk side of the equation just seems to be unfounded when you look at the data.
NextMil ,

<< the default rate is so low on mortgages writ large. >>

1) This is personal finance. We are not a statistic. Average does not matter. We only care whether it can happen to us.

2) It only needs to happen once to wipe out a person financially.

3) We need to survive in order to succeed.

KlangFool

Admiral
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Re: 30 Year vs 15 Year Mortgage

Post by Admiral » Wed Jul 11, 2018 10:24 am

I agree that there is a tiny, tiny, fraction of people who get a 30 year loan and then pay it off in 15. Why? Two reasons:

First, if they have the extra money to pay down principle each month, then they refinance to save interest, as long as the rate spread is appx 1% or greater. Second, rates have been very low for many years, so anyone who took out a 30 year since, say, 2000/2001 would have seen rates plunge from 8% (or more) to as low as 2.5% over that period, and would have refinanced.

So, if you are going to do a comparison, I believe comparing a 15 year note to a 30 year note as if you would pay it off in 15 years is foolish and likely not accurate. Most people do not do this, just as most people do not stay in the same house for 30 years or keep the same exact mortgage for 30 years.

If you are able to, I would get the 15 year. There is nothing like seeing that big chunk of principle paid off each month.

That said, if you really want to compare the costs, you should compare a 15 year to a 30 year mortgage while keeping in mind that you are unlikely to pay the total 30 years worth of interest on the longer loan...rates can change a lot in 30 years. Or you might move.

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Wed Jul 11, 2018 10:27 am

foo.c wrote:
Wed Jul 11, 2018 10:20 am
Klang, I guess we have different definitions of broke.

If you have no money and no income it really doesn't matter what the payment is. If you have some kind of temporary reduced income then I agree it does make a difference.
foo.c,

I disagree. If you have no money and you need to borrow or beg money from someone, it makes a difference whether it is $1,000 or $1,800. It becomes a question of how many folks that you need to beg or borrow.

I have been through too many recessions/economic crisis. If the person can survive until the recession is over, the person survive. If not, he/she don't. And, the difference could be only one or 2 months.

KlangFool

P.S.: I have 1 year of EF. I was unemployed for more than 1 year a few times.
Last edited by KlangFool on Wed Jul 11, 2018 10:53 am, edited 1 time in total.

Broken Man 1999
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Re: 30 Year vs 15 Year Mortgage

Post by Broken Man 1999 » Wed Jul 11, 2018 10:28 am

Every loan I have ever taken was taken for the longest term, all cars and homes.

But every loan I ever took was paid off much earlier than the term of the loan, as at some point I would have extra funds, and just get tired of writing a check each month.

Obviously this strategy cannot always work if you overextend yourself in the original purchase price. Some people seem to hope they will "grow" into a large mortgage or car loan, often with bad results.

My vote would be for a 30 year mortgage, with aggressive payments after maxing all retirement and savings needs.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Wed Jul 11, 2018 10:29 am

Admiral wrote:
Wed Jul 11, 2018 10:24 am
I agree that there is a tiny, tiny, fraction of people who get a 30 year loan and then pay it off in 15. Why? Two reasons:

First, if they have the extra money to pay down principle each month, then they refinance to save interest, as long as the rate spread is appx 1% or greater. Second, rates have been very low for many years, so anyone who took out a 30 year since, say, 2000/2001 would have seen rates plunge from 8% (or more) to as low as 2.5% over that period, and would have refinanced.

So, if you are going to do a comparison, I believe comparing a 15 year note to a 30 year note as if you would pay it off in 15 years is foolish and likely not accurate. Most people do not do this, just as most people do not stay in the same house for 30 years or keep the same exact mortgage for 30 years.

If you are able to, I would get the 15 year. There is nothing like seeing that big chunk of principle paid off each month.

That said, if you really want to compare the costs, you should compare a 15 year to a 30 year mortgage while keeping in mind that you are unlikely to pay the total 30 years worth of interest on the longer loan...rates can change a lot in 30 years. Or you might move.
Admiral,

Please stay on topic. OP is saving 60K to 80K per year. He could pay off the whole mortgage in one lump sum in 5 to 10 years.

KlangFool

Admiral
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Re: 30 Year vs 15 Year Mortgage

Post by Admiral » Wed Jul 11, 2018 10:36 am

KlangFool wrote:
Wed Jul 11, 2018 10:29 am
Admiral wrote:
Wed Jul 11, 2018 10:24 am
I agree that there is a tiny, tiny, fraction of people who get a 30 year loan and then pay it off in 15. Why? Two reasons:

First, if they have the extra money to pay down principle each month, then they refinance to save interest, as long as the rate spread is appx 1% or greater. Second, rates have been very low for many years, so anyone who took out a 30 year since, say, 2000/2001 would have seen rates plunge from 8% (or more) to as low as 2.5% over that period, and would have refinanced.

So, if you are going to do a comparison, I believe comparing a 15 year note to a 30 year note as if you would pay it off in 15 years is foolish and likely not accurate. Most people do not do this, just as most people do not stay in the same house for 30 years or keep the same exact mortgage for 30 years.

If you are able to, I would get the 15 year. There is nothing like seeing that big chunk of principle paid off each month.

That said, if you really want to compare the costs, you should compare a 15 year to a 30 year mortgage while keeping in mind that you are unlikely to pay the total 30 years worth of interest on the longer loan...rates can change a lot in 30 years. Or you might move.
Admiral,

Please stay on topic. OP is saving 60K to 80K per year. He could pay off the whole mortgage in one lump sum in 5 to 10 years.

KlangFool
I am absolutely on topic. OP has people running numbers comparing accelerated payoff to a 15 year loan, and making recommendations based on that. I do not agree that it is the proper/useful comparison. If the OP can theoretically pay it off in a lump sum in 5-10 years then a 15 year note should not be a stretch in terms of the extra money each month--and if paid off early, the savings (vs a 30 year) is even greater.

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Wed Jul 11, 2018 10:51 am

Admiral wrote:
Wed Jul 11, 2018 10:36 am
KlangFool wrote:
Wed Jul 11, 2018 10:29 am
Admiral wrote:
Wed Jul 11, 2018 10:24 am
I agree that there is a tiny, tiny, fraction of people who get a 30 year loan and then pay it off in 15. Why? Two reasons:

First, if they have the extra money to pay down principle each month, then they refinance to save interest, as long as the rate spread is appx 1% or greater. Second, rates have been very low for many years, so anyone who took out a 30 year since, say, 2000/2001 would have seen rates plunge from 8% (or more) to as low as 2.5% over that period, and would have refinanced.

So, if you are going to do a comparison, I believe comparing a 15 year note to a 30 year note as if you would pay it off in 15 years is foolish and likely not accurate. Most people do not do this, just as most people do not stay in the same house for 30 years or keep the same exact mortgage for 30 years.

If you are able to, I would get the 15 year. There is nothing like seeing that big chunk of principle paid off each month.

That said, if you really want to compare the costs, you should compare a 15 year to a 30 year mortgage while keeping in mind that you are unlikely to pay the total 30 years worth of interest on the longer loan...rates can change a lot in 30 years. Or you might move.
Admiral,

Please stay on topic. OP is saving 60K to 80K per year. He could pay off the whole mortgage in one lump sum in 5 to 10 years.

KlangFool
I am absolutely on topic. OP has people running numbers comparing accelerated payoff to a 15 year loan, and making recommendations based on that. I do not agree that it is the proper/useful comparison. If the OP can theoretically pay it off in a lump sum in 5-10 years then a 15 year note should not be a stretch in terms of the extra money each month--and if paid off early, the savings (vs a 30 year) is even greater.
Admiral,

1) The issue here is OP has 250K of investment versus 400K house. He has too much money in the house. 15 years mortgage just make it worse.

2) If everything went well over the next few years, he could pay off the 15/30 years mortgage in a few years. If not, he could use the cash flow. So, it is a small price to pay for the 30 years mortgage over the next few years.

KlangFool

NextMil
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Re: 30 Year vs 15 Year Mortgage

Post by NextMil » Wed Jul 11, 2018 11:07 am

KlangFool wrote:
Wed Jul 11, 2018 10:22 am
NextMil wrote:
Wed Jul 11, 2018 10:09 am
I don't understand why people think that the delta between the 30 year and the 15 year payment is much less riskier when its not exponentially more expensive, and the default rate is so low on mortgages writ large. Admittedly in the past, I have recasted my mortgage to lower the payment on my 15 year, but having looked at the data it seems like the risk is really unfounded, particularly when you factor in a strong emergency fund, and cash in investment accounts both taxable and pre-tax. Its not like the payment is double.

I buy the arguments on investing the difference if that is your cup of tea, but the risk side of the equation just seems to be unfounded when you look at the data.
NextMil ,

<< the default rate is so low on mortgages writ large. >>

1) This is personal finance. We are not a statistic. Average does not matter. We only care whether it can happen to us.

2) It only needs to happen once to wipe out a person financially.

3) We need to survive in order to succeed.

KlangFool
I disagree. Statistics matter, and there is a reason mortgage insurance isn't required after 20% paid. Measuring risk appropriately is sound. Otherwise, no one would have a mortgage in the first place due to the 2-5% risk of default. I would also argue that bogleheads are probably even much further away from the 2-5% that are in default or seriously delinquent in mortgages due to our approach in investing etc. I hate debt, and am paying mine down, but the more and more I look at the "risk" of default or delinquency on mortgages the more and more I think its something that is really overstated than grounded in reality. In what other area of your life would you think that having a 95-98% success rate would be considered risky?

KlangFool
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Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Wed Jul 11, 2018 11:12 am

NextMil wrote:
Wed Jul 11, 2018 11:07 am
KlangFool wrote:
Wed Jul 11, 2018 10:22 am
NextMil wrote:
Wed Jul 11, 2018 10:09 am
I don't understand why people think that the delta between the 30 year and the 15 year payment is much less riskier when its not exponentially more expensive, and the default rate is so low on mortgages writ large. Admittedly in the past, I have recasted my mortgage to lower the payment on my 15 year, but having looked at the data it seems like the risk is really unfounded, particularly when you factor in a strong emergency fund, and cash in investment accounts both taxable and pre-tax. Its not like the payment is double.

I buy the arguments on investing the difference if that is your cup of tea, but the risk side of the equation just seems to be unfounded when you look at the data.
NextMil ,

<< the default rate is so low on mortgages writ large. >>

1) This is personal finance. We are not a statistic. Average does not matter. We only care whether it can happen to us.

2) It only needs to happen once to wipe out a person financially.

3) We need to survive in order to succeed.

KlangFool
I disagree. Statistics matter, and there is a reason mortgage insurance isn't required after 20% paid. Measuring risk appropriately is sound. Otherwise, no one would have a mortgage in the first place due to the 2-5% risk of default. I would also argue that bogleheads are probably even much further away from the 2-5% that are in default or seriously delinquent in mortgages due to our approach in investing etc. I hate debt, and am paying mine down, but the more and more I look at the "risk" of default or delinquency on mortgages the more and more I think its something that is really overstated than grounded in reality. In what other area of your life would you think that having a 95-98% success rate would be considered risky?
NextMil,

We need to survive in order to succeed. 95% to 98% success rate would not matter if we are the 2% to 5%.

<<I would also argue that bogleheads are probably even much further away from the 2-5% that are in default or seriously delinquent in mortgages due to our approach in investing etc. >>

Really? I had seen plenty of 100% stock and no emergency fund is needed thread in the forum.

KlangFool

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willthrill81
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Re: 30 Year vs 15 Year Mortgage

Post by willthrill81 » Wed Jul 11, 2018 11:21 am

InvisibleAerobar wrote:
Wed Jul 11, 2018 9:50 am
FPS_dapdap wrote:
Wed Jul 11, 2018 8:32 am
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. 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.
Why would being uncertain long-term argue more for a 30 year loan? I'm not questioning you, I'm just curious.
Cashflow in hard times

I think people here advocates for 1-year worth of expenses saved up in a rainy-day fund. What if it takes more than one year to get a job after being laid off? What if you have to take a drastic pay-cut in that next job to even be employed? In professions where age discrimination is rampant, this could very well happen (then again, for a 15 year mortgage, cumulative chance of being laid off during term of the mortgage is reduced).
It's true that having a lower payment with a 30 year mortgage would help in a long-term unemployment situation, but with a 30 year loan, you're exposing yourself to twice as much risk of long-term unemployment as a 15 year mortgage.

Further, despite it being pointed out repeatedly, the interest rate spread between a 15 year and a 30 year mortgage should not be ignored. On a $300k mortgage, this spread will cost you at least $20k more if you pay a 30 year mortgage in 15 years instead of getting a 15 year mortgage to begin with. That's a significant cost in my book.
“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

bhsince87
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Re: 30 Year vs 15 Year Mortgage

Post by bhsince87 » Wed Jul 11, 2018 11:42 am

I'm amazed at how many people on this forum don't seem to understand how inflation works.

I guess we've been spoiled for the past decade or so.


Maybe that trend will continue, but I wouldn't't bet on it.
Retirement: When you reach a point where you have enough. Or when you've had enough.

dknightd
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Re: 30 Year vs 15 Year Mortgage

Post by dknightd » Wed Jul 11, 2018 11:46 am

For maximum flexibility you rent. For maximum security you buy in cash. There is no right answer.

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Jimbo9911
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Re: 30 Year vs 15 Year Mortgage

Post by Jimbo9911 » Wed Jul 11, 2018 11:49 am

We took a 15 year mortgage and after a year or so began paying $1,000 "apply to principal only" payment each month in addition to the scheduled payment.
Paid the whole thing off in about 8 years or so, I believe.
I would suggest that plan.

InvisibleAerobar
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Re: 30 Year vs 15 Year Mortgage

Post by InvisibleAerobar » Wed Jul 11, 2018 11:53 am

willthrill81 wrote:
Wed Jul 11, 2018 11:21 am
InvisibleAerobar wrote:
Wed Jul 11, 2018 9:50 am
FPS_dapdap wrote:
Wed Jul 11, 2018 8:32 am
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. 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.
Why would being uncertain long-term argue more for a 30 year loan? I'm not questioning you, I'm just curious.
Cashflow in hard times

I think people here advocates for 1-year worth of expenses saved up in a rainy-day fund. What if it takes more than one year to get a job after being laid off? What if you have to take a drastic pay-cut in that next job to even be employed? In professions where age discrimination is rampant, this could very well happen (then again, for a 15 year mortgage, cumulative chance of being laid off during term of the mortgage is reduced).
It's true that having a lower payment with a 30 year mortgage would help in a long-term unemployment situation, but with a 30 year loan, you're exposing yourself to twice as much risk of long-term unemployment as a 15 year mortgage.

Further, despite it being pointed out repeatedly, the interest rate spread between a 15 year and a 30 year mortgage should not be ignored. On a $300k mortgage, this spread will cost you at least $20k more if you pay a 30 year mortgage in 15 years instead of getting a 15 year mortgage to begin with. That's a significant cost in my book.
opps, you make a good point. somehow thought the difference is on the order of 10k, as opposed to 20k as you pointed out

EnthusiasticLearner
Posts: 79
Joined: Fri Dec 18, 2015 9:18 am
Location: North

Re: 30 Year vs 15 Year Mortgage

Post by EnthusiasticLearner » Wed Jul 11, 2018 12:05 pm

This is not what you asked, OP, but it is worth mentioning that we have a 20 year mortgage. We only throw pennies extra on it here and there as we are still not maxing all tax advantaged space at our income level, but we would pay it off early if we planned to stay. (We want to move to a more expensive home closer to work in the next five years and we plan to get a 20 year mortgage on that house as well.)

Xrayman69
Posts: 35
Joined: Fri Jun 01, 2018 8:52 pm

Re: 30 Year vs 15 Year Mortgage

Post by Xrayman69 » Wed Jul 11, 2018 5:16 pm

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?
Completely agree. I liked the flexibility. I’m doing the same. Bought current house in 2009. Refinanced in 2013. Paying off at approximately 20 year rate. But if interested rate ever get well above my mortgage then will pull back and invest more in taxable accounts. Payed minimal premium for the flexibility. I’m not adverse to calculable risks and have traditionally been disciplined to stick with plan and not require strict mandated discipline with debt utilization.

Similar with car purchases. Borrowed 80% of new car purchase in 2013 (could,have paid in full cash) for 5 year loan. Total premium was 2k. Took the funds that would have gone to car purchase and immediately placed into a taxable account the following day and have been fortunate for market gains and dividends to come out ahead.

School interest loans were consolidated at a rate of less then 2%. Also had discipline to divert cash flow to maximize retirement contribution and tax advantages accounts to max , then to taxable accounts.

In summary, flexibility and discipline are good for low current interests rates (compared to historical norms). I would do the 30 year.

NextMil
Posts: 502
Joined: Wed Dec 13, 2017 12:33 pm

Re: 30 Year vs 15 Year Mortgage

Post by NextMil » Wed Jul 11, 2018 7:32 pm

KlangFool wrote:
Wed Jul 11, 2018 11:12 am
NextMil wrote:
Wed Jul 11, 2018 11:07 am
KlangFool wrote:
Wed Jul 11, 2018 10:22 am
NextMil wrote:
Wed Jul 11, 2018 10:09 am
I don't understand why people think that the delta between the 30 year and the 15 year payment is much less riskier when its not exponentially more expensive, and the default rate is so low on mortgages writ large. Admittedly in the past, I have recasted my mortgage to lower the payment on my 15 year, but having looked at the data it seems like the risk is really unfounded, particularly when you factor in a strong emergency fund, and cash in investment accounts both taxable and pre-tax. Its not like the payment is double.

I buy the arguments on investing the difference if that is your cup of tea, but the risk side of the equation just seems to be unfounded when you look at the data.
NextMil ,

<< the default rate is so low on mortgages writ large. >>

1) This is personal finance. We are not a statistic. Average does not matter. We only care whether it can happen to us.

2) It only needs to happen once to wipe out a person financially.

3) We need to survive in order to succeed.

KlangFool
I disagree. Statistics matter, and there is a reason mortgage insurance isn't required after 20% paid. Measuring risk appropriately is sound. Otherwise, no one would have a mortgage in the first place due to the 2-5% risk of default. I would also argue that bogleheads are probably even much further away from the 2-5% that are in default or seriously delinquent in mortgages due to our approach in investing etc. I hate debt, and am paying mine down, but the more and more I look at the "risk" of default or delinquency on mortgages the more and more I think its something that is really overstated than grounded in reality. In what other area of your life would you think that having a 95-98% success rate would be considered risky?
NextMil,

We need to survive in order to succeed. 95% to 98% success rate would not matter if we are the 2% to 5%.

<<I would also argue that bogleheads are probably even much further away from the 2-5% that are in default or seriously delinquent in mortgages due to our approach in investing etc. >>

Really? I had seen plenty of 100% stock and no emergency fund is needed thread in the forum.

KlangFool
I guess we have different definitions of risk. A less than 2% failure rate to me is not risky at all. When you drive are you wearing an airbag and a crash helmet? In jest, of course.

JoeRetire
Posts: 1647
Joined: Tue Jan 16, 2018 2:44 pm

Re: 30 Year vs 15 Year Mortgage

Post by JoeRetire » Wed Jul 11, 2018 7:45 pm

NextMil wrote:
Wed Jul 11, 2018 7:32 pm
I guess we have different definitions of risk. A less than 2% failure rate to me is not risky at all. When you drive are you wearing an airbag and a crash helmet? In jest, of course.
My grandfather would have called him a "belt AND suspenders kind of guy".

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: 30 Year vs 15 Year Mortgage

Post by KlangFool » Wed Jul 11, 2018 9:08 pm

NextMil wrote:
Wed Jul 11, 2018 7:32 pm

I guess we have different definitions of risk. A less than 2% failure rate to me is not risky at all. When you drive are you wearing an airbag and a crash helmet? In jest, of course.
NextMil,

It only needs to happen once to wipe the person out. For me, the risk is not worth taking. And, at a cost of 10K to 20K, why bother? The amount is too small to matter to me.

http://www.collaborativefund.com/blog/t ... -of-money/

<< 16. Optimism bias in risk-taking, or “Russian Roulette should statistically work” syndrome: An over attachment to favorable odds when the downside is unacceptable in any circumstance.

<<The odds of something can be in your favor – real estate prices go up most years, and most years you’ll get a paycheck every other week – but if something has 95% odds of being right, then 5% odds of being wrong means you will almost certainly experience the downside at some point in your life. And if the cost of the downside is ruin, the upside the other 95% of the time likely isn’t worth the risk, no matter how appealing it looks.>>


KlangFool

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