Mortgage: 15 vs 30 year

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Njm8845
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Mortgage: 15 vs 30 year

Post by Njm8845 » Mon Jan 14, 2019 10:03 am

I'm going to be a first time homebuyer in the coming months and have gone back and forth on the type of mortgage I should get. I've posted other questions, but wanted to focus on the following issue:

I am most likely going to be in the location for 8 or fewer years. The breakeven for renting vs. buying is 3-4 years.

Doesn't the fact that "I will sell the house long before the loan is paid off" make the 30-year mortgage the easy choice?

I hate the thought of paying $100k+ extra in interest, which is why I always leaned towards the 15 year. But since I will offload the house relatively soon, it doesn't seem like that much extra interest I'll be paying.... and the improved cash flow is still there.

Am I thinking about this correctly? Am I over-thinking this?

brokenrecord
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Re: Mortgage: 15 vs 30 year

Post by brokenrecord » Mon Jan 14, 2019 10:06 am

Depends on your financial goals. If all my goals were being met, I’d do 15 years every time. To me, there’s a psychological comfort to having that extra equity, even if it’s not paid off at the time of move. It will provide more options.

02nz
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Re: Mortgage: 15 vs 30 year

Post by 02nz » Mon Jan 14, 2019 10:07 am

Yes it’s a trade off between lower payment and less interest. Up to you to decide on that trade off based on the specific numbers and your income situation. I’d also look at 7- and 10-year ARMs, which have payments calculated like a 30-year mortgage but are likely to have lower interest rates.

barnaclebob
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Re: Mortgage: 15 vs 30 year

Post by barnaclebob » Mon Jan 14, 2019 10:14 am

For any loan you pay interest on your principle. Period. The whole idea of "you pay all the interest up front" is just a side effect of having a big balance and a long payoff time. Any principle you accrue will come back to you when you sell so really the holding period doesn't matter.

The only difference between a 15 year loan and a 30 year loan paid off in 15 years is the interest rate. Many people advocate getting a 30 year loan and paying it off at a 15 year rate if you wanted to get a 15 year in the first place because it gives you some cash flow flexibility. This flexibility can cost about$25-$100 a month depending on the difference in interest rate and size of the loan.

But to give an accurate answer we need to know what the alternative to a 15 year mortgage is. With the 30 year, would you be investing that extra cash each month into index funds?

HEDGEFUNDIE
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Re: Mortgage: 15 vs 30 year

Post by HEDGEFUNDIE » Mon Jan 14, 2019 10:38 am

Why not a 7 or 10 year ARM? Lower interest rate than both the 15 and 30 years.

Topic Author
Njm8845
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Re: Mortgage: 15 vs 30 year

Post by Njm8845 » Mon Jan 14, 2019 10:46 am

barnaclebob wrote:
Mon Jan 14, 2019 10:14 am
But to give an accurate answer we need to know what the alternative to a 15 year mortgage is. With the 30 year, would you be investing that extra cash each month into index funds?
Yes, I would be investing in VTI

Hiwatter
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Re: Mortgage: 15 vs 30 year

Post by Hiwatter » Mon Jan 14, 2019 10:59 am

I've always been a fan of the 15-year mortgage in nearly every situation.

Gets you into a lower interest rate and more of your payment goes to Principal.

I think the bigger thing to focus on in your situation is making sure you buy a quality home in a good area

KlangFool
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Re: Mortgage: 15 vs 30 year

Post by KlangFool » Mon Jan 14, 2019 11:03 am

Njm8845 wrote:
Mon Jan 14, 2019 10:46 am
barnaclebob wrote:
Mon Jan 14, 2019 10:14 am
But to give an accurate answer we need to know what the alternative to a 15 year mortgage is. With the 30 year, would you be investing that extra cash each month into index funds?
Yes, I would be investing in VTI
Njm8845,

What is the actual interest rate on the 15 years versus 30 years? And, what is the actual PITI? You could calculate your break-even point.

In my case, it was between 3% versus 3.49%. The difference was 0.49%. In my case, if my investment earned more than 5%, I made money.

KlangFool

Olemiss540
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Re: Mortgage: 15 vs 30 year

Post by Olemiss540 » Mon Jan 14, 2019 11:07 am

barnaclebob wrote:
Mon Jan 14, 2019 10:14 am
$25-$100 a month depending on the difference in interest rate and size of the loan.
To be more precise, it will cost you a minimum of 40 bucks per month PER $100k in outstanding balance (at .5% difference in rate).
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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willthrill81
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Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Mon Jan 14, 2019 11:12 am

Njm8845 wrote:
Mon Jan 14, 2019 10:03 am
I'm going to be a first time homebuyer in the coming months and have gone back and forth on the type of mortgage I should get. I've posted other questions, but wanted to focus on the following issue:

I am most likely going to be in the location for 8 or fewer years. The breakeven for renting vs. buying is 3-4 years.

Doesn't the fact that "I will sell the house long before the loan is paid off" make the 30-year mortgage the easy choice?

I hate the thought of paying $100k+ extra in interest, which is why I always leaned towards the 15 year. But since I will offload the house relatively soon, it doesn't seem like that much extra interest I'll be paying.... and the improved cash flow is still there.

Am I thinking about this correctly? Am I over-thinking this?
It's not at all a slam dunk. As of today, Bankrate.com reports that the average 30 year mortgage rate is 4.43%, whereas it's 3.75% for a 15 year mortgage. At those rates and for a $100,000 mortgage, after eight years, you would have paid $32,911.38 in interest with the 30 year mortgage and $23,467 in interest with the 15 year mortgage, a difference of $9,444.38.

Are the lower payments with the 30 year mortgage worth $9,444 for every $100,000 that you borrow?
“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

delamer
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Re: Mortgage: 15 vs 30 year

Post by delamer » Mon Jan 14, 2019 11:16 am

HEDGEFUNDIE wrote:
Mon Jan 14, 2019 10:38 am
Why not a 7 or 10 year ARM? Lower interest rate than both the 15 and 30 years.
I agree with this suggestion.

If you are set on a fixed rate mortgage, then I’d go with the 30 year since you plan to sell the house way before either loan would be paid off. The caveat is that you actually do invest the difference, of course.

Liquidity is a valuable asset.

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willthrill81
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Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Mon Jan 14, 2019 11:23 am

delamer wrote:
Mon Jan 14, 2019 11:16 am
HEDGEFUNDIE wrote:
Mon Jan 14, 2019 10:38 am
Why not a 7 or 10 year ARM? Lower interest rate than both the 15 and 30 years.
I agree with this suggestion.

If you are set on a fixed rate mortgage, then I’d go with the 30 year since you plan to sell the house way before either loan would be paid off. The caveat is that you actually do invest the difference, of course.

Liquidity is a valuable asset.
What difference does it make whether the house will be paid off in eight years or not?

The lower payments of the 30 year mortgage come with a price tag. The price may be worth it, but it's definitely there.
“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

delamer
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Re: Mortgage: 15 vs 30 year

Post by delamer » Mon Jan 14, 2019 11:41 am

willthrill81 wrote:
Mon Jan 14, 2019 11:23 am
delamer wrote:
Mon Jan 14, 2019 11:16 am
HEDGEFUNDIE wrote:
Mon Jan 14, 2019 10:38 am
Why not a 7 or 10 year ARM? Lower interest rate than both the 15 and 30 years.
I agree with this suggestion.

If you are set on a fixed rate mortgage, then I’d go with the 30 year since you plan to sell the house way before either loan would be paid off. The caveat is that you actually do invest the difference, of course.

Liquidity is a valuable asset.
What difference does it make whether the house will be paid off in eight years or not?

The lower payments of the 30 year mortgage come with a price tag. The price may be worth it, but it's definitely there.
Liquidity. Putting more equity into a “forever house” to save interest makes sense — we’ve done that.

But less so into a house that you know you won’t be hanging on to.

Your last point is key — I am not arguing that there is no price to be paid, just that sometimes it is worth paying it.

Obviously, not everyone will agree.

But I’d do an ARM in this situation.

setancre
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Re: Mortgage: 15 vs 30 year

Post by setancre » Mon Jan 14, 2019 11:46 am

Mortgage professor website has an excellent calculator for this. Also has a bunch of other useful calculators, fyi.

https://www.mtgprofessor.com/calculator ... or9ci.html

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willthrill81
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Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Mon Jan 14, 2019 11:47 am

delamer wrote:
Mon Jan 14, 2019 11:41 am
willthrill81 wrote:
Mon Jan 14, 2019 11:23 am
delamer wrote:
Mon Jan 14, 2019 11:16 am
HEDGEFUNDIE wrote:
Mon Jan 14, 2019 10:38 am
Why not a 7 or 10 year ARM? Lower interest rate than both the 15 and 30 years.
I agree with this suggestion.

If you are set on a fixed rate mortgage, then I’d go with the 30 year since you plan to sell the house way before either loan would be paid off. The caveat is that you actually do invest the difference, of course.

Liquidity is a valuable asset.
What difference does it make whether the house will be paid off in eight years or not?

The lower payments of the 30 year mortgage come with a price tag. The price may be worth it, but it's definitely there.
Liquidity. Putting more equity into a “forever house” to save interest makes sense — we’ve done that.

But less so into a house that you know you won’t be hanging on to.
Interest saved is interest saved, regardless of whether it's your "forever house" or not. We took out 15 year mortgage on our two prior homes, one we held for four years and another for one, and doing so resulted in us walking away with more home equity than we would have otherwise.
delamer wrote:
Mon Jan 14, 2019 11:41 am
But I’d do an ARM in this situation.
There's definitely an argument for that direction, but the OP's plans have a significant likelihood of changing over a period as long as eight years. And considering the upward direction of interest rates, he could get really hosed by an ARM if he has to remain in the home over a lengthy period.
“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

Olemiss540
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Re: Mortgage: 15 vs 30 year

Post by Olemiss540 » Mon Jan 14, 2019 12:24 pm

willthrill81 wrote:
Mon Jan 14, 2019 11:47 am

There's definitely an argument for that direction, but the OP's plans have a significant likelihood of changing over a period as long as eight years. And considering the upward direction of interest rates, he could get really hosed by an ARM if he has to remain in the home over a lengthy period.
I am strongly considering a modified approach with an ARM mortgage. If you get a 7/1 or 10/1 ARM and pay it down like a 15 year note, you will have the upside of lower interest rates than a 30 year, lower minimum payments of a 30 year IF you had a job loss or an emergency, and by the time the rate is going to adjust, would be 50% to 66% through the loan term anyways (as long as you made payments at the 15 year amounts) so the impacts of potential rate increases would be on a much smaller balance.

Thoughts from the larger group? Of course the downside being that you might find excuses to why you need to pay minimums instead of being FORCED to pay down at 15 year rates.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

FootballFan5548
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Re: Mortgage: 15 vs 30 year

Post by FootballFan5548 » Mon Jan 14, 2019 12:31 pm

I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.

chw
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Re: Mortgage: 15 vs 30 year

Post by chw » Mon Jan 14, 2019 2:53 pm

I would opt for the 30 year mortgage. I am a retired mortgage banker, and saw many folks struggle with the higher payments of the 15 year mortgage. The struggles usually begin with job loss or income reductions during a recession, or other family difficulty. Refinancing to 30 years can often be difficult when it's needed for the same reasons (job loss/income reduction). You can approximate the same schedule as the 15 year term by making one to one and a half extra principal payments a year. You may not get quite as good a fixed rate as a 15 year term, but you will have a lower mortgage payment with the 30 year term should an unexpected life event happen.

The 15 year mortgage could be appropriate for someone with a very low debt ratio, and high cash reserves should a loss of income become an issue. You stated that you are a first home buyer- IMO I would stick with the 30 year mortgage to give you a cushion for the unexpected.

nwa-non
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Re: Mortgage: 15 vs 30 year

Post by nwa-non » Mon Jan 14, 2019 4:24 pm

It completely depends on the financed amount and the rates.

Check this Google sheet out: https://docs.google.com/spreadsheets/d/ ... sp=sharing

Here I have given you 3 amortization tables to play with. There's a 30-year table, a 15-year table, and the first table is if you pay extra the difference between the monthly payments on the 15-year mortgage vs the 30-year one, and apply it to the principal on the 30-year mortgage.

I've gone with $300k as the financed amount. 4.5% as 30-year rate. 3.875% as 15-year rate.

If you were to pay extra $680.26 as additional principal (which is the difference between the 15-year monthly payment and the 30-year monthly payment) each month toward the 30-year mortgage, you'd pay if off in 192 months, or 16 years.

In this particular scenario, at the end of 8 years you'd have paid down the loan to a balance of $176,018.74 (applying extra payment) or $254,451.14 (30-year) or $161,653.31 (15-year).

Or you could invest that $680.26 in VTI, as you mentioned. Or you could put that in an guaranteed return of 2% in Ally savings account.

You can download the excel, plug in your own numbers and play around. Change the financed amounts and rates and see where you end up.

In most cases, going for the 30-year mortgage makes sense, especially if you intend to make extra payments towards principal, as your base payment is smaller and gives you more cash in hand. It's up to to you to do what you want with that cash.

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willthrill81
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Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Mon Jan 14, 2019 4:56 pm

chw wrote:
Mon Jan 14, 2019 2:53 pm
I would opt for the 30 year mortgage. I am a retired mortgage banker, and saw many folks struggle with the higher payments of the 15 year mortgage. The struggles usually begin with job loss or income reductions during a recession, or other family difficulty. Refinancing to 30 years can often be difficult when it's needed for the same reasons (job loss/income reduction). You can approximate the same schedule as the 15 year term by making one to one and a half extra principal payments a year. You may not get quite as good a fixed rate as a 15 year term, but you will have a lower mortgage payment with the 30 year term should an unexpected life event happen.

The 15 year mortgage could be appropriate for someone with a very low debt ratio, and high cash reserves should a loss of income become an issue. You stated that you are a first home buyer- IMO I would stick with the 30 year mortgage to give you a cushion for the unexpected.
The problem you're describing is a behavioral one: people tend to overspend on mortgages, regardless of the term. The average person tends to spend nearly every dime that they have coming in, and they're thrown into a tailspin if they miss just one paycheck. Cash reserves (i.e. an emergency fund) are needed by everyone, regardless of their mortgage term.

It's been shown in a recent thread that the cost of the 'flexibility' of a 30 year mortgage is pretty steep, around $6-9k on a $100k mortgage if a 30 year mortgage is paid off in 15 years rather than having taken out a 15 year mortgage to begin with, due to higher interest rates. In one example, a 30 year mortgage had about a $200 lower monthly payment than a 15 year, but the higher interest rate would cost the borrower $50 more per month over a 15 year period. Spending $50 to potentially reduce one's monthly obligations $200 seems like a high price to pay to me.
“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

PolarBearMarket
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Re: Mortgage: 15 vs 30 year

Post by PolarBearMarket » Mon Jan 14, 2019 4:59 pm

nwa-non wrote:
Mon Jan 14, 2019 4:24 pm
It completely depends on the financed amount and the rates.

Check this Google sheet out: https://docs.google.com/spreadsheets/d/ ... sp=sharing

Here I have given you 3 amortization tables to play with. There's a 30-year table, a 15-year table, and the first table is if you pay extra the difference between the monthly payments on the 15-year mortgage vs the 30-year one, and apply it to the principal on the 30-year mortgage.

I've gone with $300k as the financed amount. 4.5% as 30-year rate. 3.875% as 15-year rate.

If you were to pay extra $680.26 as additional principal (which is the difference between the 15-year monthly payment and the 30-year monthly payment) each month toward the 30-year mortgage, you'd pay if off in 192 months, or 16 years.

In this particular scenario, at the end of 8 years you'd have paid down the loan to a balance of $176,018.74 (applying extra payment) or $254,451.14 (30-year) or $161,653.31 (15-year).

Or you could invest that $680.26 in VTI, as you mentioned. Or you could put that in an guaranteed return of 2% in Ally savings account.

You can download the excel, plug in your own numbers and play around. Change the financed amounts and rates and see where you end up.

In most cases, going for the 30-year mortgage makes sense, especially if you intend to make extra payments towards principal, as your base payment is smaller and gives you more cash in hand. It's up to to you to do what you want with that cash.
One of the implications of this model is the direct calculation of what would be paid for liquidity opportunity.

Effectively, given the total value of payments in each option, choosing a 30-yr mortgage and paying it as if it were a 15-yr mortgage means paying ~$140 more per month for the opportunity to reduce monthly payments by ~$680 per month if needed.

chw
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Re: Mortgage: 15 vs 30 year

Post by chw » Mon Jan 14, 2019 5:14 pm

willthrill81 wrote:
Mon Jan 14, 2019 4:56 pm
chw wrote:
Mon Jan 14, 2019 2:53 pm
I would opt for the 30 year mortgage. I am a retired mortgage banker, and saw many folks struggle with the higher payments of the 15 year mortgage. The struggles usually begin with job loss or income reductions during a recession, or other family difficulty. Refinancing to 30 years can often be difficult when it's needed for the same reasons (job loss/income reduction). You can approximate the same schedule as the 15 year term by making one to one and a half extra principal payments a year. You may not get quite as good a fixed rate as a 15 year term, but you will have a lower mortgage payment with the 30 year term should an unexpected life event happen.

The 15 year mortgage could be appropriate for someone with a very low debt ratio, and high cash reserves should a loss of income become an issue. You stated that you are a first home buyer- IMO I would stick with the 30 year mortgage to give you a cushion for the unexpected.
The problem you're describing is a behavioral one: people tend to overspend on mortgages, regardless of the term. The average person tends to spend nearly every dime that they have coming in, and they're thrown into a tailspin if they miss just one paycheck. Cash reserves (i.e. an emergency fund) are needed by everyone, regardless of their mortgage term.

It's been shown in a recent thread that the cost of the 'flexibility' of a 30 year mortgage is pretty steep, around $6-9k on a $100k mortgage if a 30 year mortgage is paid off in 15 years rather than having taken out a 15 year mortgage to begin with, due to higher interest rates. In one example, a 30 year mortgage had about a $200 lower monthly payment than a 15 year, but the higher interest rate would cost the borrower $50 more per month over a 15 year period. Spending $50 to potentially reduce one's monthly obligations $200 seems like a high price to pay to me.
Will, I respectfully disagree about the problem being behavioral. An unexpected life event such as job loss or major medical emergency, can severely impact a family's budget in ways no one can foresee (and cannot be predicted). I always advised my clients to be conservative in budgeting for their mortgage payments, and simply be aggressive with extra principal payments once an adequate emergency fund is in place, and they have funded their retirement plans (at least to a level to get matching funds). IMO I would not gamble on taking on a higher mortgage payment than is necessary, for a few basis points in lower rate.

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willthrill81
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Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Mon Jan 14, 2019 5:31 pm

chw wrote:
Mon Jan 14, 2019 5:14 pm
willthrill81 wrote:
Mon Jan 14, 2019 4:56 pm
chw wrote:
Mon Jan 14, 2019 2:53 pm
I would opt for the 30 year mortgage. I am a retired mortgage banker, and saw many folks struggle with the higher payments of the 15 year mortgage. The struggles usually begin with job loss or income reductions during a recession, or other family difficulty. Refinancing to 30 years can often be difficult when it's needed for the same reasons (job loss/income reduction). You can approximate the same schedule as the 15 year term by making one to one and a half extra principal payments a year. You may not get quite as good a fixed rate as a 15 year term, but you will have a lower mortgage payment with the 30 year term should an unexpected life event happen.

The 15 year mortgage could be appropriate for someone with a very low debt ratio, and high cash reserves should a loss of income become an issue. You stated that you are a first home buyer- IMO I would stick with the 30 year mortgage to give you a cushion for the unexpected.
The problem you're describing is a behavioral one: people tend to overspend on mortgages, regardless of the term. The average person tends to spend nearly every dime that they have coming in, and they're thrown into a tailspin if they miss just one paycheck. Cash reserves (i.e. an emergency fund) are needed by everyone, regardless of their mortgage term.

It's been shown in a recent thread that the cost of the 'flexibility' of a 30 year mortgage is pretty steep, around $6-9k on a $100k mortgage if a 30 year mortgage is paid off in 15 years rather than having taken out a 15 year mortgage to begin with, due to higher interest rates. In one example, a 30 year mortgage had about a $200 lower monthly payment than a 15 year, but the higher interest rate would cost the borrower $50 more per month over a 15 year period. Spending $50 to potentially reduce one's monthly obligations $200 seems like a high price to pay to me.
Will, I respectfully disagree about the problem being behavioral. An unexpected life event such as job loss or major medical emergency, can severely impact a family's budget in ways no one can foresee (and cannot be predicted). I always advised my clients to be conservative in budgeting for their mortgage payments, and simply be aggressive with extra principal payments once an adequate emergency fund is in place, and they have funded their retirement plans (at least to a level to get matching funds). IMO I would not gamble on taking on a higher mortgage payment than is necessary, for a few basis points in lower rate.
Buyers should have an adequate emergency fund (i.e. 3-6 months of expenses, including the new mortgage) in place before they ever purchase the home. Otherwise, they're skating on thin ice as it may easily take them a couple of years to save up that needed EF. With an adequate EF in place, the cost/benefit of the 30 year mortgage's flexibility, which isn't as much as many believe, is fairly poor.

For instance, if a borrower takes out a $250k mortgage at today's average 30 year rate of 4.43%, their P&I payment will be $1,265.34 per month. If they pay it off in 15 years, their total interest expense will be $92,629. If they instead take out a 15 year mortgage at today's average rate of 3.75%, their P&I payment will be $1,818.06, and their total interest expense over the life of the mortgage will be $77,250.80. That's a difference between the two of $15,378.20 or $85.43 per month in return for the ability to lower their mortgage payment by $552.72. That's a significant guaranteed cost in return for the ability to drop one's payments by that amount. Not taking on too much mortgage debt and building up an adequate EF first seem more prudent to me.

In the above example, the $552.72 higher payment of the 15 year mortgage would increase the needed EF, assuming it was six months' of expenses in size, by $3,316.32. If that enables them to save $85.43 per month in interest payments, then the effective return on the additional EF needed is a whopping 31% annually. Where else are you going to get that kind of return on your money?

IMHO, if a borrower cannot afford to the payments of a 15 year mortgage and first build up an adequate EF based on a 15 year mortgage, then they should not buy the property. Now if they meet both of these requirements, they could still go with a 30 year mortgage if they do so for the explicit and planned purpose of using it as a potential arbitrage opportunity (e.g. investing the above $552.72 monthly into stocks). But we both know that very few people do that.
“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

delamer
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Re: Mortgage: 15 vs 30 year

Post by delamer » Mon Jan 14, 2019 5:49 pm

willthrill81 wrote:
Mon Jan 14, 2019 11:47 am
delamer wrote:
Mon Jan 14, 2019 11:41 am
willthrill81 wrote:
Mon Jan 14, 2019 11:23 am
delamer wrote:
Mon Jan 14, 2019 11:16 am
HEDGEFUNDIE wrote:
Mon Jan 14, 2019 10:38 am
Why not a 7 or 10 year ARM? Lower interest rate than both the 15 and 30 years.
I agree with this suggestion.

If you are set on a fixed rate mortgage, then I’d go with the 30 year since you plan to sell the house way before either loan would be paid off. The caveat is that you actually do invest the difference, of course.

Liquidity is a valuable asset.
What difference does it make whether the house will be paid off in eight years or not?

The lower payments of the 30 year mortgage come with a price tag. The price may be worth it, but it's definitely there.
Liquidity. Putting more equity into a “forever house” to save interest makes sense — we’ve done that.

But less so into a house that you know you won’t be hanging on to.
Interest saved is interest saved, regardless of whether it's your "forever house" or not. We took out 15 year mortgage on our two prior homes, one we held for four years and another for one, and doing so resulted in us walking away with more home equity than we would have otherwise.
delamer wrote:
Mon Jan 14, 2019 11:41 am
But I’d do an ARM in this situation.
There's definitely an argument for that direction, but the OP's plans have a significant likelihood of changing over a period as long as eight years. And considering the upward direction of interest rates, he could get really hosed by an ARM if he has to remain in the home over a lengthy period.
Money saved is money saved, yes. But you ignored the liquidity issue.

With an ARM, it is important to understand your worst case scenario. As in, when you will reach your maximum interest rate and what will your payment be then (recognizing that you’ll have paid down some principal by the time of any reset).

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willthrill81
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Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Mon Jan 14, 2019 5:53 pm

delamer wrote:
Mon Jan 14, 2019 5:49 pm
willthrill81 wrote:
Mon Jan 14, 2019 11:47 am
delamer wrote:
Mon Jan 14, 2019 11:41 am
willthrill81 wrote:
Mon Jan 14, 2019 11:23 am
delamer wrote:
Mon Jan 14, 2019 11:16 am


I agree with this suggestion.

If you are set on a fixed rate mortgage, then I’d go with the 30 year since you plan to sell the house way before either loan would be paid off. The caveat is that you actually do invest the difference, of course.

Liquidity is a valuable asset.
What difference does it make whether the house will be paid off in eight years or not?

The lower payments of the 30 year mortgage come with a price tag. The price may be worth it, but it's definitely there.
Liquidity. Putting more equity into a “forever house” to save interest makes sense — we’ve done that.

But less so into a house that you know you won’t be hanging on to.
Interest saved is interest saved, regardless of whether it's your "forever house" or not. We took out 15 year mortgage on our two prior homes, one we held for four years and another for one, and doing so resulted in us walking away with more home equity than we would have otherwise.
delamer wrote:
Mon Jan 14, 2019 11:41 am
But I’d do an ARM in this situation.
There's definitely an argument for that direction, but the OP's plans have a significant likelihood of changing over a period as long as eight years. And considering the upward direction of interest rates, he could get really hosed by an ARM if he has to remain in the home over a lengthy period.
Money saved is money saved, yes. But you ignored the liquidity issue.

With an ARM, it is important to understand your worst case scenario. As in, when you will reach your maximum interest rate and what will your payment be then (recognizing that you’ll have paid down some principal by the time of any reset).
I wasn't not ignoring the liquidity issue. I was pointing out that whether the home is your 'forever home' or not is completely irrelevant.

If the OP's 8 year plan were definite, I agree that the ARM would probably be superior. But if his plans change, the pendulum could swing the other way. And I agree that the terms of the ARM are very important in making this decision.
“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

nwa-non
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Re: Mortgage: 15 vs 30 year

Post by nwa-non » Mon Jan 14, 2019 6:23 pm

willthrill81 wrote:
Mon Jan 14, 2019 5:31 pm

IMHO, if a borrower cannot afford to the payments of a 15 year mortgage and first build up an adequate EF based on a 15 year mortgage, then they should not buy the property. Now if they meet both of these requirements, they could still go with a 30 year mortgage if they do so for the explicit and planned purpose of using it as a potential arbitrage opportunity (e.g. investing the above $552.72 monthly into stocks). But we both know that very few people do that.
Just for the sake of argument: Why is a 15-year mortgage sacrosanct? Why not a 10-year mortgage? 5, anyone? Should we just pay all cash? Because it is all about affordability. Lenders have figured out that there is a disconnect between the median income and the median price of houses, nationally or take any arbitrary location. For people to have affordable housing, the length of loans have increased.

Check this out: https://docs.google.com/spreadsheets/d/ ... sp=sharing

If you pay out a 30-year mortgage as if it was amortized as a 10-year mortgage, you'd come out ahead if you were actually paying out a 15-year mortgage.

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Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Mon Jan 14, 2019 6:36 pm

nwa-non wrote:
Mon Jan 14, 2019 6:23 pm
willthrill81 wrote:
Mon Jan 14, 2019 5:31 pm

IMHO, if a borrower cannot afford to the payments of a 15 year mortgage and first build up an adequate EF based on a 15 year mortgage, then they should not buy the property. Now if they meet both of these requirements, they could still go with a 30 year mortgage if they do so for the explicit and planned purpose of using it as a potential arbitrage opportunity (e.g. investing the above $552.72 monthly into stocks). But we both know that very few people do that.
Just for the sake of argument: Why is a 15-year mortgage sacrosanct? Why not a 10-year mortgage? 5, anyone? Because it is all about affordability. Lenders have figured out that there is a disconnect between the median income and the median price of houses, nationally or take any arbitrary location. For people to have affordable housing, the length of loans have increased.

Check this out: https://docs.google.com/spreadsheets/d/ ... sp=sharing

If you pay out a 30-year mortgage as if it was amortized as a 10-year mortgage, you'd come out ahead if you were actually paying out a 15-year mortgage.
You're absolutely right that a 15 year mortgage isn't special at all; it's simply the most common term after the 30 year. By the same token, mortgages longer than 30 years are out there for those that want the lowest possible payments. The point is that drawing out payments comes with a real price tag that should not be ignored nor underestimated.

Probably the biggest reason that homes have gotten more expensive over the last 50 years is because new homes have gotten so much larger. The median square feet per person in newly built homes has doubled since 1970.
“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

tindel
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Re: Mortgage: 15 vs 30 year

Post by tindel » Tue Jan 15, 2019 1:00 am

For us it's about practicality.

Most people live in a home for 8-12 years right now (depending on the source you read). With a 15 year loan, you're going to have a decent amount of equity in your home after 8-12 years and paid less interest. In contrast with a 30 year loan, you've paid a ton of interest and have little equity to show for it after 8-12 years. God forbid you're forced to sell in a down market and have to bring more money to the table.
willthrill81 wrote:
Mon Jan 14, 2019 6:36 pm
Probably the biggest reason that homes have gotten more expensive over the last 50 years is because new homes have gotten so much larger. The median square feet per person in newly built homes has doubled since 1970.
I was recently looking around my area. They don't make many new houses less than 2000 sq ft - the handful they do sell in my area are about $100k more than mine. Gigantic houses, 3000 sq ft, can be had for only $150k more than my current home - a few at that price point are 4000+ sq ft. We're a family with 2 adults, 1 child, and one dog. We currently have a 1900 sq ft house. We only really use 1100 sq ft... the rest is basically storage and a spare bedroom that guest use a few times a year.

I shutter at the thought of how much furniture I'd need to buy for a 4000 sq ft home. Not to mention all of the fancy-pants corners and stuff that will eventually leak water with time. Give me a nice 1970's square house. I'll never have a leak everything is easy to fix and update even if it is a bit boring.

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Njm8845
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Re: Mortgage: 15 vs 30 year

Post by Njm8845 » Tue Jan 15, 2019 7:00 am

FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?

KlangFool
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Re: Mortgage: 15 vs 30 year

Post by KlangFool » Tue Jan 15, 2019 7:54 am

Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool

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Njm8845
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Re: Mortgage: 15 vs 30 year

Post by Njm8845 » Tue Jan 15, 2019 9:06 am

KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Then you lose out. But doesn't it have just as much chance to go up as it does down? It seems rational to lock in a lower known rate for 10 years and then flip a coin on a lower/higher rate once most of the house is paid off.

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Re: Mortgage: 15 vs 30 year

Post by HEDGEFUNDIE » Tue Jan 15, 2019 9:35 am

KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Then you still have many years before you lose money compared with taking out the higher interest 30 year fixed loan from the beginning.

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Re: Mortgage: 15 vs 30 year

Post by KlangFool » Tue Jan 15, 2019 10:18 am

Njm8845 wrote:
Tue Jan 15, 2019 9:06 am
KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Then you lose out. But doesn't it have just as much chance to go up as it does down? It seems rational to lock in a lower known rate for 10 years and then flip a coin on a lower/higher rate once most of the house is paid off.
Njm8845,

Many folks lose their houses that way in the 2008/2009 recession. They lost their jobs while their ARM reset to the higher interest. They could not refinance and they do not have the money to pay the higher interest mortgage.

The same story will repeat itself again in the next recession.

KlangFool

HEDGEFUNDIE
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Re: Mortgage: 15 vs 30 year

Post by HEDGEFUNDIE » Tue Jan 15, 2019 10:21 am

KlangFool wrote:
Tue Jan 15, 2019 10:18 am
Njm8845 wrote:
Tue Jan 15, 2019 9:06 am
KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Then you lose out. But doesn't it have just as much chance to go up as it does down? It seems rational to lock in a lower known rate for 10 years and then flip a coin on a lower/higher rate once most of the house is paid off.
Njm8845,

Many folks lose their houses that way in the 2008/2009 recession. They lost their jobs while their ARM reset to the higher interest. They could not refinance and they do not have the money to pay the higher interest mortgage.

The same story will repeat itself again in the next recession.

KlangFool
If you cannot afford your house because the interest rate adjusted, you bought too much house.

If you cannot afford your house because you lost your job, that is a different story. A 30 year fixed mortgage would not help you in that situation either.

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Re: Mortgage: 15 vs 30 year

Post by KlangFool » Tue Jan 15, 2019 11:25 am

HEDGEFUNDIE wrote:
Tue Jan 15, 2019 10:21 am

If you cannot afford your house because the interest rate adjusted, you bought too much house.

If you cannot afford your house because you lost your job, that is a different story. A 30 year fixed mortgage would not help you in that situation either.
HEDGEFUNDIE,

<<If you cannot afford your house because the interest rate adjusted, you bought too much house.>>

A) Many people bought too much house in the first place.

B) Just because you could afford the house if the interest rate adjusted to X, it does not mean that you can afford the house at X+Y interest rate.

<<If you cannot afford your house because you lost your job, that is a different story.>>

C) It is the same story. It is very common for folks to buy a house at low ARM rate. They assume that they will have a job and their pay will increase when the ARM reset. Hence, they buy more house with an ARM.

D) Bad things tend to happen at the same time. ARM reset to high-interest rate. Job loss, and housing crash. If someone is not prepared, he/she will lose the house. We had been there for 2007/2009 recession. Now, folks are going to repeat the same mistake again.

KlangFool

Topic Author
Njm8845
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Re: Mortgage: 15 vs 30 year

Post by Njm8845 » Tue Jan 15, 2019 12:08 pm

KlangFool wrote:
Tue Jan 15, 2019 11:25 am
A) Many people bought too much house in the first place.

B) Just because you could afford the house if the interest rate adjusted to X, it does not mean that you can afford the house at X+Y interest rate.

<<If you cannot afford your house because you lost your job, that is a different story.>>

C) It is the same story. It is very common for folks to buy a house at low ARM rate. They assume that they will have a job and their pay will increase when the ARM reset. Hence, they buy more house with an ARM.

D) Bad things tend to happen at the same time. ARM reset to high-interest rate. Job loss, and housing crash. If someone is not prepared, he/she will lose the house. We had been there for 2007/2009 recession. Now, folks are going to repeat the same mistake again.

KlangFool
I think you have the overall point of "why subject yourself to extra risk". Minimal upside with, while unlikely, significant downside. No need to expose myself to potential ruin to save a few thousand dollars.

WhiteMaxima
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Re: Mortgage: 15 vs 30 year

Post by WhiteMaxima » Tue Jan 15, 2019 12:23 pm

KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Typically rent goes up when interest goes up. OP can rent out a room or so to offset the interest reset. OP also need to save the ARM savings to pay toward principle so at the interest reset, the base is lower.
Last edited by WhiteMaxima on Tue Jan 15, 2019 12:29 pm, edited 1 time in total.

Sandi_k
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Re: Mortgage: 15 vs 30 year

Post by Sandi_k » Tue Jan 15, 2019 12:29 pm

delamer wrote:
Mon Jan 14, 2019 11:16 am
HEDGEFUNDIE wrote:
Mon Jan 14, 2019 10:38 am
Why not a 7 or 10 year ARM? Lower interest rate than both the 15 and 30 years.
I agree with this suggestion.

If you are set on a fixed rate mortgage, then I’d go with the 30 year since you plan to sell the house way before either loan would be paid off. The caveat is that you actually do invest the difference, of course.

Liquidity is a valuable asset.
Agreed that cash flow matters. But so does the interest rate. I can tell you that we expected to stay in our first home for 7 years, and then "move up." We ended up staying there for 19 years. Personally, I sleep better at night with a fixed rate mortgage.

This entire question is why we refi'd to a 20 year loan in that house, and have a 15 year loan on the current house. The 20 year is a great "sweet spot" for first time buyers. And the 15 year is doable when you're further along in your financial journey, and don't want a mortgage in retirement.

KlangFool
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Re: Mortgage: 15 vs 30 year

Post by KlangFool » Tue Jan 15, 2019 12:37 pm

WhiteMaxima wrote:
Tue Jan 15, 2019 12:23 pm
KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Typically rent goes up when interest goes up. OP can rent out a room or so to offset the interest reset. OP also need to save the ARM savings to pay toward principle so at the interest reset, the base is lower.
Recession. It is amazing that folks forgot 2007/2009 recession easily.

KlangFool

WhiteMaxima
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Re: Mortgage: 15 vs 30 year

Post by WhiteMaxima » Tue Jan 15, 2019 12:42 pm

KlangFool wrote:
Tue Jan 15, 2019 12:37 pm
WhiteMaxima wrote:
Tue Jan 15, 2019 12:23 pm
KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Typically rent goes up when interest goes up. OP can rent out a room or so to offset the interest reset. OP also need to save the ARM savings to pay toward principle so at the interest reset, the base is lower.
Recession. It is amazing that folks forgot 2007/2009 recession easily.

KlangFool
recession means more people out of their own house, rental demand is getting high. I won't offer below market rent to people out of their own home. car sharing concept become house sharing.

Olemiss540
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Re: Mortgage: 15 vs 30 year

Post by Olemiss540 » Tue Jan 15, 2019 12:48 pm

willthrill81 wrote:
Mon Jan 14, 2019 5:31 pm
chw wrote:
Mon Jan 14, 2019 5:14 pm
willthrill81 wrote:
Mon Jan 14, 2019 4:56 pm
chw wrote:
Mon Jan 14, 2019 2:53 pm
I would opt for the 30 year mortgage. I am a retired mortgage banker, and saw many folks struggle with the higher payments of the 15 year mortgage. The struggles usually begin with job loss or income reductions during a recession, or other family difficulty. Refinancing to 30 years can often be difficult when it's needed for the same reasons (job loss/income reduction). You can approximate the same schedule as the 15 year term by making one to one and a half extra principal payments a year. You may not get quite as good a fixed rate as a 15 year term, but you will have a lower mortgage payment with the 30 year term should an unexpected life event happen.

The 15 year mortgage could be appropriate for someone with a very low debt ratio, and high cash reserves should a loss of income become an issue. You stated that you are a first home buyer- IMO I would stick with the 30 year mortgage to give you a cushion for the unexpected.
The problem you're describing is a behavioral one: people tend to overspend on mortgages, regardless of the term. The average person tends to spend nearly every dime that they have coming in, and they're thrown into a tailspin if they miss just one paycheck. Cash reserves (i.e. an emergency fund) are needed by everyone, regardless of their mortgage term.

It's been shown in a recent thread that the cost of the 'flexibility' of a 30 year mortgage is pretty steep, around $6-9k on a $100k mortgage if a 30 year mortgage is paid off in 15 years rather than having taken out a 15 year mortgage to begin with, due to higher interest rates. In one example, a 30 year mortgage had about a $200 lower monthly payment than a 15 year, but the higher interest rate would cost the borrower $50 more per month over a 15 year period. Spending $50 to potentially reduce one's monthly obligations $200 seems like a high price to pay to me.
Will, I respectfully disagree about the problem being behavioral. An unexpected life event such as job loss or major medical emergency, can severely impact a family's budget in ways no one can foresee (and cannot be predicted). I always advised my clients to be conservative in budgeting for their mortgage payments, and simply be aggressive with extra principal payments once an adequate emergency fund is in place, and they have funded their retirement plans (at least to a level to get matching funds). IMO I would not gamble on taking on a higher mortgage payment than is necessary, for a few basis points in lower rate.
Buyers should have an adequate emergency fund (i.e. 3-6 months of expenses, including the new mortgage) in place before they ever purchase the home. Otherwise, they're skating on thin ice as it may easily take them a couple of years to save up that needed EF. With an adequate EF in place, the cost/benefit of the 30 year mortgage's flexibility, which isn't as much as many believe, is fairly poor.

For instance, if a borrower takes out a $250k mortgage at today's average 30 year rate of 4.43%, their P&I payment will be $1,265.34 per month. If they pay it off in 15 years, their total interest expense will be $92,629. If they instead take out a 15 year mortgage at today's average rate of 3.75%, their P&I payment will be $1,818.06, and their total interest expense over the life of the mortgage will be $77,250.80. That's a difference between the two of $15,378.20 or $85.43 per month in return for the ability to lower their mortgage payment by $552.72. That's a significant guaranteed cost in return for the ability to drop one's payments by that amount. Not taking on too much mortgage debt and building up an adequate EF first seem more prudent to me.

In the above example, the $552.72 higher payment of the 15 year mortgage would increase the needed EF, assuming it was six months' of expenses in size, by $3,316.32. If that enables them to save $85.43 per month in interest payments, then the effective return on the additional EF needed is a whopping 31% annually. Where else are you going to get that kind of return on your money?

IMHO, if a borrower cannot afford to the payments of a 15 year mortgage and first build up an adequate EF based on a 15 year mortgage, then they should not buy the property. Now if they meet both of these requirements, they could still go with a 30 year mortgage if they do so for the explicit and planned purpose of using it as a potential arbitrage opportunity (e.g. investing the above $552.72 monthly into stocks). But we both know that very few people do that.
Well stated. Although it conflict with my personal circumstances, I am the only one to blame and appreciate the math being laid out so succinctly and unbiased.

Many disagree with a personal finance topic expressly due to the fact it goes against their personal situation (usually due to that persons own poor decisions) with zero willingness to rationalize that fact.

I very well may end up with a 30 year note but it is not because that is the best decision, merely because I would be buying more house than I should or can currently afford.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

TropikThunder
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Re: Mortgage: 15 vs 30 year

Post by TropikThunder » Tue Jan 15, 2019 12:50 pm

WhiteMaxima wrote:
Tue Jan 15, 2019 12:42 pm
KlangFool wrote:
Tue Jan 15, 2019 12:37 pm
WhiteMaxima wrote:
Tue Jan 15, 2019 12:42 pm
Typically rent goes up when interest goes up. OP can rent out a room or so to offset the interest reset. OP also need to save the ARM savings to pay toward principle so at the interest reset, the base is lower.
Recession. It is amazing that folks forgot 2007/2009 recession easily.

KlangFool
recession means more people out of their own house, rental demand is getting high. I won't offer below market rent to people out of their own home. car sharing concept become house sharing.
But you’ll approve a lease for a renter who just lost his job? Doesn’t sound like a winning strategy.

WhiteMaxima
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Re: Mortgage: 15 vs 30 year

Post by WhiteMaxima » Tue Jan 15, 2019 1:14 pm

TropikThunder wrote:
Tue Jan 15, 2019 12:50 pm
WhiteMaxima wrote:
Tue Jan 15, 2019 12:42 pm
KlangFool wrote:
Tue Jan 15, 2019 12:37 pm
WhiteMaxima wrote:
Tue Jan 15, 2019 12:42 pm
Typically rent goes up when interest goes up. OP can rent out a room or so to offset the interest reset. OP also need to save the ARM savings to pay toward principle so at the interest reset, the base is lower.
Recession. It is amazing that folks forgot 2007/2009 recession easily.

KlangFool
recession means more people out of their own house, rental demand is getting high. I won't offer below market rent to people out of their own home. car sharing concept become house sharing.
But you’ll approve a lease for a renter who just lost his job? Doesn’t sound like a winning strategy.
ASK for a year pre-paid with 10% discount.

international001
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Re: Mortgage: 15 vs 30 year

Post by international001 » Tue Jan 15, 2019 2:01 pm

If risk and liquidity are not issues, get a variable rate mortgage. Chances are you'll pay the least on interests. Just because on average short term rates will be lower than the equivalent long term rate. Same concept that bonds, if you know you want to invest for 30 years, better a 30 year bonds than renewing a 1 year bond every year.

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willthrill81
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Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Tue Jan 15, 2019 9:30 pm

tindel wrote:
Tue Jan 15, 2019 1:00 am
For us it's about practicality.

Most people live in a home for 8-12 years right now (depending on the source you read). With a 15 year loan, you're going to have a decent amount of equity in your home after 8-12 years and paid less interest. In contrast with a 30 year loan, you've paid a ton of interest and have little equity to show for it after 8-12 years. God forbid you're forced to sell in a down market and have to bring more money to the table.
willthrill81 wrote:
Mon Jan 14, 2019 6:36 pm
Probably the biggest reason that homes have gotten more expensive over the last 50 years is because new homes have gotten so much larger. The median square feet per person in newly built homes has doubled since 1970.
I was recently looking around my area. They don't make many new houses less than 2000 sq ft - the handful they do sell in my area are about $100k more than mine. Gigantic houses, 3000 sq ft, can be had for only $150k more than my current home - a few at that price point are 4000+ sq ft. We're a family with 2 adults, 1 child, and one dog. We currently have a 1900 sq ft house. We only really use 1100 sq ft... the rest is basically storage and a spare bedroom that guest use a few times a year.

I shutter at the thought of how much furniture I'd need to buy for a 4000 sq ft home. Not to mention all of the fancy-pants corners and stuff that will eventually leak water with time. Give me a nice 1970's square house. I'll never have a leak everything is easy to fix and update even if it is a bit boring.
While we were both in college, we lived in a 550 sq. ft. apartment, so when we graduated and I got a 'real job', we let the pendulum swing too far in the other direction and bought a 4/3 2,400 sq. ft. home. After four years, we decided to downsize to a 1,600 sq. ft. townhouse, then when we moved cross country, we bought a 1,200 sq. ft. 3/2 and love it. We use all of our space and don't need another inch than we have. And once the mortgage is gone hopefully by the end of the year, I have no doubt that we'll enjoy it even more.
“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

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willthrill81
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Location: USA

Re: Mortgage: 15 vs 30 year

Post by willthrill81 » Tue Jan 15, 2019 9:31 pm

Olemiss540 wrote:
Tue Jan 15, 2019 12:48 pm
willthrill81 wrote:
Mon Jan 14, 2019 5:31 pm
chw wrote:
Mon Jan 14, 2019 5:14 pm
willthrill81 wrote:
Mon Jan 14, 2019 4:56 pm
chw wrote:
Mon Jan 14, 2019 2:53 pm
I would opt for the 30 year mortgage. I am a retired mortgage banker, and saw many folks struggle with the higher payments of the 15 year mortgage. The struggles usually begin with job loss or income reductions during a recession, or other family difficulty. Refinancing to 30 years can often be difficult when it's needed for the same reasons (job loss/income reduction). You can approximate the same schedule as the 15 year term by making one to one and a half extra principal payments a year. You may not get quite as good a fixed rate as a 15 year term, but you will have a lower mortgage payment with the 30 year term should an unexpected life event happen.

The 15 year mortgage could be appropriate for someone with a very low debt ratio, and high cash reserves should a loss of income become an issue. You stated that you are a first home buyer- IMO I would stick with the 30 year mortgage to give you a cushion for the unexpected.
The problem you're describing is a behavioral one: people tend to overspend on mortgages, regardless of the term. The average person tends to spend nearly every dime that they have coming in, and they're thrown into a tailspin if they miss just one paycheck. Cash reserves (i.e. an emergency fund) are needed by everyone, regardless of their mortgage term.

It's been shown in a recent thread that the cost of the 'flexibility' of a 30 year mortgage is pretty steep, around $6-9k on a $100k mortgage if a 30 year mortgage is paid off in 15 years rather than having taken out a 15 year mortgage to begin with, due to higher interest rates. In one example, a 30 year mortgage had about a $200 lower monthly payment than a 15 year, but the higher interest rate would cost the borrower $50 more per month over a 15 year period. Spending $50 to potentially reduce one's monthly obligations $200 seems like a high price to pay to me.
Will, I respectfully disagree about the problem being behavioral. An unexpected life event such as job loss or major medical emergency, can severely impact a family's budget in ways no one can foresee (and cannot be predicted). I always advised my clients to be conservative in budgeting for their mortgage payments, and simply be aggressive with extra principal payments once an adequate emergency fund is in place, and they have funded their retirement plans (at least to a level to get matching funds). IMO I would not gamble on taking on a higher mortgage payment than is necessary, for a few basis points in lower rate.
Buyers should have an adequate emergency fund (i.e. 3-6 months of expenses, including the new mortgage) in place before they ever purchase the home. Otherwise, they're skating on thin ice as it may easily take them a couple of years to save up that needed EF. With an adequate EF in place, the cost/benefit of the 30 year mortgage's flexibility, which isn't as much as many believe, is fairly poor.

For instance, if a borrower takes out a $250k mortgage at today's average 30 year rate of 4.43%, their P&I payment will be $1,265.34 per month. If they pay it off in 15 years, their total interest expense will be $92,629. If they instead take out a 15 year mortgage at today's average rate of 3.75%, their P&I payment will be $1,818.06, and their total interest expense over the life of the mortgage will be $77,250.80. That's a difference between the two of $15,378.20 or $85.43 per month in return for the ability to lower their mortgage payment by $552.72. That's a significant guaranteed cost in return for the ability to drop one's payments by that amount. Not taking on too much mortgage debt and building up an adequate EF first seem more prudent to me.

In the above example, the $552.72 higher payment of the 15 year mortgage would increase the needed EF, assuming it was six months' of expenses in size, by $3,316.32. If that enables them to save $85.43 per month in interest payments, then the effective return on the additional EF needed is a whopping 31% annually. Where else are you going to get that kind of return on your money?

IMHO, if a borrower cannot afford to the payments of a 15 year mortgage and first build up an adequate EF based on a 15 year mortgage, then they should not buy the property. Now if they meet both of these requirements, they could still go with a 30 year mortgage if they do so for the explicit and planned purpose of using it as a potential arbitrage opportunity (e.g. investing the above $552.72 monthly into stocks). But we both know that very few people do that.
Well stated. Although it conflict with my personal circumstances, I am the only one to blame and appreciate the math being laid out so succinctly and unbiased.

Many disagree with a personal finance topic expressly due to the fact it goes against their personal situation (usually due to that persons own poor decisions) with zero willingness to rationalize that fact.

I very well may end up with a 30 year note but it is not because that is the best decision, merely because I would be buying more house than I should or can currently afford.
Thanks for the kind words. We certainly haven't and don't always do what's mathematically optimal ourselves, but knowing the math does help us to make informed decisions.
“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

Gil Gunderson
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Re: Mortgage: 15 vs 30 year

Post by Gil Gunderson » Tue Jan 15, 2019 9:46 pm

I think if was likely to move in 7-9 years and would be cashflow constrained I would go 15. I would suggest using XIRR to determine the rate of return on the difference in cashflow for the 15 vs 30 and the mortgage balance at year 8. Each month use the difference in motgage payment as the outflow and in month 96 use the mortgage delta as your inflow. Assuming the same down payment and 3.75% on 15 and 4.5% on 30 your rate of return on the incremental payment for the 15 will be approx 9.2%.

TropikThunder
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Re: Mortgage: 15 vs 30 year

Post by TropikThunder » Wed Jan 16, 2019 1:33 am

WhiteMaxima wrote:
Tue Jan 15, 2019 12:42 pm
KlangFool wrote:
Tue Jan 15, 2019 12:37 pm
Recession. It is amazing that folks forgot 2007/2009 recession easily.

KlangFool
recession means more people out of their own house, rental demand is getting high. I won't offer below market rent to people out of their own home. car sharing concept become house sharing.
Took me a while to find what I was looking for, but this is just flat not true. According to the St. Louis Fed study, each recession since the 1960's has been accompanied by a spike in rental vacancy rates. This graph doesn't give regional breakdowns, but what you can see is that each recession (regardless of causation) showed increased vacancies.

Image
https://fred.stlouisfed.org/series/RRVRUSQ156N


Similarly, a Harvard study after the Great Recession showed rental prices also dropped during the Great Recession throughout the country:
According to MPF Research, nominal rents for large investment-grade apartment properties slipped 0.3 percent in 2008 and then dropped 4.1 percent in 2009—both declines outpacing the change in overall prices. The weakness in 2009 was widespread, with rents down in 61 of 64 metropolitan areas. The largest decline was in the West (6.2 percent) and the smallest in the Northeast (1.8 percent), with the South (3.3 percent) and Midwest (3.5 percent) falling between these extremes.
http://www.jchs.harvard.edu/sites/defau ... itions.pdf

The problem is that, as KlangFool pointed out, people tend to lose their jobs and their homes at the same time, and no one approves tenants without an income, even if they can pre-pay. Sure, you can find anecdotal success stories, but the data doesn't suport that. The job loss/home loss/economic slowdown swamps the normal supply-and-demand curve.

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unclescrooge
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Re: Mortgage: 15 vs 30 year

Post by unclescrooge » Wed Jan 16, 2019 2:43 am

KlangFool wrote:
Tue Jan 15, 2019 10:18 am
Njm8845 wrote:
Tue Jan 15, 2019 9:06 am
KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am
FootballFan5548 wrote:
Mon Jan 14, 2019 12:31 pm
I second the vote for a 7 or 10 year ARM. When I bought my starter home I knew I'd only be in it for 5-6 years. I locked into an incredibly low 7 year ARM rate and sure enough 4.5 years later we sold and moved. It made sense for us, and if you're confident you'll only be there for 8 years, I'd suggest a 10 year ARM for a little more cushion.
Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Then you lose out. But doesn't it have just as much chance to go up as it does down? It seems rational to lock in a lower known rate for 10 years and then flip a coin on a lower/higher rate once most of the house is paid off.
Njm8845,

Many folks lose their houses that way in the 2008/2009 recession. They lost their jobs while their ARM reset to the higher interest. They could not refinance and they do not have the money to pay the higher interest mortgage.

The same story will repeat itself again in the next recession.

KlangFool
When the rates adjusted in 2008/9, the rates went DOWN.

People lost their homes because of job loss and neg-am loans, not ARMs.

KlangFool
Posts: 11604
Joined: Sat Oct 11, 2008 12:35 pm

Re: Mortgage: 15 vs 30 year

Post by KlangFool » Wed Jan 16, 2019 8:31 am

unclescrooge wrote:
Wed Jan 16, 2019 2:43 am
KlangFool wrote:
Tue Jan 15, 2019 10:18 am
Njm8845 wrote:
Tue Jan 15, 2019 9:06 am
KlangFool wrote:
Tue Jan 15, 2019 7:54 am
Njm8845 wrote:
Tue Jan 15, 2019 7:00 am


Why doesn't everybody do a 10yr ARM, then refinance to a fixed mortgage once the low interest period is over?
What happened if the interest rate goes up big in year 10 with refinance?

Klangfool
Then you lose out. But doesn't it have just as much chance to go up as it does down? It seems rational to lock in a lower known rate for 10 years and then flip a coin on a lower/higher rate once most of the house is paid off.
Njm8845,

Many folks lose their houses that way in the 2008/2009 recession. They lost their jobs while their ARM reset to the higher interest. They could not refinance and they do not have the money to pay the higher interest mortgage.

The same story will repeat itself again in the next recession.

KlangFool
When the rates adjusted in 2008/9, the rates went DOWN.

People lost their homes because of job loss and neg-am loans, not ARMs.
1) It depends on when they get their ARM versus when it was reset.

2) In any case, a person cannot count on be lucky whenever the ARM reset.

KlangFool

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