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Five Reasons the 30 Year Mortgage Beats the 15

I’m one of the rare examples of personal finance bloggers who thinks the 30 year mortgage beats the 15 year loan for most homeowners. Yes, there are advantages to paying off your mortgage in half as much time, but you still have to deal with the effects of a higher house payment for 15 years, and that’s a long time when life is out there happening.

Before getting started, let’s use the following numbers as a point of reference for comparison:

  • A mortgage amount of $200,000 for both a 30- and 15-year loan.
  • As of today, the going rate on a 30 year fixed rate mortgage is around 3.50%, with a monthly payment of $898.
  • The 15 year fixed is currently at about 2.75%, giving a monthly payment $1,357.
  • The difference between the payments on the two terms is $459 per month.
  • Over the course of a full year, the difference between the two loans is $5,508.

Why is the 30 year loan better than the 15?

Better cash flow for other purposes

Five Reasons the 30 Year Mortgage Beats the 15
Five Reasons the 30 Year Mortgage Beats the 15
As you can see from the numbers presented above, if you had taken a 15 year mortgage, you’d have $459 less in your cash flow each month, or more $5,500 each year. That’s money that will be effectively removed from your monthly and annual cash flow.

While paying off your mortgage in less time may be a worthy goal, it’s important to remember that there will be no tangible benefit to your cash flow until the mortgage is fully paid. With fixed rate loans, you don’t reduce your payment by paying down the loan—it will remain constant until the loan is gone. All of the benefit of the 15 year loan is on the back end, when the loan is paid! Until that happens, the most tangible financial affect will be a lower cash flow.

More options in an emergency

Let’s say you lose your job; right up there with looking for a new one as your new mission in life will be lowering your living expenses. Now we all know that short of selling your home, there’s no way to lower your mortgage payment when you’re unemployed. By the time you’ve lost your job, it will already be too late to do anything about your house payment.

A mortgage is long-term debt, and what ever terms you set up when you took it will be the ones you’ll have to deal with in the middle of a crisis. Though the standard financial advice is usually to do what will be the best thing in the long run, there may be no long run if immediate problems aren’t successfully dealt with.

This is just my personal thinking, but if you work in an occupation or industry that is prone to layoffs or is experiencing a contraction, you should stay with a 30 year loan. That course is even more advisable if your compensation fluctuates. But increasingly this applies to nearly all occupations and industries—the ones that once were stable aren’t any more.

More control over your liquid assets

One of the overlooked issues of a 15 year loan is that it transfers cash into the home at the expense of other financial pursuits. Once money is paid into a mortgage, there are only two ways to get it out if needed: sell the home or borrow against it. Assuming that you have no intention of selling, borrowing will defeat the entire purpose of the 15 year loan.

But closer to home, there’s little point in paying off a mortgage in 15 years if you have credit card debt and car loans. Better to keep the mortgage outstanding longer and get rid of other debt, since mortgages are generally fixed rate and have tax advantages.

Broader investment diversification

The 30 year loan leaves you with more money for everything else. One of the problems inherent in a 15 year mortgage is that it means that a disproportionate amount of your household budget will flow into a single investment—your home. Financial advisors tell us to diversify as a way of protecting against declines in any investment class—since 2007 we’ve learned the hard way that house prices can go down as well as up.

That being the case, it makes sense to increase your non-housing investment. Because of its high cost relative to nearly everything else, most people are already “overweight” in their investment in their home to begin with. When it comes to a mortgage, you’re not just paying off a debt—every dollar of principal increases the investment in your home, and away from other investment classes.

You can still pay it off in 15 years (or less)

This is what I like best about a 30 year loan, and the reason that it stands head and shoulders above the 15.

If you have a 30 year loan you can make payments based on what would be required to payoff the loan in 15 years. The advantage to this is that if you ever get into an emergency situation where you need to drastically cut living expenses, you’ll be able to fall back on the original payment—in our example above, that would be $459 per month less than the payment on the 15 year loan, or roughly the amount of a typical car payment.

Now accountants and financial analysts will make the point that in using this method you’re incurring a rate that’s .75 above the going rate for a 15 year loan, and they’re right. However, since mortgage interest is tax deductible, the higher rate paid for a 30 year loan will also create a bigger deduction. What this means is that the net interest rate you’ll pay for the 30 year loan will actually be something less than .75%.

But numbers aside, .75%–or what ever it will be net of the tax benefit—will be a small price to pay for the flexibility the 30 year loan affords, especially in an emergency situation.

What do you think? Are there compelling reasons why you think the 15 year loan is better?

( Photo from Flickr by james.thompson )


44 Responses to Five Reasons the 30 Year Mortgage Beats the 15

  1. I paid off my mortgage in about 10 years, but you describe the approach I took. Cash flow is very important, so we started with a 30 year long, paid extra, then refinance to a 15 year loan (with no fees like closing cost) when the interest rate dropped and our new 15 year monthly payment would be less than the original 30 year monthly payment.

    The advantages that you list above are especially important if your family only has one breadwinner (like mine does).

  2. MR – I think that approach (30 year, payoff in less) is even more important today, with all the economic uncertainty and the weakness in housing. If you take a 15 year loan today, you’re betting that we’ll have 15 years of stability that will enable you to carry out your plans. That may not be the case, so ability to manage cash flow becomes more important. Without it, you may never reach the goal.

  3. There is no one right answer to this. In the end, it is a balance between cash flow and ultimate value. This is not unlike the question of whether to lease a car (better for cash flow) or buy outright (better for the ultimate bottom line). So it really depends on a family’s financial situation, which also might change over time (new kids are born, older kids move away, etc.)

  4. CCC – That’s true, but I think that for most people, being conservative with outgo is more important now than ever. If you take a 15 year payment before you have kids, what happens when they finally come along? I think that’s a different kind of long term planning–but long term nonetheless. It’s about being ready for what ever happens, rather than locking yourself into a plan that may become unmanageable in the future.

  5. I see your point but I think there is benefit to the discipline required in a 15 year mortgage. Yes we could take a 30 year loan and pay it down in 15 years, but that’s much less likely to happen when that extra $400+ is in my account in cash. In planning to save the most money, sometimes for families like mine it makes sense to force that savings. We’re not at all worried about emergencies since we have multiple income streams and a big emergency fund, and we already have more than the value of our house invested elsewhere. So in our case, having less cash flow actually makes us more frugal, causing us to be conscious of wasteful spending on stuff like dining out and clothing.

  6. Hi Sarah – You and your family have a lot of discipline, so I agree that a 15 year loan can be the better way. It’s a form of forced savings, or forced debt reduction.

    The post however is written for more typical situations where money or jobs are tight. When I was in the mortgage business, one situation I noticed was the number of people refinancing from 15 year loans back to 30. Everyone wants to pay off their loan in less time, but using a 40% increase in the house payment–and one that’s locked in at that–is a tough way to do it, especially when cracks in the financial foundation hit.

  7. Hi Kevin, I think the 30 year makes sense for homeowners that are young or otherwise have a small financial cushion. You can always pay more every month if you have to, but it makes sense to save a hefty emergency fund and start developing multiple streams of income first.

    I really like the point about many people being “overweight” in housing. Even worse, it’s a singular asset so you can’t sell off part of it, and it’s quite illiquid. As we’ve seen with the current bubble bursting, too many people throw their savings away trying to hold on to their house only to lose it anyway.

  8. Hi Jennifer–Excellent point about a house as a singular asset. A bank account, money market fund or even a stock portfolio can be partially sold to raise cash. A house is totally illiquid. It’s common to attach all kinds of emotional strings to homeownership, but considering all the money that’s sunk into it, it is first and foremost an investment.

  9. Having a 15 year loan gives you equity a whole lot quicker, which is of utmost importancein such an unstable economy. If you have a 30 year loan and want to move, good luck getting your house sold and breaking even.

    Good points about the 30-yr note providing monthly cash flow flexibility, but don’t forget the flexibility of the ability to move that property should life circumstances change, for better or worse. That, a 30 year loan can’t provide.

  10. Hi Jason–That’s an excellent point, and it goes to show how complicated home ownership has become. To take that a step farther, if your employment situation is in doubt–with no end in sight–you might even be better off renting. In some markets, it’s difficult to sell a house at any price, so renting is the only option that provides complete flexibility.

    However I still maintain that for the typical homeowner–who doesn’t want to sell–the 30 year loan provides greater flexibility. The advantage of the 15 only kicks in when the loan is finally paid in full. Most people won’t be in a position to make that happen in a financial crisis.

  11. Yes, yes, yes. Finally an intelligent personal finance blog looking at the 30 yr vs 15 yr mortgage issue. This is the most misunderstood topic in personal finance where the advice given is often very low quality.

    15 year mortgages are better than 30 year mortgages for one main reason, they have a lower interest rate, that’s all.

    30 year mortgages are better than 15 year mortgages because they have a lower minimum payment.

    Far too often financial advice confuses the issue and reports a 15 year mortgage as vastly superior to a 30 year because of the difference in total interest paid over the life of each loan. That is a terrible way of analyzing the situation.

    That simplistic analysis would also tell you that a 5% 15 year $200k mortgage is better than a 4.5% 30 year mortgage. After all this 15 year mortgage will pay $80k less over its life than the longer 30 year. It should be obvious that is statement is completely false. In the United States where the overwhelming majority of residential mortgages have no prepayment penalties it would be a horrible decision to take a higher rate 15 year mortgage. You can simply amortize the longer lower rate mortgage with extra principal payments. In the example given above you can pay off the 30 year mortgage in exactly 15 years with $13k less in total payments, this comes entirely from the difference in interest rates.

    This does not mean a 30 year mortgage is always better, only that the difference between the two is more nuanced. A more meaningful analysis is as follows. $200k mortgages 3.75% 15 year rate or a 4.5% 30 year rate. $1454 payment on the 15 year and a $1013 on the 30 year. Assume a prepayment of $441 on the 30 year mortgage every month, that makes the out of pocket cash amount the same under both options. After 15 years the 15 year mortgage is completely gone, the 30 year mortgage will have a balance of $19,371 remaining.

    So comparing apples to apples you can have a 200k debt today, make payments of $1454 a month for 15 years, and be totally debt free in 15 years. The difference is a lump sum payment of $19,371 in month 180 if you take out a 30 year mortgage. The present value of that is something like $10,500 today.

    So would you pay $10k today to have the option of reducing your monthly cash outflow by $441 in any given month for the next 15 years? That is the difference between a 15 year and a 30 year boiled down into a simple comparison. It’s not obvious that one is better than the other, it is most certainly a personal decision if that cashflow flexibility is worth the extra $10k cost. But make no mistake those are the savings of a 15 year mortgage over a 30 year, none of this $100k less total interest nonsense. Your post was great but from the comments I think people still are missing this essential point.

    The issue is of course even more complex if a full analysis were done. As you mentioned the cost isn’t interest rate isn’t really .75% more because of the mortgage interest tax deduction. There are also interest rate factors to consider. If tomorrow morning we wake up and the 30 year treasury bond is yielding 10% you are going to be very sad that you took out the 15 year mortgage. You are forced into larger principal payments to pay off a 3.75% interest rate debt when the 30 year holder can invest his $441 a month into a much more attractive fixed income asset.

  12. Hi Bill–Thanks for the comment and for your support. What others might miss that you and I see is the cash flow component. How much cash flow do you want committed for 15 years for the benefit of paying your mortgage off in half the time?

    I get the thinking–long term you will be better off with the 15 because you’ll be mortgage free–but you can pay it off in 15 years with the 30 year loan too, and in the process you keep control of your cash flow. To me, that’s critically important, especially since we’re now in a very unstable time with no end in sight.

    At the core, the problem I have with the 15 year is the same one I have with optimistic retirement projections–they assume perfect world conditions for a very long period of time. If we look at the economy, housing and employment over just the past 10 years, there’s nothing to support perfect world assumptions extending out more than a decade. So if you take a 15 year loan, and in year three you lose your job and have to take one at 50% less pay, how do you handle the payment on the 15 year loan? We can’t ignore that.

    I love your calculation of the present value of the interest saved. Most people would gladly pay a $10,000 debt to free up $441 a month.

  13. Hi, Kevin,

    I tend to be more of the 15-year over 30-year, personally. But, if you are on the 30-year plan and can put additional principal on every month — even a few dollars! — you end up shortening your term.

    One pro/con of the 15-year, as you said, is that you’re on the hook for that amount every month, as opposed to a 30-year that has lower payments but allows you more flexibility to add more in months when you can. But, it really depends on everyone’s circumstances.

    But, what about this? Don’t over-buy a house. Don’t get a house that’s bigger than you need. Or even consider renting until you really find the right fit. It seems to still be a buyer’s market, for the most part, so most people have time to find what they’re really looking for.

  14. Hi Chris–You’re so right! Don’t overbuy! The mistake most people make is buying at or just above their financial capabilities. You’re constrained no matter what you do at that point. But buy beneath your means and a 15 year loan won’t be such an issue. That’s really at the root of the debate, much more so than the term of the mortgage.

  15. I agree the most important thing you can do when buying a home is to not overspend. Also getting a 15 year mortgage can be a great idea. If your payments are sufficiently small compared to your income that the optional lower payment on a 30 year does nothing for you by all means take the 15 year and save some money. The problem is that far too often borrowers don’t understand the decision they are making. Here are two great examples I found this morning.

    My local credit union offers a loan called a “Finish Line Refi”. It’s a short term mortgage, fixed rate 5-12 years, targeted at older homeowners who want to pay off their mortgage before retirement. When you look closely at the loans you find they are a terrible product.

    Comparison one is between a 12 year Finish Line mortgage and a 15 year conventional. The 12 year has an interest rate of 4.49%, the 15 year has an interest rate of 3.875%. You can take out the longer 15 year, add extra principal payments, pay it off in 12 years and save over 5% of the loan balance in interest payments. This doesn’t even consider the option of making a lower payment on the 15 year if you needed to. That 12 year loan product should not exist and yet they find customers willing to take a strictly inferior loan.

    Comparison two is just as ridiculous. You can take out a 7 year Finish Line mortgage at 3.99% or a 7/1 ARM at 3.99%. You can pay off the 7/1 ARM in exactly 7 years by making exactly the same payments as the Finish Line loan. However taking the ARM gives you the option of reducing your payment,if necessary, by a whopping 65% a month. If you have a 100k mortgage that’s $900 a month! You’d be a fool to take the Finish Line mortgage, the two products are exactly the same except you have the option to lower your payment by 65% in an emergency. The Finish Line product should not exist and yet customers use it.

    One note is that the Finish Line loans have no closing costs, this makes them slightly more attractive than they otherwise would be but not enough to overcome the difference in interest rates

    Here is a link for actual live levels on the loans.
    http://www.wcu.com/home/rates/mortgage

  16. Hi Bill–I’m not familiar with that loan type, but it doesn’t surprise me even a little. The whole thing is a play on emotions–you have a borrower who’s 58 years old, has 27 years remaining on his 30 year loan, but wants to retire at 65 with no mortgage–PRESTO, 7 year “Finish Line” solves his problem. Not fully comprehending the mortgage universe, he jumps in thinking this is some sort of magic program that will get him where he wants to go.

    Businesses thrive on those who make emotional decisions because they know that they don’t look at numbers–they FEEL their way through everything. For that reason they’re doomed to pay more. Not to be harsh, but that really is true.

    “Feelers” are easy sales targets–identify and exploit their emotional hot button and you’ve got them. Very sad but it happens every day. There are even sales courses that can train you how to do that–when you meet a feeler, put your charts and graphs away, and just talk to them about how it will FEEL when their mortgage is paid in 7 years. Done deal.

  17. You are assuming everyone is getting 200k houses. In your own words, we should be getting houses well below what we can afford.

    I know I am not typical, but I bought a house for 40k. A perfecty fine house that needed some new paint and new windows. I’ve invested another 8K into it. When I compared the 30 to the 15, the difference in payment was about $60 a month. And saved me thousands in interest. It was a no-brainer. In all, I’ll have my house paid for in 8 years (because i double up whenever I can).

  18. Hi Rebecca–You’ve done what is fundamentally the best thing. You’ve purchased a home that’s low enough in price that you have far more options than people who bought at higher prices (which is by far the most popular course).

    If you think about it, $48,000 (including repairs) is the cost of a high end car or a typical SUV, so it makes sense to pay it off as quickly as possible. The advice given in this post is aimed at the typical homeowner/buyer, which you obviously aren’t. Very well done!

  19. There are many who agree with you, Kevin.
    As you suggest, this is the lowest rate money you’ll ever have, today the 15 is about 3.5%, and 30 at 4.0%.
    If there’s no other debt, no credit cards, no car loan, etc, how about the emergency fund? Are you depositing to the 401(k) to get the full matching?
    Any prepayment is like a 15 year (or longer) CD at that rate. The last 10 years aside, I think the next 10 will provide better returns.
    Tough to go 15, then have a child or two and realize the Mrs would like some time off. That $400/mo would be real handy then.

  20. Hi Joe–Good points accross the board. What I mostly like about the 30 is that you keep your options. When I was in the business, there was a steady flow of people who wanted to refinance from a 15 year back to a 30. In principle, the 15 seemed like the way to go, but life can get in the way. What works on paper doesn’t always work in life.

    Another under-appreciated factor is inflation. As the cost of living steadily rises, the need to improve cash flow increases as well. Since pay raises and promotions aren’t as generous as they once were, the cash flow improvement increasingly comes from the expense side of the ledger. The house payment is the biggest and give the greatest savings.

  21. Another option using the 30 year mortgage is to put the different between the 30 year and 15 year payments into your own side fund each month used to generate compound interest.

    Once the side fund has compounded to the mortgage balance, you can pay it off.

    In the interim, you’ve got 100% liquidity, maximized tax deductions, and an appreciating asset instead of dead equity that must be borrowed to access:

  22. Hi Derrik–that’s a brilliant hybrid strategy. It’s what I was hinting at with Broader investment diversification and Better cash flow for other purposes. You said it better, and in a lot less words! I think we’re on the same track here…

  23. Why would anyone with fiscal discipline want to pay off a mortgage with an deductible interest rate around 4 percent?

    The equity on your home will only be earning about 3 percent after taxes. I’d rather have the liquidity and invest this money elsewhere with much more upside.

    Given our high national debt, inflation will be significant over the next 15+ years which is even more reason to minimize the equity and let the bank take the hit.

  24. Hi Aaron, As you can tell from the post, I agree with you. But one thing I have realized since writing this post is that the financial situation of the world is so complicated that we don’t know how it will play out. Like you I think inflation is inevitable, however, how it plays out will be another story.

    We can have general inlfation, even into double digits, while house prices stagnate or continue declining. That’s whats been happening the past few years, so it isn’t a blind speculation. If that is the case, paying off the mortgage in less time could be an excellent strategy. But I sure wouldn’t do it if it meant draining your other assets to low levels. Today we have to be ready for just about anything!

  25. Hi Kevin,
    I wish I would have read this before my husband and I refinanced our home for a 15 year mortgage in 2010 thinking we would get our home paid off quicker to sell it. We bought our tiny house in 2006 (before we had our son, thinking we would only be there a few years) but now are busting out of it. Even with the refinance it will be years before we have paid off enough to sell because the value of homes in our area has gone down so much. With the higher mortgage payment now we cannot even rent it out to move into a bigger house because no sane person would pay that much rent for such a tiny house! This whole experience has left us with such a bad taste in our mouth for home ownership I don’t know if we will end up buying again.

  26. Hi Laura–I’m sorry to hear about your dilemma. But I think you’re doing the right thing staying there and making the payments. One advantage you DO have with the 15 year is that it is paying down faster than it would with a 30. That means you’ll be closer to the day when you’ll again have equity in it and be able to sell.

    You’re six years into the loan so you have 9 years left–at this point the paydown should be accelerating and you’ll get clear sooner. Had you taken the 30, you’d have 24 years left to pay, and more than 90% of the balance remaining. Yes, it would be an easier payment to make, but you might never have gotten out of it.

    Do you have an amortization schedule to keep track of your balance and balance projections?

  27. I feel sorry for the author of this blog and those who have convinced themselves or have been convinced by those selling to them that a 30 is better than a 15. It is like saying a big mac is better for you than a whopper. The TRUTH, they both are bad for you and the sooner you can pay the mortgage off the sooner you will see. I can say that because I have had both and now have neither. From where I sit I hope many will see because truly the borrow is slave to the lender and I AM FREE.

  28. Hi Scott–I actually agree with you, no mortgage is best. But most homeowners do have a mortgage, and it’s a matter of how best to get to the point of being able to pay it off.

    I’m glad that you’re mortgage free, but offer some friendly advice to add a bit humility to your recommendation. You were once right there where others are now, having a mortgage of your own. Consider yourself blessed my friend. High house prices don’t allow many to buy without taking a mortgage.

  29. Hey, Kevin – lighten up a bit on Scott. I agree most are not mortgage free. That having been said, I agree with Scott. 15 year mortgages are the way to go (and yes, I do have a 15 year mortgage, which with any luck we’ll have paid off in 3 yars). If you are young, have limited income, maybe one income and little ones, then maybe a 30 year mortgage is the best route to take – for the sake of security ’cause all kinds of costs come up with little ones. But, if your little ones are college aged or older – then I say throw caution to the wind, get that 15 year mortgage and forced savings. It is soooooooooooooooo much easier to discipline yourself financially when your kids won’t be “at risk”. That’s what we’re doing and we’re loving every minute of it. It is unbelievable how much $ you can save when you don’t have children financially dependent on you. When you do – I totally get that 30 year mortgage, but once it’s just you and your spouse, suck it up and get it paid in full.

  30. Hi Jim–I didn’t actually even disagree with Scott, but only emphasized the fact that most people do have mortgages that they struggle to pay, and converting to a 15 year loan only makes the burden heavier. I think that’s the reason so many houses are in foreclosure, people are carrying payments they can barely afford. For that reason alone I think caution is the best advice.

    That said, you make a good point about throwing caution to the wind when the kids are grown and gone. The risks drop when that happens, and getting free and clear on your house is one of the best preparations for retirement.

  31. Kevin, Another great thought provoking financial post – thank you.

    I’ve always been biased to the 15 year term and the reason is simply psychological. When I look at the paltry amount of principal that is paid off when you make the minimum payment on a 30 year term mortgage, it really doesn’t feel right to me. That being said, there have been times when I have taken a 30 year term. Cash flow is a very valid consideration and sometimes that breathing room when you start in a new home is highly desirable. Also, I think some regional housing markets would be very difficult to enter if you were not flexible enough to consider a 30 year option.

  32. I agree on the small amount of principal on 30 year loans, but you always have the option to pay extra principal. And you won’t be locked into the higher payment the way you would with the 15.

  33. I took a 30 year mortgage on a rental, in order to put the cash flow to better use. And while I agree that it makes more financial sense to do the same for any property, I bought my house cash because I like the feeling to live in a paid for house. An expensive luxury but I am happy to be able to afford it.

  34. Hi Pauline–Paid for is always best, but house prices in so many places are too high for the average person to do that. That’s why I’m a strong believer in the 30 year mortgage rather than the 15. You can always pay a 30 year loan in 15 years, and when you do you preserve your ability to fall back on the lower payment that comes with the longer loan term. With a 15 year loan, you’re usually stuck.

  35. I think the last point you made is one of the most important of all. You can treat a 30 year mortgage as if it were a 15 year mortgage and pay it off in that amount of time. It’s not that hard (assuming you have the spare cash flow). Simply ue a mortgage calculator to enter the same principle and interest on your 30 year loan but use a 15 year term. That will tell you what your payment should be if you want to shorten it to 15 years. One other point to consider is that if you have other debt secured or non-secured, you should focus on paying that off rather than paying down the mortgage.

  36. YES (!!!) Jose–very good point on paying other debt first! Credit cards, auto loans and other debt usually carry higher interest rates and are not tax deductible, and should be eliminated first.

    The payment bite is usually higher too. For example, you may be paying $600/mo on a $100,000 mortgage, but $300/mo on a $10,000 car loan, or $200/mo on a $6,000 credit card.

    By paying off those debts first, you leave yourself with more free cash to paydown the mortgage.

  37. Hey Kevin, great article here. I think the key for people taking your advice here is to designate the extra cash flow they’ll have saved going with a 30 and use it for another major financial goal. They could even put the money toward the mortgage if they like!

  38. Exactly John, and that’s a point I should have stressed. The advantage is in having extra cash flow to direct into savings, investment and debt reduction (including your mortgage). If you just fold the extra into your regular budget the advantage is largely lost.

  39. The only way a 30 year mortgage is superior to a 15 year is the fexibility of a lower payment if job loss or reduction occurs. But, I believe the negatives far out weigh the positives. Here are some other options.

    Make sure you have adequate savings when you pruchase the home so job loss won’t have as great of an impact.

    Find a cheaper house (10-20% less) and commit to the 15 year mortgage.

    Get credit cards paid off before you purchase the house and then get rid of them.

    The facts overwhelmingly show we have a real debt problem in this country. Most will not pay extra to make a 30 year mortgage a 15 year mortgage. Most will incur credit cared debt. Most will buy too much house and too much car so those payments are too high. They end up in trouble and blame it on the 15 year mortgage.

    Why would anyone spend brain power on justifying why spending 15 years of house payments on interest is a good thing. That is nuts!

  40. Hi Kerry–I actually agree with all of those outcomes of human weakness. However, human weakness is a part of life. Your point that “The only way a 30 year mortgage is superior to a 15 year is the fexibility of a lower payment if job loss or reduction occurs” is more than sufficient reason for many people to go for the 30 rather than the 15. There’s life in the ivory tower–complete with its battery of “should have’s”–and then there’s real life. The two are very different, and I hope you can appreciate this.

    We’re all human and life doesn’t always go according to a script. We have to be aware of that when making plans–especially long-term plans.

  41. Kerry, unfortunately you are incorrect when you say that only benefit of a 30 year over a 15 year is the payment flexibility in the event of job loss. This is not true. 30 year loans have other attributes that make them superior to 15 year loans in some instances.

    First, a 30 year loan has more duration than a 15 year loan, it will benefit more from a rise in interest rates. For example, if one year from today interest rates have risen 3% you will be very sad that you borrowed with a 15 year instead of a 30 year. The 15 year loan is locking you into paying principal at a faster pace toward a 2.75% debt, it would be far better to be paying your 3.5% 30 year mortgage and investing the difference in payment in higher yield bonds. Even 5 year treasuries would be yielding ~3.75% more than your debt service in that situation. Conceptually a 30 year loan outperforms a 15 year loan when interest rates rise, it’s present value falls more than the 15 year’s because of it’s longer term.

    Second, a mortgage loan is not just a simple fixed income instrument. You are not only borrowing money you are also buying a call option on interest rates. What I mean by that is that when interest rates fall you can prepay your mortgage loan at face value instead of it’s market value. That is not how most debt in the world works, commercial mortgage loans don’t work that way. It is a valuable feature of a residential mortgage loan and it is something you are paying for as a borrower, whether you realize it or now. What this means is that in a scenario where interest rates drop a 30 year and a 15 year mortgage become equivalent. If you borrow for 15 years at 2.75% or 30 years at 3.5%, if interest rates drop 1% those loans become functionally equivalent. They both get prepaid and become identical. This means that assuming the 15/30 year difference is the difference in present value of scheduled payments is incorrect. If interest rates ever move lower the difference is only in payment made up to that occurrence.

    Third, combining the first two comments the 30 year loan is longer and thus the call option you are buying is much longer and therefor much more valuable. For example, if interest rates remained unchanged from the time you took out your loan until the 15th year and then fell the 30 year loan could outperform.

    What this means is that you cannot simply look at the difference in cumulative payments made on each type of loan, you can not even look at the total present value of cumulative payments made on each loan. You have to take the total present value over all possible future interest rate paths multiplied by the probability of that path occurring. Conceptually a 30 year loan does much better than a 15 year if interest rates go up, they are equivalent if rates go down. The 15 year does better if rates don’t move much or take too long to move. I’m not in any way arguing that a 30 year is an obviously better option I’m just pointing out that simplistic cumulative payment calculations are incredibly misleading when trying to decide between the two.

  42. What he said ;-)

    But I do want to re-emphasize that in this economic environment, if we’re not building flexibility into our plans, we could be setting ourselves up for a trap. A 30 year provides greater flexibility than the 15, if only because of the lower payment.

    A future reduction of income is no longer a remote possibility.

  43. I enjoyed reading this article. I’m a firm believer in a 15 year note, but you make some good points. We bought a $156,000 house, put $40,000 down, 15 year note, around $1000 a month mortgage (not including taxes). Not a crappy house either (3 bed, 2 bath, 2000 sq ft…this took lots of research to find the perfect house). Our goal was to pay it off in 7.5 years by doubling it, but since we were DINKS (double income no kids) we wanted to put more money towards it so I could stay home when we did have kids (husband’s a teacher…we all know it’s underpaid). We became mortgage hungry and paid it off in 33 months! Everything besides bills, a couple big vacations a year, $200 allowance for me, and a few hundred stashed away for my husband’s dream car, went to the mortgage. We were young, making money, and didn’t want to waste it on interest.

    I personally believe that if you can’t afford the “extra money” it requires to get a 15 year note, then your house is “too big for your britches.” I think the problem many people incur is buying a house they’re approved for and not what they can afford.

    But I also do believe that everyone’s situation is different and you have to make the decision based on your family’s needs and your discipline (or lack there of). Thanks for posting! Cool to read the other side of the debate.

  44. Hi Olivia–You and your husband did the whole house buying “thing” the right way. You obviously bought less house than you could afford and had plenty of extra cash as a result. That is the First Rule of Homebuying, to buy less house than you can afford. Most people ignore that rule either because they get star struck looking at houses, or they look to live in the best school district for their kids. For them, the 30 year is the way to go.

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