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I say buy a house you cancomfortably afford with a 15 year note.
Here's why - there are a lot of maintenance items with a 15 year life span - roof, furnace etc. Won't it be nice to have equity you can tap into when it comes time for replacement?
Also - do you have young kids? That loan will be getting paid off about the time they start college.
Even IF you have the self discipline to invest the difference - what will you do with it - put it in the stock market where you could lose it or a CD with 1/2% yield?
I took the 30 year mortgage with the intent of making it a 15 year mortgage but what I found is even though I had the money paying the extra was hard mentally, I have no clue why because I was not hurting. In the beginning years of the 30 year mortgage interest rates dropped again and I ended up moving to a 15 year mortgage. The amount of money I saved paying in interest alone worked out to be a bundle.
Here is the kicker. The house will be paid off soon and instead of my money going to interest I will pay higher taxes so it all does not matter in the end.
With this market, all the printing, all the government spending I trust nothing.
This short time on earth I want peace of mind.
The secret is to "set it and forget it," just as you would for your savings/investment. Set up an automatic electronic payment for your mortgage, then set up a second one for the principle payment. There's no self-discipline involved.
You could do the same, regardless of whether it is a 30 or 15 year loan. The difference in interest is negligible. Some would rather assume the additional risk and pay a little less interest (15 year option). Others would prefer to take the safer route and pay a little more interest (30 year), but have the peace of mind of knowing that they have a cushion in case of emergency. There is no right or wrong answer. Everyone's situation is different.
^^^ this! I had 30 years mortgage but made double payments most of the times. I paid off the house in 13 years.
Lower mortgage gives you the flexibility of paying less if you have hard times ( sickness, unemployment etc.)
I agree, if you double up on a 30 year the entire second payment goes against principle, not interest
You cant turn a 30 into a 15 because you sign a contract based on 30. So interest is based on 30. Your first payment is 95% interest on a 30 and 70% on a 15 do the math. 30 year mortgages are crazy!
I have a 30 year mortgage with 26 years left on it at 5.5%. I recently pulled the trigger on a refi to a 15 year mortgage at 2.75%. If everything goes through as it should, my monthly payment will go up by $75. Big deal. For $75 extra a month I will shave 11 years off my mortgage. Pretty good deal if you ask me.
I bought a house in 2012 and went over this very carefully. Common advice is "get the 30, pay it off in 15". This isn't bad advice, but the difference in rates was running about .75%. On a 200k house (and mine was more) that's 1500/year in interest if the entire thing was mortgaged. (I'm aware that the days of 100% mortgages are gone--for now) So even with a decent down payment this can be 1250/year or so in savings if you can commit to the 15 and carry enough safety margin to handle it. IMO, that's preferable if you have the money to carry a few months of safety margin.
Then I had to compare running a 30 year vs a 15 year. I looked at the effect on my personal net worth including the value of the property. The 15 year was better for about 6 years during which the reduced interest rate on the entire loan outweighed the value of returns on a larger tax exempt portfolio. After that point the portfolio pulls ahead and starts to snowball rapid as the compounding works in your favor. (Trust me, despite the decreasing interest costs each month, it doesn't even begin to keep up with the impact of compound interest in the market at around 6%.)
I decided to look at the long term, and by the time you're 15 years in, the 30 year at these rates is absolutely dominating if you take the entire reduction in your payment and put it into a diversified 401k for tax exempt growth. Note, I do not itemize deductions (not worth it), so my mortgage interest isn't even being deducted. I will however make additional payments to get out of having to pay PMI. The return on getting out from under PMI is very good (not necessarily as good as the portfolio), but it provides a great reduction in my risk level by having the mortgage paid a few years in advance. If you had the option, the best strategy IMO is to do a 20% down to avoid PMI with 30 year financing on owner occupied and then put all the excess cash into the 401k. If you have the desire and cash to do it, you can convert it to an investment property and keep the favorable financing while buying a new house as owner occupied. The lower rates you got by classifying it as owner occupied stay on the mortgage and as a result the cash flow is dramatically better and diversifies your investments to include real estate.
I have a 30 year mortgage with 26 years left on it at 5.5%. I recently pulled the trigger on a refi to a 15 year mortgage at 2.75%. If everything goes through as it should, my monthly payment will go up by $75. Big deal. For $75 extra a month I will shave 11 years off my mortgage. Pretty good deal if you ask me.
Excellent deal. Check it from your effect on net wealth each month and it'll say you are brilliant. (You pay an extra 75, but your principal is reduced by dramatically more than extra 75 each month)
As several have suggested, one can turn a 30-year mortgage into a 15-year mortgage by paying additional 'principle' with each payment. However, the question is: Do you have the self-discipline to do that on a regular, monthly basis (or are you willing to set-up an automatic payment for 'mortgage' and 'additional principle' ... and then keep your hands off. (Of course, the latter is the same thing as establishing a 15-year mortgage to begin with).
Things to watch out for:
(1) Track monthly payments; Ensure they are properly applied to mortgage & principle
(2) Avoid Variable Rate mortgages in today's low interest market (that might give you a lower down-payment, but, could sabotage plans to pay-off your mortgage sooner.
(3) Ensure that you have a 'No penalty for prepay' clause in your mortgage.
Since today's interest rates are incredibly low; and a 15-year mortgage is typically available at an even lower rate-- with only a nominal payment increase, the 'smart money' will go with a shorter mortgage (you can choose whatever time-term works best for you). Also, in this low interest market, a cash purchase/payoff (for a non-retiree) is not always the best investment or cash-flow vehicle.
I have a 15 year mortgage because my wife is sort of debt adverse when it comes to housing, but a 30 year mortgage at 3.25% is insane. I wouldn't lend my brother $1000 at that rate for that long - so I consider it basically a steal. In some parts of the country house prices are stupid high, so it would really depend on many factors - but if 3-4% over 30 years is pretty easy to beat without being risky. Inflation alone will wipe out your payment in years 20-30 assuming you can stay gainfully employed.
I frankly don't get the advice of: Take a 30 year mortgage and pay it in 15 years.
I can give an advice of taking a 15 year and pay it in 7.5 years!
In my opinion, the lower the mortgage term the better. If someone can afford a 15 year mortgage they should go for it. If they think they can have upturns/downturns in their life and are comfortable with lower payments, go for the 30 yr.
Here's something to think about:
On a $450K house with a 4% interest rate for 30 years, you pay: 277K in interest and a total of $856K.
On the same house with a 3% interest rate for 15 yrs, you pay: 94K in interest and a total of $581K.
This is the beauty of compounding. In other words, if you are buying a house where house prices are skyrocketing and getting a 30 year loan, you're getting shafted, unless you earn more than $250k a year and pay your loan off or have the ability to pay your loan off. I see many people in New York, Socal, Seattle taking over-leveraged mortgage debt even after the sub-prime debacle i.e. going into debt six times their annual salary. This is not going to end well.
Last edited by codexone; 05-28-2013 at 02:01 PM..
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