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Thread summary:

Couple seeking advice on 15 year fixed mortgage or 30 year fixed mortgage, 80k 30 year fixed 6.0%, 80k 15 year fixed 5.56% interest

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Old 06-03-2008, 10:12 AM
 
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My husband & I are in the process of shopping for a mortgage on a new home. We are trying to decide whether to go with a 15-year fixed rate or 30-year fixed rate.

When entering our information into a mortgage calculator, we come up with some concerning figures. If we borrow $80K at 6.00% (rate quoted us for 30-yr fixed) for 30 years, we will pay $93K in interest alone. If we borrow 80K at 5.56% for 15 years, we will pay $38K in interest. That's a difference of nearly $55K we will pay in interest alone! Our payments will be about $200 more a month resulting in $3K more over 15 years, but spending $55K to save $3K does not sound like a good idea to me. My husband offers the point of view that by going with a 15-yr. mortgage we would be locked into paying that higher monthly payment every month. He says if we went with a 30-year fixed rate we would then be able to pay extra money toward the principle on months when we can afford it, but when circumstances arise where we could use a little extra cash, we would just not make an extra payment that month which would give us added flexibility for times when we could use the extra money like for taking family /outings/vacations, which we rarely do now, or for emergencies, etc. Would anyone be able to offer any advice? Thank you so much!
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Old 06-03-2008, 11:04 AM
 
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One of the advantages of the 15 year mortgage is that you build equity in your home much faster than you would in a 30 year loan, even if you're making additional on the 30. It also forces you to stay on target instead of finding excuses not to make the additional payments. You said that you'd be able to pay more when you could afford it and then mentioned family vacations and outings. In other words, it's just going to be blown on fun that you'd still have any way by finding money for it from other places.

Get the 15 year mortgage and get a 3to6 month emergency fund in the bank. You won't need to worry about needing money to pay for emergencies, and you'll then be able to save money each month toward your vacations and outings without having to reduce your monthly payments on your home or by tapping in to the savings you'd need for an emergency.

You're going to make a finite, limited amount of money in your lifetime. The savings in interest is like someone handing you an additional year of income. Or, to look at it another way: think of how long it would take you to earn that money. Would you rather spend that amount of time doing your job and knowing you get to keep all of that money, or would you rather spend that amount of time doing your job only to sign your paycheck over to the bank that holds the note?

Would you rather have that $55K to send your kids to college, or do you think it's better for that money to be used by your mortgage company?
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Old 06-03-2008, 12:20 PM
 
835 posts, read 2,734,117 times
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Quote:
Originally Posted by sean98125 View Post
One of the advantages of the 15 year mortgage is that you build equity in your home much faster than you would in a 30 year loan, even if you're making additional on the 30. It also forces you to stay on target instead of finding excuses not to make the additional payments. You said that you'd be able to pay more when you could afford it and then mentioned family vacations and outings. In other words, it's just going to be blown on fun that you'd still have any way by finding money for it from other places.

Get the 15 year mortgage and get a 3to6 month emergency fund in the bank. You won't need to worry about needing money to pay for emergencies, and you'll then be able to save money each month toward your vacations and outings without having to reduce your monthly payments on your home or by tapping in to the savings you'd need for an emergency.

You're going to make a finite, limited amount of money in your lifetime. The savings in interest is like someone handing you an additional year of income. Or, to look at it another way: think of how long it would take you to earn that money. Would you rather spend that amount of time doing your job and knowing you get to keep all of that money, or would you rather spend that amount of time doing your job only to sign your paycheck over to the bank that holds the note?

Would you rather have that $55K to send your kids to college, or do you think it's better for that money to be used by your mortgage company?
Some very good points, thank you!!
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Old 06-03-2008, 06:15 PM
 
Location: AL for now
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Thumbs up Completely agree...

We took a 30-year loan but made extra payments every month. Whenever we got raises, we used the extra income to boost our payment. We just set up an autopay plan from our checking account and told our lender how much extra principal we wanted to pay every month. If you don't see the extra income, you don't really miss it. We paid off our loan in just under 16 years and now have the security and freedom of no mortgage! It takes a lot of discipline...if you have the 30 year mortgage and don't have a plan set up as to how/when you are going to make extra principal payments, I agree that for most people, only paying extra in those months you have extra cash means that the extra payments tend not to be made very often... For us, we were both so busy working and taking care of daily chores/responsibilities that to sit down every month and decide whether and how much extra to pay wasn't going to happen. Agreeing up front once/year and doing the autopay was key.
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Old 06-05-2008, 01:35 AM
f_m
 
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There are calculators to compare these options. Sorry I don't have links right now. But when I looked at it, if you pay the same amount as the 15 yr payment but on a 30 yr mortgage (adding the extra to the principal), you can cut the length of the loan to almost the same time span as the 15 yr (maybe a difference of a couple years). Why? Because the interest amount is continually recalculated as you pay down the principal.

Of course being forced to pay the 15 yr payment may be desirable for some people so it ensures the higher amount is being paid. The other benefit is usually the rates are lower for the shorter terms.
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Old 06-05-2008, 11:26 PM
f_m
 
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Here is the calculator, you can add in extra payments and see how the term length changes:

Mortgage Calculator -- Bankrate.com
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Old 06-06-2008, 04:03 PM
 
28,461 posts, read 78,262,942 times
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Default GREAT advice.

Quote:
Originally Posted by AnotherBravesFan View Post
We took a 30-year loan but made extra payments every month. Whenever we got raises, we used the extra income to boost our payment. We just set up an autopay plan from our checking account and told our lender how much extra principal we wanted to pay every month. If you don't see the extra income, you don't really miss it. We paid off our loan in just under 16 years and now have the security and freedom of no mortgage! It takes a lot of discipline...if you have the 30 year mortgage and don't have a plan set up as to how/when you are going to make extra principal payments, I agree that for most people, only paying extra in those months you have extra cash means that the extra payments tend not to be made very often... For us, we were both so busy working and taking care of daily chores/responsibilities that to sit down every month and decide whether and how much extra to pay wasn't going to happen. Agreeing up front once/year and doing the autopay was key.
They little bit of extra interest is certainly worth the piece of mind knowing that should anything change you can SUSPEND your additional principal payments with no hassle and go back to a smaller 30 yr payment. With intrest rates on mortgages still low there are lots of options to consider about whether the potential return from accelerating your equity is smarter than using the funds elsewhere. Are you fully funding a 401K? I would argue that so not do so but pay off a mortgage more quickly is misguided...

You have to factor in the boost that Uncle Sam by allpwing full deduction of mortgage interest in any 'return' calculation AND the possibility that NEGATIVE appreciation may really wipe out any gain from "accelerated equity growth"...
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Old 06-06-2008, 04:30 PM
 
835 posts, read 2,734,117 times
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Quote:
Originally Posted by AnotherBravesFan View Post
We took a 30-year loan but made extra payments every month. Whenever we got raises, we used the extra income to boost our payment. We just set up an autopay plan from our checking account and told our lender how much extra principal we wanted to pay every month. If you don't see the extra income, you don't really miss it. We paid off our loan in just under 16 years and now have the security and freedom of no mortgage! It takes a lot of discipline...if you have the 30 year mortgage and don't have a plan set up as to how/when you are going to make extra principal payments, I agree that for most people, only paying extra in those months you have extra cash means that the extra payments tend not to be made very often... For us, we were both so busy working and taking care of daily chores/responsibilities that to sit down every month and decide whether and how much extra to pay wasn't going to happen. Agreeing up front once/year and doing the autopay was key.

I'm not trying to be rude or sound ungrateful for the advice, but I don't see what the point of doing that is. It seems to me if you're going to set up a regular extra principal payment to pay off a 30-yr loan in 16 years, why wouldn't you just go with a 15-yr term in the first place and get the lower rate? Thanks.
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Old 06-06-2008, 06:43 PM
 
947 posts, read 2,967,155 times
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Quote:
Originally Posted by sean98125 View Post
One of the advantages of the 15 year mortgage is that you build equity in your home much faster than you would in a 30 year loan, even if you're making additional on the 30. It also forces you to stay on target instead of finding excuses not to make the additional payments. You said that you'd be able to pay more when you could afford it and then mentioned family vacations and outings. In other words, it's just going to be blown on fun that you'd still have any way by finding money for it from other places.

Get the 15 year mortgage and get a 3to6 month emergency fund in the bank. You won't need to worry about needing money to pay for emergencies, and you'll then be able to save money each month toward your vacations and outings without having to reduce your monthly payments on your home or by tapping in to the savings you'd need for an emergency.

You're going to make a finite, limited amount of money in your lifetime. The savings in interest is like someone handing you an additional year of income. Or, to look at it another way: think of how long it would take you to earn that money. Would you rather spend that amount of time doing your job and knowing you get to keep all of that money, or would you rather spend that amount of time doing your job only to sign your paycheck over to the bank that holds the note?

Would you rather have that $55K to send your kids to college, or do you think it's better for that money to be used by your mortgage company?

This is really well said!
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Old 06-06-2008, 11:11 PM
f_m
 
2,289 posts, read 7,916,775 times
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Quote:
Originally Posted by dinalkulp View Post
I'm not trying to be rude or sound ungrateful for the advice, but I don't see what the point of doing that is. It seems to me if you're going to set up a regular extra principal payment to pay off a 30-yr loan in 16 years, why wouldn't you just go with a 15-yr term in the first place and get the lower rate? Thanks.
I'm not the original poster of that message, but I would probably do the same thing because the difference in the monthly payment for the range I'm looking at is around $600. So if I lost my job and had to spend several months to find another one, I'd like to be able to shift down to the lower monthly payment level rather than deal with the higher one with no job.
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