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The comments about the "safety" of a 30 year mortgage seem to me to be nonsense. If you can't afford to continue saving while making mortgage payments, you are buying too much house. If you can't project your job/lifestyle at least 5 years in advance you have no business buying a house at all. With a 15 year, that is 1/3 of the mortgage term, and you have substantial equity built up. With a 30 year mortgage you are still making interest payments with a pittance going toward principal. Also, the chances of a financial emergency double over the course of 30 years vs. 15 years.
I fully agree. For some reason, it seems that 15-year loans incite the most extreme fear-mongering in otherwise reasonable people. I do not know why.
It really depends on debt to income ratio among other things. Someone who would be putting themselves at (for example) a 30% DTI by having a 15-year loan is in a much, much riskier position than one that would only rise to a DTI ratio of (say) 10%.
15-year loans are really not always a bad thing. If you think that a 15-year loan should be avoided even if it would only be a 10% DTI, then what about those of more modest means for whom even a 30-year mortgage would be 20% or 25% DTI? By your logic they should rent and save 50% of the home value before they buy at all.
Risks lie on a spectrum from negligible to serious, and exactly where on the spectrum a give household would put themselves by having a 15-year loan is going to depend on a lot of factors. You are painting such loan with a ridiculously broad brush. I don't know what motivates your contempt for 15-year loans. Like many other financial products they will make sense for some and not others. Why is this so hard to understand?
here is the real world , sh*t happens.
as a landlord for 25 years I can tell you no matter how carefully you screen tenants or what their resources may be situations change on a dime.
I think the smarter thing to do is take the 30 year , and pay it off when you want. it can be well worth the difference.
you are better off picking up that fraction of a point through being a better investor and leave yourself more options on your expenses...
but everyone has to do what they are comfortable with.
Choose whatever term makes you feel comfortable, but whatever you do just pay the darn thing off. People get in trouble because they refinance over and over again.
as a landlord for 25 years I can tell you no matter how carefully you screen tenants or what their resources may be situations change on a dime.
I think the smarter thing to do is take the 30 year , and pay it off when you want. it can be well worth the difference.
you are better off picking up that fraction of a point through being a better investor and leave yourself more options..
The same argument could be used to say you should never buy real estate at all. There is risk management, and then there is paranoia.
The value of a half-point difference in rates relative to risk may be too high for some and not others. Again you are projecting your risk tolerance on others with vastly different situations.
The rational approach is to assess the various options one has for handling a liquidity crunch, both kinds (income loss and unexpected expense), and then decide whether the risk of not making it is high enough to justify a 30-year loan.
The irrational approach is to assert that 15-year loans never make sense and that there are no exceptions, which is basically what you are doing.
Someone with 12 months' expenses in liquid assets and a 15-year mortgage at 10% DTI is in a far, far safer position than someone with only 3 months emergency fund, and a 30-year mortgage at 25% DTI.
There are other factors that affect risk besides loan length.
I'm not really sure which dogma is worse, the 15-year-only dogma promoted by Dave Ramsey, or the 30-year-only dogma that you promote. Again, different situations call for different measures.
I agree with you in principal on the life projection, but I think we have entered into more unsettled times than has historically been the norm. I graduated college five years ago, almost to the day. When I graduated, I never would have suspected I would have lived in three states in four years (from 2010-2014 I've lived in IA, IN, and TN. I've also spent some time in MA, VA, and SC), nor would I have predicted the wild income swings ($30k to $45k to ~$21k to now roughly $60k). Only one of these moves was really by choice, the rest I've made out of financial necessity.
I feel more comfortable about my circumstances now than ever before, but I've had the bottom fall out in a day before and realize it could do so again.
You don't even belong in this conversation. You have to stay in a house for 5 years to recoup your closing and moving costs. If you're that mobile, you have no business buying a house. You are going to have to pay 6% right off the top just to sell the place.
I am mortgage free at age 33 and I can vouch for some posters here that it is one of the best decisions I have ever made. I would do it over and over in a heart beat. Investments are volatile and a home is a place to live and granted there are maintenance but if you're handy, most things can be done by yourself. Taxes and insurance plus utilities are the bills that you will have to deal with. I have been stashing on all money into savings and 401k and college funds...not spending much. it depends on your life style and how you see yourself in the future with your financing...many people will go against paying off mortgage early because you can use the $ to invest instead...but there's pros and cons to these things and it is really comes down to what you find most comfortable with.
I've been considering this scenario - pay out extra to finish a 15-yr mortgage by 49, or put the extra into maxing out the 401k @ $18k/yr. That additional into 401k gets me +$1mil. net at 65. No (or little) debt at 49 vs. a very handsome reward at 65 due to 28 years of compounding interest. What do you do?
I've been considering this scenario - pay out extra to finish a 15-yr mortgage by 49, or put the extra into maxing out the 401k @ $18k/yr. That additional into 401k gets me +$1mil. net at 65. No (or little) debt at 49 vs. a very handsome reward at 65 due to 28 years of compounding interest. What do you do?
What percentage of your income would the 401k contribution be in each scenario (i.e. early vs. on-time payoff)?
There is something to be said for putting into the 401k an amount appropriate for your retirement needs, and then applying additional funds to paying off the mortgage or other low-interest debt.
I may have the orders completely backward here, but HOAs are typically in affluent to middle class areas. These people are generally going to be less likely to "junk up" the property than poorer or rural residents IMO. In many cases, it seems like an expense to enforce a problem that doesn't exist.
Yeah, money used to keep the riff raff out plus a public shaming but that ship has sailed since the Kardashians. Plus with all the AirBNB, VRBO you never know who is going to be living in your NBHD even if only for a short period. Generally there is no enforcement expense since like minded people choose to live by the rules. The problem is usually when someone buys and thinks they're above the rules and then complain about HOA's when they get smacked.
I've been considering this scenario - pay out extra to finish a 15-yr mortgage by 49, or put the extra into maxing out the 401k @ $18k/yr. That additional into 401k gets me +$1mil. net at 65. No (or little) debt at 49 vs. a very handsome reward at 65 due to 28 years of compounding interest. What do you do?
Don't forget that after you pay off a house, your monthly housing expenses are tax free. You don't have to report the rent or mortgage you are not paying as income, and after you retire it doesn't count as income when computing the tax liability of your SS. If you are going to have substantial income after retirement, take a close look at a Roth IRA. You are really going to get whacked on your 401k when you start taking distributions. By the time you pay income tax on it and your SS, a third of the balance will evaporate before your eyes.
I've been considering this scenario - pay out extra to finish a 15-yr mortgage by 49, or put the extra into maxing out the 401k @ $18k/yr. That additional into 401k gets me +$1mil. net at 65. No (or little) debt at 49 vs. a very handsome reward at 65 due to 28 years of compounding interest. What do you do?
At your young age, I would always max out retirement accounts first and take advantage of the compounding. You will have the same appreciation effect from the property whether it has a mortgage or not, but that money invested elsewhere will add appreciation. Mortgage gets paid off a little later - so what?
General rule I've always followed (not for everyone), is if I can make money on borrowed money, I borrow it. Since, your Q is either/or, max out the retirement funds. The mortgage will take care of itself eventually.
Quote:
Originally Posted by Emigrations
I graduated college five years ago, almost to the day. When I graduated, I never would have suspected I would have lived in three states in four years (from 2010-2014 I've lived in IA, IN, and TN. I've also spent some time in MA, VA, and SC), nor would I have predicted the wild income swings ($30k to $45k to ~$21k to now roughly $60k). Only one of these moves was really by choice, the rest I've made out of financial necessity.
I feel more comfortable about my circumstances now than ever before, but I've had the bottom fall out in a day before and realize it could do so again.
With that track record of mobility, know that if you need to move, houses aren't sold in five minutes. Real estate can be a very illiquid asset when times get rough.
Since you have an average income, I would establish an emergency fund for at least a year's expenses and then be aggressively investing as much as possible in retirement funds. If you can handle the taxes, Roth is preferable.
If you are certain you can stay put, buy a property that fits your financial needs - after you establish retirement savings strategy. Rent may seem to be rathole money, but know that what you don't pay in rent can often be paid in maintenance (roof, heating/ac, plumbing, remodeling, appliances) - not all of which you get back. I knew a tax attorney who firmly believed he would always come out ahead renting. So don't be too quick to consider renting a bad deal.
Last edited by Ariadne22; 05-12-2015 at 06:00 PM..
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