Mortgage at 30 years vs at 15 years

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Hi,

I am considering a mortgage for a house for $93,000. I can get a 15 years mortgage at 2.25% or a 30 years mortgage at 2.75%. What do you think I should do?

Thanks for the help.

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Ouch, beefjerkay...that's a terrible way to put it.

TheWalL (Feb. 03, 2013 @ 5:55p) |

Better still, look at the break even point and your chances of staying with the mortgage till that time.

fw101 (Feb. 03, 2013 @ 8:05p) |

By tomorrow's standards, the rates on both are pathetically low. It all hinges on what return you really think you can ... (more)

Bagofchips (Feb. 04, 2013 @ 10:00a) |

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Can you comfortably afford the 15 year payments?
If you went with a 30 yr mortgage, what would you do with the extra cash (because of the lower monthly payment)?

uutxs said:   Can you comfortably afford the 15 year payments?
If you went with a 30 yr mortgage, what would you do with the extra cash (because of the lower monthly payment)?


The mortgage at 15 years takes 31% of my budget. The 30 year mortgage would take 23% of my budget. With the money left over with the 30 years old mortgage I would probably use half of it (house improvements) and save/invest the other half.

noelandres said:   uutxs said:   Can you comfortably afford the 15 year payments?
If you went with a 30 yr mortgage, what would you do with the extra cash (because of the lower monthly payment)?


The mortgage at 15 years takes 31% of my budget. The 30 year mortgage would take 23% of my budget. With the money left over with the 30 years old mortgage I would probably use half of it (house improvements) and save/invest the other half.

If you are comfortable with the higher payment and would otherwise just spend the extra cash --- with 30 yr --- on random crap (or have it sitting in a checking account) then go with the 15 year

If you rather want the flexibility of lower payment (you can always pay extra when possible) or will wisely invest the extra cash for good long term return, go with the 30 year.

15 year.

How old are you? As a rule of thumb I always recommend that people have their mortgage paid off before they plan to retire.

I like 30 year mortgages for the safety cushion and usually just make 15 year payments.

noelandres said:   Hi,

I am considering a mortgage for a house for $93,000. I can get a 15 years mortgage at 2.25% or a 30 years mortgage at 2.75%. What do you think I should do?

Thanks for the help.


I'm guessing that you're young and no where near maxing out your tax favored retirement plans/opportunities. If that's correct take the 30 and put more into retirement.

Depends on where you are with your retirement, emergency savings, etc.

Just looking at the numbers: Comparing the 2 options after 15 years:
-On the 30 year mortgage, you will owe $56k, but will have paid ~$41.3k less.

Return on money saved - (Cost)
0% - ($14,624.77)
1% - ($11,384.70)
2% - ($7,803.71)
3% - ($3,841.51)
4% - $547.26
5% - $5,413.67

enc0re said:   How old are you? As a rule of thumb I always recommend that people have their mortgage paid off before they plan to retire.

I am 31 years old.

Not likely you will stay in the same exact residence until reaching 61. At today's low rates, might as well do the 30 years since this gives more flexibility and you can have more stuff AND emergency savings now.

enc0re said:   As a rule of thumb I always recommend that people have their mortgage paid off before they plan to retire.

One of the single worst pieces of financial advice. Ever.

I know this is a really stupid question but I am brilliant in other areas

I have a 30 year fixed rate 5.65%. 84 of 360 payment made.
It is an investment property so rates are usually higher than a primary residence loan.
Been paying an extra $500 per month which will get my mortgage paid off in 10 years (11/22).
Is it worth the expense of refinancing down to a 10 year fixed at 3.75 or so rate and having closing costs etc rolled into loan or will my extra $500 monthly payments due me just as well in paying off the loan early and more economically.

Again, sorry if this is a stupid question, but I'm mathematically challenged even though I ROCK in other skills (nope, no pics)

lorymills1 said:   I know this is a really stupid question but I am brilliant in other areas

I have a 30 year fixed rate 5.65%. 84 of 360 payment made.
It is an investment property so rates are usually higher than a primary residence loan.
Been paying an extra $500 per month which will get my mortgage paid off in 10 years (11/22).
Is it worth the expense of refinancing down to a 10 year fixed at 3.75 or so rate and having closing costs etc rolled into loan or will my extra $500 monthly payments due me just as well in paying off the loan early and more economically.

Again, sorry if this is a stupid question, but I'm mathematically challenged even though I ROCK in other skills (nope, no pics)

Depends on the refi cost and whether the higher payments (now it becomes obligatory as opposed to the $500 extra you voluntarily pay) would cause any hardship. 5.65% down to 3.75% is terrific, provided the cost is moderate.

lorymills1 said:   I know this is a really stupid question but I am brilliant in other areas

I have a 30 year fixed rate 5.65%. 84 of 360 payment made.
It is an investment property so rates are usually higher than a primary residence loan.
Been paying an extra $500 per month which will get my mortgage paid off in 10 years (11/22).
Is it worth the expense of refinancing down to a 10 year fixed at 3.75 or so rate and having closing costs etc rolled into loan or will my extra $500 monthly payments due me just as well in paying off the loan early and more economically.

Again, sorry if this is a stupid question, but I'm mathematically challenged even though I ROCK in other skills (nope, no pics)
First, why do you find it necessary to tell us you have skillz not just once, but twice. Second, is your financial security/ROI such that you will always be able to make the higher payments? I don't think this question is a math problem. It's a prediction problem.

First, because it is frustrating not to be able to understand this scenario even though it's been explained to me by many people and I just don't see it easily.
Second, yes.

BEEFjerKAY said:   enc0re said:   As a rule of thumb I always recommend that people have their mortgage paid off before they plan to retire.One of the single worst pieces of financial advice. Ever.I respectively disagree for most people. I would take it one step farther and suggest "most" people should strive to have no mortgage by 55.

It is all well and good for financially savy people to consiously take the longer term at a 3/8% - 5/8% premium. You can make a strong case especially in todays interest rate environment. However, you assume the discipline to invest the differnce in payment. My experience is that 80%-90% don't, in fact take on additional debt HELOCs, credit cards, etc...

I can't begin to tell you the number of people in their 60s, 70, and even 80s still with mortgages they can't afford. Several of them lost their homes to forclosure. Some because they lost their jobs in the last five years. With the rampant age discrimination that exists in the job market, many ended up with significantly lower paid jobs or were forced to retire early.

The single biggest differnce I see between those in retirement making it, and those not is whether or not they are still paying on a mortgage. A theoretically benefit for the finacially astute, is often a mistake for the practical realities of many people's lives.

btuttle said:   I can't begin to tell you the number of people in their 60s, 70, and even 80s still with paid off houses and near zero liquidity to cover even minor events.

People stupidly pay off their mortgages, then fall prey to reverse mortgage scams when they realize they do not have the liquidity to pay for maintenance or healthcare.

It's a stupid goal. Which, as you correctly point out, is the the absolutely right, prudent course of action for stupid people.

For those who have some shred of financial sense, not so much.

edit: possibly third only to healthcare costs/impacts and the loss of social network as one leave a job and gets older, I'd say the failure to consider the sudden lack of financing choices is one of the bigger things "near retirees" overlook.

That and the value of the death put.

money2011 said:   I like 30 year mortgages for the safety cushion and usually just make 15 year payments.

This. 30 years will give you more time to pay for the mortgage but if you're able to pay the 30 year mortgage within 15 years, I think it is still good.

money2011 said:   I like 30 year mortgages for the safety cushion and usually just make 15 year payments.

At OP's rates, the 15 year mortgage with only the required payments would result in total interest paid of $17,915.26 per 100k original principle and the 30 year mortgage with 15-year mortgage payments would result in total interest paid of $23,206.85 per 100k. So the question becomes, is the extra $5k per 100k over the course of the next 15 years worth it for the flexibility you gain? Also keep in mind that taking advantage of that flexibility would cost more in interest as well. I'm not prescribing anything, just something to think about.

That $5k assumes no tax benefit and that the funds are not put to use in any economically productive fashion. It also assumes interest rates do not move back up.
Factor in even just two of those three factors ... and that $5k quickly evaporates.

Face it folks, paying off all of your debt when interest rates are at their lowest points in history is not likely to be your optimal investment choice.

Or more to the point, it's not what wealthier private investors and corporations are doing.

lorymills1 said:   I know this is a really stupid question but I am brilliant in other areas

I have a 30 year fixed rate 5.65%. 84 of 360 payment made.
It is an investment property so rates are usually higher than a primary residence loan.
Been paying an extra $500 per month which will get my mortgage paid off in 10 years (11/22).
Is it worth the expense of refinancing down to a 10 year fixed at 3.75 or so rate and having closing costs etc rolled into loan or will my extra $500 monthly payments due me just as well in paying off the loan early and more economically.

Again, sorry if this is a stupid question, but I'm mathematically challenged even though I ROCK in other skills (nope, no pics)


Use your skills: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

BEEFjerKAY said:   That $5k assumes no tax benefit and that the funds are not put to use in any economically productive fashion. It also assumes interest rates do not move back up.
Factor in even just two of those three factors ... and that $5k quickly evaporates.

Face it folks, paying off all of your debt when interest rates are at their lowest points in history is not likely to be your optimal investment choice.

Or more to the point, it's not what wealthier private investors and corporations are doing.


Sometimes I forget that the folks on here aren't like most people and may actually have some financial discipline. Most people I know would just blow the extra cash.

Agreed.

Many people spend their 401k balance whenever they change jobs. Buy extended warranties on routine purchases. etc etc

OK doveroftke
using your link.... and....
assuming worst case scenario of $5,000 closing costs added to $106,000 principal, monthly payment on a 10yr loan at 3.5% (P&I only) =
$1,097.63 monthly payment
current loan of 30 yrs at 5.65% $672.29 P&I plus $500 per month additional principal for 10yr payoff =
$1,172.29 monthly payment
I could save $75 per month and possibly more if I use my skills to get a lower interest rate or lower closing costs
may give it a whirl.... thanks

money2011 said:   I like 30 year mortgages for the safety cushion and usually just make 15 year payments.

That's a bad idea...you're paying interest on a 30-year amortization regardless of what monthly payments you're making. You end up paying more in interest even if you paid a 30-year mortgage at a 15-year payment rate.

BEEFjerKAY said:   enc0re said:   As a rule of thumb I always recommend that people have their mortgage paid off before they plan to retire.

One of the single worst pieces of financial advice. Ever.


Things can change in an evolving economy to make that one of the absolute best pieces of advice. With the trends in automation, it may be prudent for many folks (those not making the innovations) to pay off their mortgages sooner, rather than later. Folks are already getting to the point where they have 2-3 different careers within their working years... that reduces the opportunity to maximize your income when you start fresh. If innovation picks up, you could find that number increasing dramatically... 6-8+ careers within working years. If that is the case, that constant retooling will lower your wages if you happen to be stuck in that cycle. Will it happen to everyone? Certainly not, but it will happen to enough folks that it will be problematic.

Dus10 said:   Things can change in an evolving economy to make that one of the absolute best pieces of advice...

Perhaps. But nothing in your post supports that premise.

BEEFjerKAY said:   death put.

Ouch, beefjerkay...that's a terrible way to put it.

lorymills1 said:   OK doveroftke
using your link.... and....
assuming worst case scenario of $5,000 closing costs added to $106,000 principal, monthly payment on a 10yr loan at 3.5% (P&I only) =
$1,097.63 monthly payment
current loan of 30 yrs at 5.65% $672.29 P&I plus $500 per month additional principal for 10yr payoff =
$1,172.29 monthly payment
I could save $75 per month and possibly more if I use my skills to get a lower interest rate or lower closing costs
may give it a whirl.... thanks

Better still, look at the break even point and your chances of staying with the mortgage till that time.

By tomorrow's standards, the rates on both are pathetically low. It all hinges on what return you really think you can get on the payment differential. Still, I like the idea of having cheap money as long as possible. That's why I chose the 30 year in my situation - I believed worst case I'd be indifferent when I ran the numbers.



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