I use the PITI calculators to get a better idea of the true cost of the mortgage payments.
A 15 yr would be about $1.3 million after 15 years and a $5.5k monthly. Doing a 30 yr at the offered rate would be about $1.86 million after 30 years and a $4.3k monthly.
It's a little bit of a stretch, not too bad, but I would rather get it paid off and not pay the extra 560k. The other component that was brought up was the potential inflation issues that could be much worse, so locking in the mortgage price over 30 years is a better deal. Then they started mentioning paying less of a down payment, or at most 20%, rather than starting with a higher down payment to reduce costs.
It looks like there's several factors at play, but not sure if we should go for the 15 yr, just because we can do it. When is that the obvious pick instead of a 30 year mortgage?
Was set on doing a 15 year mortgage, everyone is saying just do a 30 year mortgage
byu/essendoubleop inRealEstate
Posted by essendoubleop
47 Comments
If you can afford it the shorter term is a better choice, of course
Are you going to live in the house for 15 years? Most people move in 7ish nowadays
Pay extra to principal monthly on a 30 and refinance later
Some day you may like the fact that you have a lower monthly payment with the 30 year. In the meantime, you can always pay extra on the principal every month and turn your 30 year into a 15 year simply by paying it down quicker.
I’m a fan of 15 year mortgages. The rate discount makes a huge difference in TCO. It’s not just payment schedule that helps.
Plus if you think you might sell in the next 5 years, you’ll have a lot more equity. Because of the amortization schedule, 30 year loans for the first several years are mostly interest payments. Whereas with a 15 year loan, due to the shorter cycle and lower interest rate combined, the payment is much heavier on principal.
The argument I could see on going 30-yr vs 15-yr would be you can still pay off the 30-yr in 15-yrs if you’re disciplined. Then, if something happened in life (job loss) you could revert to paying the 30-yr payments if you needed breathing room.
Shorter is better for the vast majority of people and is a huge mental burden off your shoulders , giving you options in the future.
edit “if you can afford shorter”
Finance for 30, then put the difference in monthly payments vs a 15 into extra principal payments.
That gives you more budget flexibility if someone loses a job or can’t work for a while.
What’s the difference in interest rates? Is a key data point
If the 15 year rate is only like 0.25%, it might not be worth it because you’re only saving 0.25% but leaving yourself 1.2k less flexibility. You can always pay more on your monthly, but you can rarely pay less.
There is usually no rule that says you can’t pay more than the minimum. Get the 30 year mortgage, but pay it as if it were the 15 year ($5.5k monthly) with the extra going towards principal. If you keep at it, it will be paid off much faster than 30 years. If something negative happens with your income, it’s nice to have that cushion to be able to fall back and pay only $4.3k for a while until you are able to afford the higher payments again.
the question is what is the rate spread between 15 and 30 and how does that compare to your other investment returns. Then you decide if you want to do the 15, the 30, or do the 30 but pay as if it was 15 so you always have the option to dial it back.
How much will the 30 year cost if you pay it at the 15 year rate? The difference will be a lot less than 560k, probably on the order of less than 50k.
Considering money 15 years earlier is worth a lot more and your required payments are lower (in case of a job loss, sickness etc), people advocate for 30 year.
Do what you want but make sure you are making appropriate comparisons.
It is always better to pay less interest to the bank. However, can you comfortably afford a 15 year mortgage? In general, the monthly mortgage payment should be no more than 30% of your monthly salary. Ownership comes with repairs, regular maintenance, property tax, insurance, added utility costs, and any HOA fees on top of mortgage payment.
I’d take the flexibility of 30 years unless you are certain you’ll never stress about the higher payment
If you can swing it, take the 30 year, and pre-pay principle on off weeks. Make sure you mark “Principle Payment) on the checks, don’t miss a Principle&Interest payment. We did that with our home mortgage, and were able to substantially shorten the term, and didn’t pay anywhere near the potential extra interest.
The trick is if you get a better rate and your income/expense stability.
You can always do a 30Y loan and double the principal payment to pay it in 15. Basically pay it like a 15Y loan. And if your finances run into problems just make the smaller payment.
I did 15Y and had that for 5 years, then needed to switch it to a 30Y due to circumstances. So it was a refi. And cost a few thousand dollars to do.
Also think about the interest rate as compared to investing that extra payment. I have a 3% 30Y loan now. Any extra money goes into the market. I will milk that cheap loan for the full term.
Can you earn more than $500K by setting aside $1K/monthly for the next 15 years? It also depends on if the extra $1K/month will stretch your ability to pay. Most forget taxes and insurance costs when they look at their mortgage payment and then find themselves in a bind. I know my insurance has almost tripled in the last 10 years.
As everyone else is saying here. The important missing factor is:
What are the interest rates on the 15 and 30 years?
Recommend you edit your post to include those.
If your bank offers it, maybe you can do a 20 year. We did that and got a similar rate as a 15, but a few hundo off the mortgage for a little breathing room if we need it.
You can pay more than the monthly payment.
But you can’t pay less.
We went with 15 year and got 5.5 no points conventional back in July. Now people are refinancing and rolling the costs into the loan but I don’t need to worry about that yet.
If the different in rate of a 15 vs 30 is a good amount, you will save a lot on a $1.3 million house just in the better rate alone. Paying a 30 like a 15 won’t get you that….
It all depends on if you can afford it or not.
I did a 15 year against the same advice you got because I’m not the most responsible. Any time I get a bonus I MAKE IT RAIN on all my hobby projects and such. I knew when I started making money I better max out all my retirement stuff so I just get used to living on what I make AFTER my savings.
So just depends what kinda person you are. I think the stats prove most people are like me in that they say they will pay at a 15 year rate, but rarely do. Same reason I don’t have credit cards. Just debit is safe for me.
If you can afford the 15 year and can absorb an extended lay off during a big downturn, Id’ do 15, but if you might run into a sticky spot where you couldn’t swing a 15 year then I’d do the 30.
I was blessed to refi at 2.25% 6 years ago so I went for it and am happy I’m on a 15. Only 9 years left and I’m DONE
The comparison you should be doing is “what is my total cost and payment of 15 year?” vs “what is my total cost of a 30yr if I pay the same amount monthly as the 15 year?”. It’ll be more than 1.3 but a lot closer to 1.3 than 1.86. You can then decide whether that much smaller spread is worth the extra flexibility 5 or 10 years from now to reduce your monthly payment 1200 dollars to account for some big life change where cash now is more valuable to you than home equity.
You can do a bi-monthly payment on your 30 year loan and reduce the payment by several years. The cost is the same as a 30 year loan, but you break the payment in two instead of one. The loan company gets to use the money two weeks earlier.
I would pay off in 15 if you can swing it. If things change, you can always re-fi.
The obvious pick is do a 30 and pay extra.
On a bi-weekly payment: For example: On a hypothetical $200,000, 30-year mortgage at 7.07% interest, making bi-weekly payments could save roughly $42,780 in total interest and pay off the loan in about 26 years instead of 30.
The amortization term determines how much of the principal you pay each month. You can always pay extra towards the principal(in the US), you could get a 30 year loan and pay on a 15 year schedule and have flexibility to make lower payments if you need.
The rate determines how much interest you pay each month on the remaining principal.
What is the difference in mortgage rates?
If you went with the 30 year mortgage and had extra cash each month, or if you came into a windfall of $100k, how would you invest that money. How does that compare to the mortgage rate
I’d do 30 and just pay extra
The average home owner owns their home for about 10 years. This part of the conversation is largely overlooked.
“Everyone” doesn’t have to pay your mortgage and “everyone” may have different financial priorities.
There’s a lot of bad advice being given. You would be better off asking this question r/personalfinance
Don’t listen to the debt slaves. Understand that most people live in a paradigm of carrying debt to support their lives, and think being in perpetual debt is just part of life. These people should be ignored.
If you can afford the 15-year payments, take that loan. You’ll be paid off in 15 years and they’ll be stuck paying the rest of their lives. 500k is a lot of money.
One other factor people don’t mention is that a lot of tiems, with a 15-year mortgage you can get local underwriting. I got a 12-year mortgage and it’s straight from my credit union, local money with no big bank underwriter. It made my closing process much faster and also the interest I’m paying stays 100% local.
Take the 30 year mortgage and pay thr $5.5K monthly
I did a 20 with a credit union— all the benefits of a 15 year without the sticker price
We did a 15. I ran a bunch of calculations: putting more towards the 30, investing the diff between a 15 and 30. 15 came out ahead. The rate discount is real!
If you can swing it, do it.
We recently weighed this decision. The big factor for us was the interest rate difference between 15 and 30 year, rates being what they are. We ended up opting for 30 year, but rather than putting 20% down, doing 25% because our lender advised us it would get us a better rate. We ended up getting in at 5.99% vs the 5.5% for 15-year. We figure that in the event of catastrophe, we are locked into a comfortable rate. In the meantime, we will be paying extra monthly. And we will refinance later if rates come down. It made sense for us, but we are also taking a much smaller loan so that .5% doesn’t feel so heavy.
What’s the math say if you take the 30 hear, pay the same payment as the 15 year (with the additional going towards principal)?
We did a 20 year mortgage several years ago as we could afford it and it was a lower interest rates, looking back i wish we had done 30 year and just made additional mortgage payments but i suspect when it is paid off in 20 years i will be glad i did 20 years even though sometimes i wish i did 30 years and put the extra money in the S&P500.
You gotta know yourself. First off you need to be able to afford it.
For me personally it was a 5 year note. I thought about extending it and paying the 5 year amount. It would be all to easy to say let’s just take it easy for the summer and do things etc. the interest is higher.. and the payment isn’t that much less. So I stuck with a 5 year note. Also I was comfortably within my budget range. It absolutely cut down on fun money.
My gauge of acceptability was can we afford this by the skin of our teeth if our income gets cut in half…. One of us loses our job or we both do and have to get some type of work at half the pay.
I hear the argument all the time that you should borrow more and pay it off slower and invest the difference. Setting aside the fact that most spend the difference rather than investing it, right now I can get margin cheaper than a mortgage rate and its not collateralized to my house.
The decision to take a 30 or 20 or 15 years, imo comes down to how comfortable you are with the PITI payments. 30 yr loans usually have higher rates than 20 yr or 15 yr loans but lower monthly payments. If this is your forever home, there is nothing preventing you from paying down a 30 yr loan sooner. For me cash flow is king.
Faster you get a paid off house the faster you get out of debt slavery. Low interest rates can be a gift and the wealthy actually have mortgages even though they can afford to pay cash since it gives them more money to invest and in some cases tax advantages, but we’re not in a low rate environment and won’t be again any time soon, so get that thing paid off
I always see these comparisons, but the interest cost over the life of the loan is only relevant if you plan to stay there for 30 years. The average mortgage lasts less than 12 years.
I would take the 30 and make additional payments. If I ended up in financial difficulty for some reason, it would be a lot easier to drop the additional payments than try to refinance a fifteen year loan at a time when nobody would want to lend me money.
Unless we rewind the clock to late 2020 & all of 2021 where avg 15yr rates were under 3%, then never.
Pick 30yrs and pay as much as possible earlier. You get best “of 2 worlds”.
What is the math if you do the 30 year loan but pay $5.5?