Author Topic: Case study: 15- or 30-year mortgage?  (Read 892 times)

sbzellison

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Case study: 15- or 30-year mortgage?
« on: August 02, 2018, 11:59:58 PM »
Hello Mustachians--

My husband and I are about to buy our first home and I'm hoping someone can look over my assumptions/budget predictions and help me decide between a 15 year and 30 year mortgage.

Monthly Budget
Income: 10416 (Minumum--not including overtime, differential/hazard pay, or per diem, all of which could be substantial.  Yay new job, for which new house is being bought.)
Taxes: 2291 (Assume 22% marginal rate based on online 2019 tax estimator.)
Automatic retirement deductions to maximize matching: 520
Average expenses: 1250 (All insurance, cars, food, phones, all other goods.  I could certainly break this down, and am open to ways to reduce this--but that's not the primary point of this thread so for now let's just assume this won't change.)
Big additional expense: 1450 (Rent on current house, which we will maintain so husband can keep his job.  New job will be 240 miles from current house--we will commute to each other on weekends, take leave, etc.)
Monthly income to play with in this thread: 4905

Note: When looking at scary housing cost numbers (1450 for rent for husband's job, XXXX for new house)--keep in mind that these are absolute max numbers.  We intend to get a permanent roommmate for one house OR switch to a cheaper rental for husband when one comes available, roommates for both houses during the summer when seasonal workers flood in, maybe roommate for new house.  This should reduce monthly expenses by 800-1100.  But we certainly do NOT intend to pay full housing costs on two very expensive houses indefinitely.  However, I'd like to budget conservatively for the worst case scenario and still try to get a savings rate that I'm comfortable with.

Mortgage numbers for this thread (happy to play with other numbers, too, but here's one scenario from our pre-approval):
Home price: $300,000 (close to minimum price for single-family in not-sketchy neighborhood that's bikeable/skiable to new job, with at least one extra bedroom for roommate, and garage for primary hobby, furniture building)
Loan amount: $240,000
Property taxes, homeowners insurance: $500 monthly
Utilities and internet on new home: $380 monthly
15-year mortgage: 3.75%; monthly payment $2622
30-year mortgage: 4.25%; monthly payment $2061

Using mortgage interest calculators, choosing the 15-year mortgage would save $120,000 in interest costs.  Choosing the 30-year mortgage and paying the additional $565 saves $95,500 and the mortgage is paid off in 16 years.

This is where my brain starts breaking down--is it wiser to choose the 15 or 30-year mortgage?  Choosing the 15-year and investing the minimum $2300 (difference between $4905 expenses and $2622 monthly payment) yields an investment rate of 24%, or 29% if you consider the $565 increase in mortgage price as an investment that will yield $120,000 in interest savings.  That's a number I can live with, especially considering that I truly believe all of the above expense and income numbers are very conservative.  It seems that if we can keep our home price around $300,000, choosing the 15-year mortgage is wise, and could be considered a diversification of investments.

So, should we be looking at a different mortgage--or a cheaper house?

Thanks, all.  I am increasingly anxious about this huge decision.
« Last Edit: August 03, 2018, 12:02:33 AM by sbzellison »

Telecaster

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Re: Case study: 15- or 30-year mortgage?
« Reply #1 on: August 03, 2018, 12:01:41 AM »
30-year.  No question.

sbzellison

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Re: Case study: 15- or 30-year mortgage?
« Reply #2 on: August 03, 2018, 12:03:15 AM »
30-year.  No question.

Thanks for replying.  Can you elaborate why?

Also, what's your response to this: http://www.mrmoneymustache.com/2011/05/24/mmm-challenge-get-yourself-a-lower-mortgage-rate/?
« Last Edit: August 03, 2018, 12:27:26 AM by sbzellison »

nereo

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Re: Case study: 15- or 30-year mortgage?
« Reply #3 on: August 03, 2018, 03:34:18 AM »
given that you are on this forum I'm going to assume that you would invest the $565 saved by going to a 30yr - which is what I would recommend here.
i) a fixed 4.25% is well below the average long-term return on the market
ii) you hinted that you are not maxing out your tax-advantaged accounts (..."enough to get match"...)
iii) despite what you said, going to a 15 yr would not diversify your holdings, it would more heavily weight your NW to that single illiquid and volatile asset (your house).

Should you be looking at a cheaper house?  DEpeonds on you and your area - if you can find something cheaper that you can be content with go for it; housing is generally the largest single-item in one's budget, and reducing that expense will only accelerate how fast you can reach FI.

Telecaster

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Re: Case study: 15- or 30-year mortgage?
« Reply #4 on: August 03, 2018, 10:00:28 AM »
30-year.  No question.

Thanks for replying.  Can you elaborate why?

Also, what's your response to this: http://www.mrmoneymustache.com/2011/05/24/mmm-challenge-get-yourself-a-lower-mortgage-rate/?

What nereo said.  The assumption is that you will invest the $565 saved by going to a 30yr, as opposed to paying down the mortgage which I believe was your intention.

MMM is big fan of paying off the mortgage.  However, for a host of reasons that is a suboptimal financial strategy.   Basically, all your green soldiers get stuck in the house, where they don't work very hard. 

Long discussion of the ins and outs here: 

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

kenmoremmm

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Re: Case study: 15- or 30-year mortgage?
« Reply #5 on: August 03, 2018, 03:17:08 PM »
monthly income to play with= 4905.
x 12 = $70k/yr

loan amount = $240k

save for 3.5 years. buy in cash. suboptimal vs investing, probably, but you'll have no interest to pay and your 15 year loan will shrink to 3.5 years.

boarder42

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Re: Case study: 15- or 30-year mortgage?
« Reply #6 on: August 03, 2018, 03:30:22 PM »
If you plan to stay over 7 years 30 year hands down less the 15 year wins.  You can enter your own numbers here
https://michaelbluejay.com/house/15vs30.html

Fishindude

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Re: Case study: 15- or 30-year mortgage?
« Reply #7 on: August 04, 2018, 08:08:57 AM »
I would never advise anyone to take a 30 year loan.   Do you really want to still be making payments on that house 30 years from now?   How old will you be?
I suggest a 15 year or shorter loan with as much down payment as you can muster, 20% minimum.   If you can't make that happen, you are taking on more house than you can afford.
Get the darned thing paid off quick and enjoy living mortgage free.

boarder42

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Re: Case study: 15- or 30-year mortgage?
« Reply #8 on: August 04, 2018, 08:25:57 AM »
I would never advise anyone to take a 30 year loan.   Do you really want to still be making payments on that house 30 years from now?   How old will you be?
I suggest a 15 year or shorter loan with as much down payment as you can muster, 20% minimum.   If you can't make that happen, you are taking on more house than you can afford.
Get the darned thing paid off quick and enjoy living mortgage free.

This is shortsighted emotions talking not long term safety growth and FIRE thinking.

Lmoot

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Re: Case study: 15- or 30-year mortgage?
« Reply #9 on: August 06, 2018, 04:09:37 AM »
I would never advise anyone to take a 30 year loan.   Do you really want to still be making payments on that house 30 years from now?   How old will you be?
I suggest a 15 year or shorter loan with as much down payment as you can muster, 20% minimum.   If you can't make that happen, you are taking on more house than you can afford.
Get the darned thing paid off quick and enjoy living mortgage free.

30 year mortgage does not mean 30 years of payments. Itís merely a way to amortize the cost  into a monthly payment.

boarder42

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Re: Case study: 15- or 30-year mortgage?
« Reply #10 on: August 06, 2018, 04:19:38 AM »
I would never advise anyone to take a 30 year loan.   Do you really want to still be making payments on that house 30 years from now?   How old will you be?
I suggest a 15 year or shorter loan with as much down payment as you can muster, 20% minimum.   If you can't make that happen, you are taking on more house than you can afford.
Get the darned thing paid off quick and enjoy living mortgage free.

30 year mortgage does not mean 30 years of payments. Itís merely a way to amortize the cost  into a monthly payment.

It should if you get a low fixed rate

Fishindude

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Re: Case study: 15- or 30-year mortgage?
« Reply #11 on: August 06, 2018, 01:47:36 PM »
30 year mortgage does not mean 30 years of payments. Itís merely a way to amortize the cost  into a monthly payment.

Sure, if you are disciplined enough to pay it off early.  Unfortunately, a whole lot of people talk like this and do just the opposite.  Many will extend their loan duration at some point by taking on home equity lines.   Read something just recently that said something like 44% of Americans age 60-70 are still carrying a mortgage.   

waltworks

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Re: Case study: 15- or 30-year mortgage?
« Reply #12 on: August 06, 2018, 03:02:53 PM »
Look, do we have to have the same debate every time?
-Saving and investing are good, so a 15 year is good, a 30 year is good, and investing whatever excess you can is good.
-Paying your mortgage off early is good.
-Paying your mortgage as slowly as possible and investing the difference is good.

If you have the self control to invest your excess money, and your rate is significantly lower than the historical returns of the stock market, and your time horizon is long, you will eventually be much, much richer if you invest and pay the minimum on a 30 year.

If you are fundamentally unhappy being in debt, you will be much much happier paying off the mortgage early. There are other situations (moving and planning to sell in the near term) where early payoff isn't a bad move.

There is no one size fits all solution here, but for optimizers, long term investing has a much better expected return than paying off a 3.5-4.5% mortgage. It has an inherent liquidity advantage as well, and it increases the chances of FIRE success.

-W

Lmoot

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Re: Case study: 15- or 30-year mortgage?
« Reply #13 on: August 06, 2018, 03:15:10 PM »
30 year mortgage does not mean 30 years of payments. Itís merely a way to amortize the cost  into a monthly payment.

Sure, if you are disciplined enough to pay it off early.  Unfortunately, a whole lot of people talk like this and do just the opposite.  Many will extend their loan duration at some point by taking on home equity lines.   Read something just recently that said something like 44% of Americans age 60-70 are still carrying a mortgage.

I mean these days people rarely take 30 years to pay off a mortgage because people rarely stay in a house for 30 years. Whatís the point rushing to pay off a house you donít plan on staying in? If you know you are not going to stay in the house through the whole term, why volunteer to pay more per month on a 15 year mortgahe, if you can use that extra cash flow to invest elsewhere?
« Last Edit: August 06, 2018, 03:17:17 PM by Lmoot »

kenmoremmm

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Re: Case study: 15- or 30-year mortgage?
« Reply #14 on: August 06, 2018, 04:09:14 PM »
I mean these days people rarely take 30 years to pay off a mortgage because people rarely stay in a house for 30 years. Whatís the point rushing to pay off a house you donít plan on staying in? If you know you are not going to stay in the house through the whole term, why volunteer to pay more per month on a 15 year mortgahe, if you can use that extra cash flow to invest elsewhere?

duration of living there should not be a factor unless i'm mistaken. you're essentially "saving" at whatever your loan interest rate is by prepaying. you will just end up with more equity in your home when it comes time to sell, and some of that equity will have been "earning" your rate.

Lmoot

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Re: Case study: 15- or 30-year mortgage?
« Reply #15 on: August 06, 2018, 06:33:36 PM »
I mean these days people rarely take 30 years to pay off a mortgage because people rarely stay in a house for 30 years. Whatís the point rushing to pay off a house you donít plan on staying in? If you know you are not going to stay in the house through the whole term, why volunteer to pay more per month on a 15 year mortgahe, if you can use that extra cash flow to invest elsewhere?

duration of living there should not be a factor unless i'm mistaken. you're essentially "saving" at whatever your loan interest rate is by prepaying. you will just end up with more equity in your home when it comes time to sell, and some of that equity will have been "earning" your rate.
I agree to an extent, but I was referring to fishindudeís advice to take a 15 yr mortgage so you arenít stuck paying a mortgage for 30 years.

Generally the interest rate for a 15 yr mortgage isnít that much lower (enough anyway, for some people to take on the risk of a nearly double monthly payment). When I bought my first house, I drained much of my cash resources getting together a down payment, closing costs, and move in costs. My goal was to have as much cash flow as possible, so that I could fill the coffers more quickly. At that stage in my life, interest savings was not a priority, stability was; which was a good thing because 2 months after closing my 1yr temp assignment job ended despite verbal encouragement all along the way, that I was intended to be hired on full time. Luckily my mortgage payment was small and I was able to wheather the storm.

Saving money is great, but not if you put yourself in peril to do so. A 30 year mortgage for most people, means more control over their cash flow. They can choose to pay more if they want, or pay the lower amount. Most lenders these days accept extra payments without fees.

Also the length of time you stay in your house does change your potential savings. If you pay your mortgage off early and move after five years, you canít claim that you saved 30 years of interest. At best you saved five years, or however many years early you paid it off by before selling.

I personally donít care much about equity. Equity is not a return on investment. The value of the property is. And the value of the property will be what it is regardless of how fast or slow you pay off the mortgage. Equity is just cash you paid to satisfy a debt. If you didnít have a lot of equity in your house, but instead you have a lot of cash, itís not necessarily a better or worse position to be in. Often times itís close to equal for periods of time. In fact there are quite a few here that would consider high equity in a property, to be a bad thing in many circumstances.
« Last Edit: August 06, 2018, 06:43:26 PM by Lmoot »

boarder42

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Re: Case study: 15- or 30-year mortgage?
« Reply #16 on: August 06, 2018, 07:44:32 PM »
Look, do we have to have the same debate every time?
-Saving and investing are good, so a 15 year is good, a 30 year is good, and investing whatever excess you can is good.
-Paying your mortgage off early is good.
-Paying your mortgage as slowly as possible and investing the difference is good.

If you have the self control to invest your excess money, and your rate is significantly lower than the historical returns of the stock market, and your time horizon is long, you will eventually be much, much richer if you invest and pay the minimum on a 30 year.

If you are fundamentally unhappy being in debt, you will be much much happier paying off the mortgage early. There are other situations (moving and planning to sell in the near term) where early payoff isn't a bad move.

There is no one size fits all solution here, but for optimizers, long term investing has a much better expected return than paying off a 3.5-4.5% mortgage. It has an inherent liquidity advantage as well, and it increases the chances of FIRE success.

-W

And if I'm not mistaken this is a FIRE forum so.....

pecunia

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Re: Case study: 15- or 30-year mortgage?
« Reply #17 on: August 06, 2018, 08:23:49 PM »
What kind of inflation can we expect over the next 30 years?  Inflation tends to make the payments smaller towards the end.

Some people say they con't care about the equity.  if you sell the home, equity is the money in your pocket.  Print out the amortization tables for 15 vs 30 years.  Who is the bigger winner with a 30 year mortgage if you sell your house?     Hint - The finance company because they will hold a greater share of the equity longer.

15 vs 30 years.  Hmmmmmmm

With a 30 year mortgage will the bank still own most of your home?  Do you want to live with a banker in the living room?

Let's say you need to borrow money after 16 years.  Will it be easier to borrow money with a 15 year loan or a 30 year loan?  (using the house as collateral)

I sure do hate house payments.  I sure did learn to hate the Lomas & Nettleton Mortgage company.

boarder42

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Re: Case study: 15- or 30-year mortgage?
« Reply #18 on: August 06, 2018, 08:32:49 PM »
What kind of inflation can we expect over the next 30 years?  Inflation tends to make the payments smaller towards the end.

Some people say they con't care about the equity.  if you sell the home, equity is the money in your pocket.  Print out the amortization tables for 15 vs 30 years.  Who is the bigger winner with a 30 year mortgage if you sell your house?     Hint - The finance company because they will hold a greater share of the equity longer.

15 vs 30 years.  Hmmmmmmm

With a 30 year mortgage will the bank still own most of your home?  Do you want to live with a banker in the living room?

Let's say you need to borrow money after 16 years.  Will it be easier to borrow money with a 15 year loan or a 30 year loan?  (using the house as collateral)

I sure do hate house payments.  I sure did learn to hate the Lomas & Nettleton Mortgage company.

So many. Dumb statements here.

pecunia

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Re: Case study: 15- or 30-year mortgage?
« Reply #19 on: August 06, 2018, 08:38:08 PM »

So many. Dumb statements here.

Thanks

boarder42

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Re: Case study: 15- or 30-year mortgage?
« Reply #20 on: August 06, 2018, 08:38:35 PM »
I love posts with no data that focus on the norms we should be distancing ourselves from on these forums.

boarder42

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Re: Case study: 15- or 30-year mortgage?
« Reply #21 on: August 06, 2018, 08:39:01 PM »

FIreDrill

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Re: Case study: 15- or 30-year mortgage?
« Reply #22 on: August 06, 2018, 09:02:23 PM »
The best way to go would be to get a 30 year and prioritize investments.  Start maxing your 401k yesterday.... Seriously go change your contribution amount now. That's an instant 22% return on your money.  Then max any other tax advantaged accounts you may have access to such as IRA's and HSA's.

After that I would personally invest the rest in a taxable brokerage account with a goal of staching enough in there until Its larger then your mortgage.  By that time you will be able to pay it off in a lump sum but you probably won't because you will become more comfortable holding a large investment account and a mortgage rather than throwing such a large amount of your net worth into a single asset class which is comparable to bonds.  That's what happened to me but then I moved across the country to a HCOL area... Also, Investing in a taxable account will historically earn you much more than paying of the mortgage over the long term (30 year period) while proving better liquidity than home equity.

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Telecaster

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Re: Case study: 15- or 30-year mortgage?
« Reply #23 on: August 06, 2018, 11:34:02 PM »
if you sell the home, equity is the money in your pocket.  Print out the amortization tables for 15 vs 30 years.  Who is the bigger winner with a 30 year mortgage if you sell your house?     Hint - The finance company because they will hold a greater share of the equity longer.

This is innumeracy.

boarder42

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Re: Case study: 15- or 30-year mortgage?
« Reply #24 on: August 07, 2018, 04:42:37 AM »
I'm all for the 30 year don't pay your house down fast crowd but in this case it really depends on how long the OP will stay. I got lucky and refinanced down to a 15 in our starter home and that allowed us to come out way ahead bc we only stayed there 3-4 years after the refi. Typically it's 7 years and most people stay in homes 6-7 years on avg. So it really depends on how long the OP thinks they'll stay.