15yr mortgage is better

[REatc]

I have been recently doing some math on a 15yr mortgage compared to a 30yr mortgage. I’m not interested in the standard argument of get a 30yr mortgage, invest the difference, have a bigger net worth in 30yrs compared to the 15yr mortgage. I am interested tho in a timeline of 5-10yrs. If I choose a 15yr over the 30yr, in 5-10yrs I will have more equity in the house than if I invested the difference and I could pay off the house easier. Paying off my mortgage is one of the biggest parts of my FIRE plan and is not negotiable. Math to follow to support my argument.

350k house      70k down payment         financing 280k

30yr mortgage: 3.5% interest rate, $1969 monthly payment, $1257 P&I
15yr mortgage:  3% interest rate,  $2645 monthly payment, $1934 P&I

30yr mortgage: first payment $441 to principal + $817 to interest
15yr mortgage: first payment $1234 to principal + $700 to interest

Difference in 15yr to 30yr in monthly payment= $676
Difference in 15yr to 30yr in principal pay down= $793

If I invest (5% return) the extra $676 a month over 5 years I get $47,065.
After 5yrs, 15yr mortgage balance is $200,250 and 30yr mortgage balance is $251,152. Difference of 50,092. 15yr balance wins.
If I invest (5% return) the extra $676 a month over 10 years I get $107,133.
After 10yra, 15yr mortgage balance is $107,611 and 30yr mortgage balance is $216,795. Difference of 109,134. 15yr balance wins.
Also I have the thought of if I’m paying an extra $676 a month on the 15yr vs 30yr, but my principal pay down is $793 a month, isn’t that an instant and constant 17% ROI? ($793/$676)

I am thinking in this short 5-10yr time period because that is when I will hit FI and potentially RE. Before RE I would pay off the mortgage, which would be better mathematically by the 15yr. I’m not sure if this would be a forever home, but neverless it would have more equity than the 30yr + invest. $676 a month extra is not a big deal to me in the overall budget, so the 15yr seems wiser to me. Also I am 100% stocks so the 15yr seems like it could/would function as a small bond. Thoughts?
Wow that was a lot

[bacchi]

Shit, if you want equity, just get a 5/1 ARM and pay it off before the rate changes.


PS You did your math wrong.

[FIREandMONEY]

With a 3% return on stocks over that 5 year period, you would be even better off with the 15 year!

I'm joking, but your whole premise relies on that ever so hard to predict rate of return in the market.  If it it it averages 9% over those 5 years you'll probably be kicking yourself.  If it averages 2%, you'll break your hand from patting yourself on the back. 

Run the math with 7% and 10% and see what the results would be.  I know you can find a lot of people saying the next decade will have slower growth, but honestly, nobody knows.

[BradminOxt19]

It's astonishing that with today's historic low mortgage rates, that there are people who think in a completely reverse way from what's financial common sense.

The biggest risk moving forward is inflation, as money supply increases.  That means real estate values rise, which is good for property owners. However, those with super low fixed mortgages for 30 years are the biggest beneficiaries of inflation, as they can pay off the 30 year super low interest rate mortgage with cheaper, inflated dollars over time.

There is risk in having a paid off house and a lot of your net worth tied up in a single home.  If you should fall ill and not be able to work and provide for food / utilities, you can't eat your house or burn the house to keep you warm (more than a single night, any way). If you should come into hard times and fail to be able to pay your property taxes for a few years, that fully paid off house will be auctioned off by the tax authorities for pennies on the dollar to pay off the property taxes. You, as the owner of the fully paid off house, get to suffer the pain of the loss of that value.

If an area should fall into economic depression, and you should need to move, your fully paid off house is now worth a lot less, and you take the full risk at selling it for a loss, rather than the bank who loaned you the money at stupid low rates.

I would never pay off my home mortgage as long as rates are so cheap.  I could have paid off my house years ago, but in 2017 - 2019 I used my pile of short term cash to buy some real estate properties that have resulted in returns in excess of 300k last year.  I cashed in those profits and now have a pile of cash waiting for the next real estate investment.  Having a fully paid off house would have resulted in virtually no return on the small amount of interest I was paying.

Despite all evidence that paying off your super low mortgage interest debt is not the wisest move, some people will never learn.

[RWD]

News flash! You'll have more equity and pay less in interest with a lower interest rate and higher payments!

Um, duh? 5-10 years tends to be about the sweet spot for 15-year beating 30-year, depending on your assumptions. The longer you keep the mortgage the more likely a 30-year with investing the difference will come out on top.

[Dicey]

News flash! You'll have more equity and pay less in interest with a lower interest rate and higher payments!

Um, duh? 5-10 years tends to be about the sweet spot for 15-year beating 30-year, depending on your assumptions. The longer you keep the mortgage the more likely a 30-year with investing the difference will come out on top.

Thank you, RWD. This info is spot on. But then, from the way the OP titled this thread and phrased the second sentence, they don't want to hear it. Hopefully, others will be more open to optimizing their green soldiers. That's why we're here, right?

[simonsez]

Paying off my mortgage is one of the biggest parts of my FIRE plan and is not negotiable.

Do whatever works for you, more than one way to skin a cat.  If you don't live in FL look into umbrella policies to protect your paid off house in case of litigation.  It's not required but if you're the type of person who sleeps better with no mortgage compared to mortgage+investing extra you might to want to explore the option.

Difference in 15yr to 30yr in principal pay down= $793
 
Also I have the thought of if I’m paying an extra $676 a month on the 15yr vs 30yr, but my principal pay down is $793 a month, isn’t that an instant and constant 17% ROI? ($793/$676)

That $793 is only the difference in month 1 of each payoff method.  Compared to the 30 year amortization with the higher interest rate, this difference will only grow over time.  For instance payment 100 for the 15 yr would have $1579.57 of principal while payment 100 for the 30 yr would have $587.93, a difference of $991.64.  I'm not sure I would think about it in the way you're indicating as that ratio for ROI but just wanted to point out that $793 only applies to the first payment.

I am thinking in this short 5-10yr time period because that is when I will hit FI and potentially RE. Before RE I would pay off the mortgage, which would be better mathematically by the 15yr. I’m not sure if this would be a forever home, but neverless it would have more equity than the 30yr + invest. $676 a month extra is not a big deal to me in the overall budget, so the 15yr seems wiser to me. Also I am 100% stocks so the 15yr seems like it could/would function as a small bond. Thoughts?
Wow that was a lot

Mazel tov!  I wouldn't think of the mortgage as a bond personally.  I know there are some similarities but also some key differences especially for retirees in the first few years (see SORR).  You can't sledgehammer a chunk out of your wall to pay for expenses but you can live off of bonds when the market is down during the early drawdown.  I also wouldn't assume 5% as a long-term average for equities nor be 100% in them nor only be concerned about the 5-10 year timeframe when thinking of FIRE nor have a 15 year mortgage in the first place but again, there are multiple paths to financial independence.  Do what works for you.

[wageslave23]

I have been recently doing some math on a 15yr mortgage compared to a 30yr mortgage. I’m not interested in the standard argument of get a 30yr mortgage, invest the difference, have a bigger net worth in 30yrs compared to the 15yr mortgage. I am interested tho in a timeline of 5-10yrs. If I choose a 15yr over the 30yr, in 5-10yrs I will have more equity in the house than if I invested the difference and I could pay off the house easier. Paying off my mortgage is one of the biggest parts of my FIRE plan and is not negotiable. Math to follow to support my argument.

350k house      70k down payment         financing 280k

30yr mortgage: 3.5% interest rate, $1969 monthly payment, $1257 P&I
15yr mortgage:  3% interest rate,  $2645 monthly payment, $1934 P&I

30yr mortgage: first payment $441 to principal + $817 to interest
15yr mortgage: first payment $1234 to principal + $700 to interest

Difference in 15yr to 30yr in monthly payment= $676
Difference in 15yr to 30yr in principal pay down= $793

If I invest (5% return) the extra $676 a month over 5 years I get $47,065.
After 5yrs, 15yr mortgage balance is $200,250 and 30yr mortgage balance is $251,152. Difference of 50,092. 15yr balance wins.
If I invest (5% return) the extra $676 a month over 10 years I get $107,133.
After 10yra, 15yr mortgage balance is $107,611 and 30yr mortgage balance is $216,795. Difference of 109,134. 15yr balance wins.
Also I have the thought of if I’m paying an extra $676 a month on the 15yr vs 30yr, but my principal pay down is $793 a month, isn’t that an instant and constant 17% ROI? ($793/$676)

I am thinking in this short 5-10yr time period because that is when I will hit FI and potentially RE. Before RE I would pay off the mortgage, which would be better mathematically by the 15yr. I’m not sure if this would be a forever home, but neverless it would have more equity than the 30yr + invest. $676 a month extra is not a big deal to me in the overall budget, so the 15yr seems wiser to me. Also I am 100% stocks so the 15yr seems like it could/would function as a small bond. Thoughts?
Wow that was a lot

5% is a very low return for stocks.  Assuming inflation at 2%, that is only 3% real returns.  Which is possible but would be historically low.  Historical return is 10% or 7% real returns.  But you do you, since you have already made up your mind.

[ericrugiero]

The way math works, 5% returns are worth more than 3 or 3.5% interest no matter the time frame.  Unless you use different numbers for closing costs, do the math wrong, or something else to skew the numbers you will ALWAYs end up with more money by earning a higher % on your investments than you pay in interest.  If your numbers don't show this then something is wrong. 

The question then becomes whether the market returns will actually be higher than the interest you pay.  Based on past results, the answer is "probably yes" over that time frame.  5% is actually very low for a 5-10 year time period but it's certainly not guaranteed.  The longer the time period, the better the odds that the market returns will be higher than the interest rate.  If you want to be more conservative and choose to pay off the mortgage that's a very valid choice.  Just don't say the math works in your favor. 

Note:  I did pay of my mortgage early.  I probably would not pay it off so fast again if I had it to do over.  But, I would most likely pay it off before retiring.  Investing the difference and then using that to pay off the rest of the mortgage just before retiring makes a lot of sense to me.   

[Duke03]

To the average American ie: someone that doesn't post on MMM the 30 year mortgage is the pay day lender of the middle class.  They buy the most expensive house they can afford to make the payment on and then don't invest anything anyways....  When it comes to my fellow Mustachians paying off the Mortgage early vs investing more is like splitting hairs. You will never convince someone else your idea is better. Personally I've always been a fan of the 10yr mortgage and then just pay it off cash around year 7ish.  It's worked out well on my last two houses, but your mileage may vary.

[American GenX]

I always went with 15 year loans and paid them off early.   Of course, rates were closer to 10% on my first home and not much lower on the second.

[rmorris50]

I had a 15 year and thought it was superior to a 30 year. Then I lost my job, boy did I change my tune fast. Found a new job, bought new house with 2.5% 30 year fixed. And my house value keeps going up, for now. I ain’t paying one cent early on that puppy. Unless I get get sick of it in retirement and just cut a check to pay it off down the road :-)


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[nereo]

If I choose a 15yr over the 30yr, in 5-10yrs I will have more equity in the house than if I invested the difference and I could pay off the house easier.

Having more of my NW tied into my home (equity) is one of the leading reasons why I will NOT do a 15yr.

It's generally inadvisable to have a large percentage of your NW tied to a single asset. Even more-so if that asset is comparitively hard to liquidate. One of the big lessons from the 'Great Recession' was to avoid having your house be your most valuable asset.

If your investments are large enough that going with a 15y doesn't make your home >30% of your total NW, do whatever makes you most comfortable. But please don't let your house become the biggest piece of your financial picture.

[wageslave23]

The way math works, 5% returns are worth more than 3 or 3.5% interest no matter the time frame.  Unless you use different numbers for closing costs, do the math wrong, or something else to skew the numbers you will ALWAYs end up with more money by earning a higher % on your investments than you pay in interest.  If your numbers don't show this then something is wrong. 

The question then becomes whether the market returns will actually be higher than the interest you pay.  Based on past results, the answer is "probably yes" over that time frame.  5% is actually very low for a 5-10 year time period but it's certainly not guaranteed.  The longer the time period, the better the odds that the market returns will be higher than the interest rate.  If you want to be more conservative and choose to pay off the mortgage that's a very valid choice.  Just don't say the math works in your favor. 

Note:  I did pay of my mortgage early.  I probably would not pay it off so fast again if I had it to do over.  But, I would most likely pay it off before retiring.  Investing the difference and then using that to pay off the rest of the mortgage just before retiring makes a lot of sense to me.

Its actually not that simple.  If you are weighing paying off your mortgage vs. investing, then yes you are correct.  But when deciding between a 3% mortgage and 3.5% mortgage with accelerated payments, you have to factor in that you are getting a .5% discount on interest for the entire loan amount while only costing you the additional monthly payment amount.