Author Topic: 15 year fixed or 30 year fixed Mortgage?  (Read 1200 times)

hoyahoyasaxa

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15 year fixed or 30 year fixed Mortgage?
« on: March 28, 2020, 02:14:44 PM »
Us: Me (34) and wife (33) live in a NY suburb and have two young children with goal to be FI by 50.  We plan to remain in this home for the foreseeable future (at least the next 5 to 10 years minimum).  We also have relatively stable jobs in higher ed that were not impacted by the current COVID-19 situation.  We both have Roth IRAs, 401(a)s, and 457(b)s.

Situation: Bought our home in June 2014 for $246,000 with $196,800 loan at 4.125% for a $953.79 monthly payment.

Option 1: Refinance to a 30-year fixed at 3.5%.  This would reduce our monthly payment to $786.95 but we would end up paying about $6,000 more over the life of the loan in total payments since it would reset to 30 years.

Option 2: Refinance to a 15-year fixed at 2.9%.  This would increase our monthly payment to $1201.83 but we would save $61,000 in total payments over the next 15 years.

Do I go with option 1 and use put the extra $167 a month into one of our retirement accounts.  What else should I be considering?

LightStache

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Re: 15 year fixed or 30 year fixed Mortgage?
« Reply #1 on: March 28, 2020, 03:34:19 PM »
The difference between your two options is $415/mo. If you went with option 1 and invested the $415/mo difference, after ten years at 8% you'd have around $75K. But you'd also pay more in interest, around $19K more than option 2. So assuming you invest the difference rationally, you end up $56K ahead with option 1. Of course there are many other factors making this decision, the most important of which is your saving and investment discipline. People accumulate wealth in primary residences because it's harder to tap the equity to spend than a brokerage account.

This is essentially a variant of the "do I pay off my mortgage" question that gets asked here all the time. Mathematically it almost never works out to pay mortgages over a shorter term, even with the considerable rate spread between 15 yr and 30 yr notes. But a lot of people chose to do it for peace of mind.

Loretta

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Re: 15 year fixed or 30 year fixed Mortgage?
« Reply #2 on: March 28, 2020, 04:51:04 PM »
I like the sound of Option 2 better, but Iím the owner of a 10 year mortgage at 3.3875 currently as I want my mortgage paid off when I retire.  If you can afford it, do it.

rmorris50

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Re: 15 year fixed or 30 year fixed Mortgage?
« Reply #3 on: April 04, 2020, 05:57:41 PM »
One "mistake" I've made through my life was not to value liquidity and cash flow enough, especially in times of crisis. I've assumed I would always be able to work and thus was comfortable "locking up" most of my investments in "hard-to-tap places" in house equity, IRAs, 401(k)s, deferred comp, life insurance CV, etc. And for the house I had a 15 year loan, thinking I could have it close to paid off by the time I early retired. But then the unthinkable happened - bam, my job was eliminated and I was packaged out. Now I had enough from the buy out to pay the mortgage for almost 2 years, but at that moment I wish I had a 30 year mortgage so I could pay less. I took the opportunity anyway to sell my house and get a job in a much lower cost of living area. I would seriously be sure you're comfortable giving up the flexibility of having a 30-year and just making higher payments vs being locked into a 15 year. Also, you probably come out better ahead investing the difference anyway. But given what I went through, and how low mortgage rates are, I only see myself getting a 30 year for the next house I buy. And if I really want a paid off mortgage in retirement, I'll just take a lump sum distribution from a retirement account after age 59.5 and pay the mortgage off.