Author Topic: 30 year mortgage doesn't make sense  (Read 13870 times)

econberkeley

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30 year mortgage doesn't make sense
« on: May 08, 2015, 11:48:07 AM »
Average American moves every 7 years. Since most Americans buy 30 year mortgage, almost all their payment goes toward the interest. Also, average person don't get tax deduction for interest since their payment is not big enough. At the end of the mortgage payments for 7 years, they will not build an equity unless home price goes up. Based on these facts, why are people getting into 30 year mortgages? What am I missing?

Jmoody10

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Re: 30 year mortgage doesn't make sense
« Reply #1 on: May 08, 2015, 11:55:21 AM »
That is why many make a strong case for renting.

brokescientist

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Re: 30 year mortgage doesn't make sense
« Reply #2 on: May 08, 2015, 12:12:21 PM »
Perhaps rental properties?

Midwest

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Re: 30 year mortgage doesn't make sense
« Reply #3 on: May 08, 2015, 12:21:33 PM »
Few reasons:

1) People buy too much house and have no intention of paying off in the near term.
2) Govt intervention into the mortgage market allows for low rates and long terms.
3) Gives flexibility in the case of lowered income or job loss.

I did benefit from a 30 year on the first 2 mortgages.  Both houses were purchased within 3 years of college graduation and we needed the lowest payment possible.  We refi'd to a 15 year soon thereafter.

RFAAOATB

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Re: 30 year mortgage doesn't make sense
« Reply #4 on: May 08, 2015, 12:33:18 PM »
Even though five year car loans are standard and you can get a seven year car loan, Suze Orman recommends not getting a car you can't afford to pay off in 3 years.

With low interest rates, I rushed to get a 30 year.  I'm aiming to pay it off much faster and the ability to lower payments is nice, but now next house I'm limiting myself to what I can afford on a 15 year.  I'm not too interested in refinancing because 0.4% is an acceptable cost for the flexibility as a hedge on income loss.

While I had 0% down VA loan for mine, most equity will be from the 20% down payment you should be making.

thd7t

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Re: 30 year mortgage doesn't make sense
« Reply #5 on: May 08, 2015, 12:41:51 PM »
Many people believe that houses are an investment, so they buy believing that the price will climb quickly.  The lower payment makes them think that they can afford more house (although, as you mention they are not building much equity), which plays into the desire for "more".  Usually, interest rates are higher than now, so a deduction is a stronger possibility. 

These all apply to people who don't have a mustachian mindset.

GuitarStv

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Re: 30 year mortgage doesn't make sense
« Reply #6 on: May 08, 2015, 12:50:52 PM »
It worked out well for us.

We originally got a 30 year mortgage (well, a 5 year mortgage with a 30 year expected amortization period, which pretty common in Canada) with the option to pay up to 30% initial principal per year via accelerated payments.  The long mortgage gave us the ability to drop house payments down to virtually nothing in case of some kind of financial emergency, but keep paying off the mortgage quickly if the money keeps rolling in.

Scandium

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Re: 30 year mortgage doesn't make sense
« Reply #7 on: May 08, 2015, 12:53:48 PM »
Average American moves every 7 years. Since most Americans buy 30 year mortgage, almost all their payment goes toward the interest. Also, average person don't get tax deduction for interest since their payment is not big enough. At the end of the mortgage payments for 7 years, they will not build an equity unless home price goes up. Based on these facts, why are people getting into 30 year mortgages? What am I missing?

Does the average american homeowner move every 7 years, or the average overall, i.e. also renters?

TexasStash

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Re: 30 year mortgage doesn't make sense
« Reply #8 on: May 08, 2015, 12:59:07 PM »
Most people get 30 year mortgages without thinking about a) length of time they're likely to be in the house, b) percentage of payment that goes toward principal, or c) what does this do for my tax situation.

Your average non-Mustachian takes the following steps to buy a house:

1) I'm tired of living in an apartment. (Or... my friends are starting to buy houses.)
2) I want a house.
3) I really like this house.
4) I want to pay as little as possible per month.

Boom... 30 year mortgage.

You can't assume people are going through a logical financial progression and then still deciding on a 30 year mortgage. Those that do go through the progression and still choose 30 years (like us) want the flexibility to handle job loss or other financial hardship. Or they just want to spend the money on other stuff.

I've also decided I'd rather invest the money I have left over rather than put it toward the house. But that's mainly because we've been really fortunate with a nice increase in housing prices in our neighborhood since we bought. I've figured out I don't want more than half of my net worth to be tied up in my house.

Gone Fishing

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Re: 30 year mortgage doesn't make sense
« Reply #9 on: May 08, 2015, 01:17:59 PM »
ARMS are pretty popular for people who do not plan on staying in a house very long. It allows them to get the best possible rate and lowest payment.  Our first mortgage was a 30 year am with a 10 year fixed rate followed by a floating rate.  We were out in 4 years, but held on to it as a rental.  I refied it on a 15 year fixed a few years ago.

Axecleaver

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Re: 30 year mortgage doesn't make sense
« Reply #10 on: May 08, 2015, 01:20:07 PM »
I think a lot of folks count on wage growth increases. That might have been a decent plan 20 years ago when both housing prices and real wages were going up, but with the current long stretch of wage stagnation, along with the 2008 bubble, I don't think this perspective is quite as common as it used to be.


thebrowze

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Re: 30 year mortgage doesn't make sense
« Reply #11 on: May 08, 2015, 01:49:07 PM »
...
Since most Americans buy 30 year mortgage, almost all their payment goes toward the interest.
...

This assertion is no longer correct, although it used to be when mortgage interest rates were much higher.  I quick search on Bloomberg shows the average 30-year mortgage rate right now is 3.90%.  On a $100,000 loan, the total mortgage payment would be $471.67.  Of that, $146.67 of the initial payment would go to principal (just over 31% of the total payment), and that percentage only increases over time.

After 7 years a borrower would have paid $14,139.66 in principal, about 14% of the total loan.  Assuming a 20% original downpayment ($125k original purchase price), the owner/borrower would now have $39,139.66 equity (about 31.3%), even if we assume ZERO price appreciation.

Rules of thumb don't always apply once economic conditions change...

edit: clarification
« Last Edit: May 08, 2015, 01:52:08 PM by thebrowze »

Jeremy E.

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Re: 30 year mortgage doesn't make sense
« Reply #12 on: May 08, 2015, 04:18:47 PM »
Because society makes people think it's "smart" to buy a house and start building equity. That if you rent, you are wasting your money. People think it's normal to buy very expensive houses that they are much bigger than they need, and often can barely afford. They want to brag about there house and they don't want to live in a "rental." They aren't able to do the math and run the numbers like in the blog post below, so they think they are being smart while building equity while in reality they are not.
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

JLee

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Re: 30 year mortgage doesn't make sense
« Reply #13 on: May 08, 2015, 04:35:05 PM »
Because society makes people think it's "smart" to buy a house and start building equity. That if you rent, you are wasting your money. People think it's normal to buy very expensive houses that they are much bigger than they need, and often can barely afford. They want to brag about there house and they don't want to live in a "rental." They aren't able to do the math and run the numbers like in the blog post below, so they think they are being smart while building equity while in reality they are not.
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

it will also vary wildly based on your particular area's rent/purchase differences. I'd likely pay around $1200/mo to rent my house, which I bought for $140k (and now have roommate cashflow of $13,200/yr).

I didn't buy it for an investment - I bought it because for the same monthly expense, I could have a little apartment. Now it makes me money. :)

James

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Re: 30 year mortgage doesn't make sense
« Reply #14 on: May 08, 2015, 04:37:23 PM »
I don't buy the premise that the 30 year mortgage either "makes sense" or "doesn't make sense".

The 30 year mortgage is a tool. The fact that some people use a 30 year mortgage while moving every 7 years and never building equity doesn't make the tool make sense or not. For me it makes sense, and for many others it makes sense. It allows us to lock in a low interest rate while putting money in the market instead of our house.

People either should or shouldn't use the 30 year mortgage based on their circumstances and goals, not because of what some average American does. If they were all doing it in order to put more in the market it would make a lot of sense. They aren't, but that is because they are consumer suckers, not because of the tool.

stlbrah

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Re: 30 year mortgage doesn't make sense
« Reply #15 on: May 08, 2015, 04:57:50 PM »
-I was 22 with no financial knowledge
-There was an 8k tax incentive at the time
-Boomers advised that "buying is better" - in this case they were correct though, considering 8k incentive

Eric

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Re: 30 year mortgage doesn't make sense
« Reply #16 on: May 08, 2015, 05:07:06 PM »
Average American moves every 7 years. Since most Americans buy 30 year mortgage, almost all their payment goes toward the interest. Also, average person don't get tax deduction for interest since their payment is not big enough. At the end of the mortgage payments for 7 years, they will not build an equity unless home price goes up. Based on these facts, why are people getting into 30 year mortgages? What am I missing?

The monthly payment is lower.  Duh!

mozar

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Re: 30 year mortgage doesn't make sense
« Reply #17 on: May 08, 2015, 08:37:23 PM »
Something about a hedge against inflation.

aspiringnomad

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Re: 30 year mortgage doesn't make sense
« Reply #18 on: May 08, 2015, 09:47:58 PM »
I don't buy the premise that the 30 year mortgage either "makes sense" or "doesn't make sense".

The 30 year mortgage is a tool. The fact that some people use a 30 year mortgage while moving every 7 years and never building equity doesn't make the tool make sense or not. For me it makes sense, and for many others it makes sense. It allows us to lock in a low interest rate while putting money in the market instead of our house.

People either should or shouldn't use the 30 year mortgage based on their circumstances and goals, not because of what some average American does. If they were all doing it in order to put more in the market it would make a lot of sense. They aren't, but that is because they are consumer suckers, not because of the tool.

+1. I prefer 15-years for my own goals, but 30-year mortgages are a fine way to finance a house if used wisely.

Faraday

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Re: 30 year mortgage doesn't make sense
« Reply #19 on: May 08, 2015, 10:13:33 PM »
I don't buy the premise that the 30 year mortgage either "makes sense" or "doesn't make sense".

The 30 year mortgage is a tool. The fact that some people use a 30 year mortgage while moving every 7 years and never building equity doesn't make the tool make sense or not. For me it makes sense, and for many others it makes sense. It allows us to lock in a low interest rate while putting money in the market instead of our house.

People either should or shouldn't use the 30 year mortgage based on their circumstances and goals, not because of what some average American does. If they were all doing it in order to put more in the market it would make a lot of sense. They aren't, but that is because they are consumer suckers, not because of the tool.

Great question, OP, and great answer, James. +1. Best explanation I've seen yet.

Mortgages are a tool that require situational awareness and wisdom to properly apply.

DW and I are in the last house we ever expect to own. We have a 15 year 2.875% mortgage I'm trying to get paid off before we FIRE. There are valid arguments against paying off the mortgage and simply investing the extra cash, but we need to optimize cash flow rather than increasing stash, because we were late to the FI game and won't enjoy as much compounding power. 

dcheesi

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Re: 30 year mortgage doesn't make sense
« Reply #20 on: May 09, 2015, 06:47:30 AM »
When I bought, I considered a shorter term (15 yr) mortgage to reduce interest payout over the life of the loan. But I decided on the longer term because it gave me extra flexibility; I could pay extra principal if I wanted to pay it off in a 15-year time window or I could drop back to the standard payment if my income situation changed. The bump in interest rate was small enough to be a non-factor when weighed against that advantage.

After the fact I decided that with my low interest rate, it made even more sense to hold onto that extra principal payment and invest it instead.

And when I did my refi, the rates for 15 and 30 year were identical, so it was a no-brainer to stick with the 30 so I could keep investing more.

justajane

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Re: 30 year mortgage doesn't make sense
« Reply #21 on: May 09, 2015, 06:59:37 AM »
We chose the 30 yr instead of the 15 yr (even though we could afford the 15) as a hedge against job loss. Our reasoning was that we could always prepay the 30 and essentially turn it into a 15 if we wanted to, but in the event of job loss, that extra amount per month could make a difference in us keeping our heads above water.

YMMV.

nereo

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Re: 30 year mortgage doesn't make sense
« Reply #22 on: May 09, 2015, 07:14:50 AM »
Based on these facts, why are people getting into 30 year mortgages? What am I missing?
You are correct that 30 year mortgages are a poor decision for some people.  However, I agree with James that they are just a tool, and they are incredibly useful for many people and quite dangerous for others (not unlike a rewards credit-card with a high APR).

Here's my own situation for some perspective.  I have a 25 year mortgage (30 year mortgages in Canada don't exist, but the difference in monthly payments betewen 25 years and 30 years is negligable).  Also, there is no mortgage interest deduction here, so it fits with your idea that many don't benefit from the deduction (which is true!).  Also, when we purchased our home we could only be certain that we'd be living here for 7-8 years, and then there would be a high likelihood that we'd be moving.  So in all we fit your assumptions of a 'typical' person with a long-term mortgage.

So why did we do it?  Well, for starters we qualified for a 3.1% interest rate. This meant that on our very first payment 46% was going towards principle.  By year 7 almost 58% will be going towards principle.  This changes the buy-vs-rent equation significantly.
Second, in our particular area renting an equivalent place would be about $300 more per month. Using the calculator below from the NY Times it was always better to buy than rent given our circumstances.  Third, we just like being home-owners. We like knowing we can do what we like, do some renovations, and best of all that we don't have to worry about moving or having the rent raised every year.  That's less of an economical arguement than a personal one.

We could have gone with a 15 year mortgage, but given the ridiculously low interest rates available, it was LESS attractive for us to pay almost double each month.  Also, at the time we purchased the house I could have sold my investments to purchase the home with cash (but just barely).  However, this was unattractive to me, since my entire net worth would have been tied up in that one single home.  I would have lost almost all diversity and wound up with something that historically does not preform nearly as well.

I will say that there are a great number of people who take out a 30 year mortgage to allow them to buy more house than they should... but then again you could make a similar arguement about credit cards.  The 30-year is a tool, which can be used productively or abused to financial ruin.
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=2&abt=0002&abg=0
« Last Edit: May 09, 2015, 08:25:40 AM by nereo »

ender

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Re: 30 year mortgage doesn't make sense
« Reply #23 on: May 09, 2015, 07:40:55 AM »
Based on these facts, why are people getting into 30 year mortgages? What am I missing?

Here's the deal. Most people don't purchase homes for financial decisions. They purchase homes because of a few reasons, none of which are financial.

The social pressure for young professionals to buy a house is insane. People act like you are crazy if you are in your 20s, working a professional job, and don't want to buy a home. Most people cannot understand any reason you would ever want to rent. "Renting is throwing money away!" is probably the most common financial myth, ever.

No one cares about the "it's not throwing money away" perspective at all. ITS ALWAYS THROWING MONEY AWAY GUYS.

... or not.

nereo

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Re: 30 year mortgage doesn't make sense
« Reply #24 on: May 09, 2015, 08:39:18 AM »
Based on these facts, why are people getting into 30 year mortgages? What am I missing?

Here's the deal. Most people don't purchase homes for financial decisions. They purchase homes because of a few reasons, none of which are financial.

The social pressure for young professionals to buy a house is insane. People act like you are crazy if you are in your 20s, working a professional job, and don't want to buy a home. Most people cannot understand any reason you would ever want to rent. "Renting is throwing money away!" is probably the most common financial myth, ever.

No one cares about the "it's not throwing money away" perspective at all. ITS ALWAYS THROWING MONEY AWAY GUYS.
I'll tweak this slightly:  Most people purchase a home because they think it is a good investment.  The mortgage industry, the real-estate industry, the tax code and social pressures all create this pervasive belief that a home is a good investment. However, it's rarely the 'investment' people believe it to be.

I will argue that owning your own home is not always a bad use of money.  Fueled by a super-low interest rate, our monthly mortgage is several hundred$ less than similar rentals in the area.  After 7 years, even including buying and selling costs our home and assuming no increase in value our home will cost us less than we would have spent in rent.  Will we have made as much as a similar amount of money put into the markets?  Almost certainly not.  This is why a home is a poor investment.  But that doesn't mean owning is always a stupid choice.

rubybeth

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nereo

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Re: 30 year mortgage doesn't make sense
« Reply #26 on: May 09, 2015, 02:30:34 PM »
Many people expect their real estate to appreciate over time. It generally does, even over short periods like seven years. The magic of leverage means you own 100% of the gain while paying a tiny fraction of the principle. Longer loan periods increase leverage by allowing for larger loans. Most people would be better seved by ARMs because they could borrow even more and earn even more when they sell.

We bult $1 million in equity in 20 years by always buying the most we could afford every time we moved. Four houses. No sweat equity. Always had a 30 year or ARM which kept payments less than rent would be. Never paid more than 28% of net take home on mortgage payment. We were fortunate that employers always paid all moving costs, real estate fees, commissions and sometimes underwrote rates or even made down payment contributions.
SnackDog, I'm glad this has worked out for you, but I have to forcefully disagree with using this strategy to build wealth.
Here are my objections to this strategy:
1) Buying 'the most [house] that could afford' means that everything else costs more too.  You will pay more in taxes, more in maintenance and it will take more of your time for upkeep
2) Being leveraged is a double-edged sword - if the market drops by 20% and you have 10-15% equity, you are underwater.  If you've purchased the maximum house you can afford then the absolute $ amount to dig yourself out of that hole is greater.
3) History isn't on your side regarding appreciation.  Broadly speaking most areas appreciate at the pace of inflation + 1-2% annually. 
4) comparing the price which you purchased the home nad the price you sold the home is not a very good measure of how good a return you have gotten.  To be fair one needs to include taxes, maintenance, opportunity costs, time-investment and real-adjust all figures to account for inflation.

you've been extremely lucky that your work has paid for all moving costs, including real-estate fees and sometimes down payments. 

ender

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Re: 30 year mortgage doesn't make sense
« Reply #27 on: May 09, 2015, 02:36:43 PM »
Many people expect their real estate to appreciate over time. It generally does, even over short periods like seven years. The magic of leverage means you own 100% of the gain while paying a tiny fraction of the principle. Longer loan periods increase leverage by allowing for larger loans. Most people would be better seved by ARMs because they could borrow even more and earn even more when they sell.

Ah, but the more interesting question is whether real estate appreciates compared to inflation over time.


CCCA

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Re: 30 year mortgage doesn't make sense
« Reply #28 on: May 09, 2015, 03:59:43 PM »
Average American moves every 7 years. Since most Americans buy 30 year mortgage, almost all their payment goes toward the interest. Also, average person don't get tax deduction for interest since their payment is not big enough. At the end of the mortgage payments for 7 years, they will not build an equity unless home price goes up. Based on these facts, why are people getting into 30 year mortgages? What am I missing?

The monthly payment is lower.  Duh!


That's what I was going to say.  Paying off a house (for most people) is something that occurs way, way off in the future.  Buying a house while minimizing the monthly payment requires a long repayment time.  Yes, you will pay more interest than having a 15 year mortgage, but the 15 year mortgage requires a significantly higher monthly payment.


Davids

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Re: 30 year mortgage doesn't make sense
« Reply #29 on: May 09, 2015, 04:09:36 PM »
I bought my house in 2010 and did a 30 year mortgage at 4.25% interest. We were paying quite a bit more each month to reduce the principal, we just recently refinanced the remaining balance to a 15 year mortgage at 3.00%. Now I am just going to make the minimum payment and a small extra so instead of what probably would have been having the home paid off in 4 more years from now if I did not refi and stick to our original plan I have decided instead to refinance to save serious dough and have the home paid off in 11 years from now with what will be just a small extra payment toward the principal. I look at it as a huge savings anyway since the extra I was paying originally will now just instead go further towards my after tax Vanguard ETF account and 529 Plan (We already MAX 401K, Roth IRA and HSA). We have a baby and I do not see us moving for awhile, the only way I see us moving is if a great job opportunity came along that would require us to move.

LLCoolDave

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Re: 30 year mortgage doesn't make sense
« Reply #30 on: May 09, 2015, 11:37:55 PM »
IMO the 30 year mortgage is a forced savings plan for people with a low savings rate. Also the low interest rates we are seeing now have never been seen before. If I remember correctly (questionable) my parents took out a 15yr in the early 80's and the interest rate was 8%.

One of the best things I did for my sister was talk her into a 15yr. She will have the house paid off at 55, right when the kids go to college. They have college funds, but not much. She can choose to help or she will be very close to FI at 55. Pretty good by todays standards.

Also an observation by Jeff Yeager; "Marriages used to last 30 years and mortgages lasted 15. Now marriages last 15 years and mortgages last 30." It's anecdotal but still rings a bit true.

nereo

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Re: 30 year mortgage doesn't make sense
« Reply #31 on: May 10, 2015, 07:32:42 AM »
IMO the 30 year mortgage is a forced savings plan for people with a low savings rate. Also the low interest rates we are seeing now have never been seen before. If I remember correctly (questionable) my parents took out a 15yr in the early 80's and the interest rate was 8%.

One of the best things I did for my sister was talk her into a 15yr. She will have the house paid off at 55, right when the kids go to college. They have college funds, but not much. She can choose to help or she will be very close to FI at 55. Pretty good by todays standards.

Also an observation by Jeff Yeager; "Marriages used to last 30 years and mortgages lasted 15. Now marriages last 15 years and mortgages last 30." It's anecdotal but still rings a bit true.
Sorry, but I have to do some correcting here
1) Today's rates are extremely low.  However, they were also <4% in the 1950s and 1940s.  Problem is, no one looks too far back, which is odd for a 30 year mortgage.
2) the divorce rate has been slowly declining for decades, and the % of couples who divorce in their first 10 years of marriage is at the lowest level since the 1960s.  Also, at no point in the last 50 years have more than 35% of couples divorced after 15 years.

I've been trying to determine if the % of 30yr mortgages (relative to all other types) has been going up or down in the last decade, but I"m not having much luck.  Will update if I can find some better statistics.

and an observation:
having a mortgage and retiring are not mutually exclusive things, especially with rates below 4%. I can be easier for many people to RE by not paying off their mortgage sooner.
sources:
http://www.nytimes.com/2014/12/02/upshot/the-divorce-surge-is-over-but-the-myth-lives-on.html?_r=0&abt=0002&abg=0

Jeremy E.

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Re: 30 year mortgage doesn't make sense
« Reply #32 on: May 11, 2015, 09:59:19 AM »
Based on these facts, why are people getting into 30 year mortgages? What am I missing?

Here's the deal. Most people don't purchase homes for financial decisions. They purchase homes because of a few reasons, none of which are financial.

The social pressure for young professionals to buy a house is insane. People act like you are crazy if you are in your 20s, working a professional job, and don't want to buy a home. Most people cannot understand any reason you would ever want to rent. "Renting is throwing money away!" is probably the most common financial myth, ever.

No one cares about the "it's not throwing money away" perspective at all. ITS ALWAYS THROWING MONEY AWAY GUYS.

... or not.
+1
I hear this all the time and I hate it... in my area it is much cheaper to rent but one of my good friends is not willing to do the math and is about to buy a house, I'm not able to talk him out of it.

Many people expect their real estate to appreciate over time. It generally does, even over short periods like seven years. The magic of leverage means you own 100% of the gain while paying a tiny fraction of the principle. Longer loan periods increase leverage by allowing for larger loans. Most people would be better seved by ARMs because they could borrow even more and earn even more when they sell.

Ah, but the more interesting question is whether real estate appreciates compared to inflation over time.



I'd like to add, that inflation is a good thing when you have a fixed 30 year mortgage, your base mortgage payment will remain the same for each of those 30 years while in theory you should be making more money each year, either from getting raises at work or even if you are retired and attempting the 4% SWR, you are hoping that you're stash still increases at a rate equal to or better than inflation. It will become a slightly easier payment every year(in theory). Say you get a 30 year fixed mortgage for $500,000, in 20 years maybe there is around $250,000 left to pay off, but assuming 3% inflation per year, in "todays dollars" at that time, it will be $142,500.

frugaliknowit

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Re: 30 year mortgage doesn't make sense
« Reply #33 on: May 11, 2015, 10:57:30 AM »
For the masses, a 30 year mortgage is typically used for the wrong reason:  More house for a lower monthly payment than with a 15 year.  For the more sophisticated, a 30 year mortgage allows for more investment.

boarder42

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Re: 30 year mortgage doesn't make sense
« Reply #34 on: May 11, 2015, 11:03:30 AM »
For the masses, a 30 year mortgage is typically used for the wrong reason:  More house for a lower monthly payment than with a 15 year.  For the more sophisticated, a 30 year mortgage allows for more investment.

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TheThirstyStag

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Re: 30 year mortgage doesn't make sense
« Reply #35 on: May 11, 2015, 11:56:22 AM »
For the masses, a 30 year mortgage is typically used for the wrong reason:  More house for a lower monthly payment than with a 15 year.  For the more sophisticated, a 30 year mortgage allows for more investment.


Well-said

Bob W

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Re: 30 year mortgage doesn't make sense
« Reply #36 on: May 11, 2015, 12:23:36 PM »
For the masses, a 30 year mortgage is typically used for the wrong reason:  More house for a lower monthly payment than with a 15 year.  For the more sophisticated, a 30 year mortgage allows for more investment.


Well-said

+1     Could ad that you know you are buying more house than you can afford if you don't have the cash to pay for it.   

I love the financial advisors that say  "Debt is bad! Kill debt! ----- well except for a massively huge debt that you have on a home "  They then cue the mortgage lender ad. 

One needs to understand that houses are the largest consumer item ever pushed.   I'm sure someone can point to the data that one is no happier living in a 3,000 sq ft house that living in a 250 sq ft RV.       I honestly can say the 4 months we spent living in the driveway while rehabbing our 3K sq '  house was a very happy time.   

Says the man who spent 15 hours this weekend rebuilding a deck only to find the hot water heater failed and needs attention tonight. 


Retire-Canada

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Re: 30 year mortgage doesn't make sense
« Reply #37 on: May 11, 2015, 12:44:41 PM »
Since most Americans buy 30 year mortgage, almost all their payment goes toward the interest. What am I missing?

I have a 30yr amortization on my mortgage. I pay ~$19.5/yr including my property taxes of $1.5K so $18K w/o taxes.

I knock ~$9K off my principal each year or 50% of my payments.

I'm in Canada, but I am pretty sure the math works the same here.

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CCCA

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Re: 30 year mortgage doesn't make sense
« Reply #38 on: May 11, 2015, 01:02:22 PM »
A summary for myself (and hopefully helpful to others):
1 - While alot of the payment goes to principal, it is not as high as people think, especially given the low interest rates we see today.
2- inflation -  a fixed payment over 30 years will lead to a much lower real payment over several decades.


I've attached a couple of graphs that show this. in the first, at low 3.5% interest, 36% of the 1st years payments are principal and they go up from there.  By year 11, you are over 50%


with a 3% inflation rate, by year 30, your constant monthly payment, will "feel" like it is 58% lower than when you first get the mortgage due to inflation.


« Last Edit: May 11, 2015, 01:06:57 PM by CCCA »

Sibley

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Re: 30 year mortgage doesn't make sense
« Reply #39 on: May 11, 2015, 01:24:40 PM »
I guess I have a different attitude towards houses entirely. To me, the house you live in is not an investment or an asset. The value of the house is excluded from your net worth, but the mortgage is included in the net worth calc. If you're not going to live in a house for 5+ years, then you shouldn't be buying a house at all. This also has the benefit of helping keep the housing price in check when you buy, because it's going to murder your net assets number.

If you own a house and it is a rental (you don't live in it), then it's an investment and everything is included in your net worth.

And yes, I realize I have a very different viewpoint on this, you don't have to agree with me. I'm even a certified public accountant, but this is how I do house math.

mm1970

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Re: 30 year mortgage doesn't make sense
« Reply #40 on: May 11, 2015, 01:24:48 PM »
We chose the 30 yr instead of the 15 yr (even though we could afford the 15) as a hedge against job loss. Our reasoning was that we could always prepay the 30 and essentially turn it into a 15 if we wanted to, but in the event of job loss, that extra amount per month could make a difference in us keeping our heads above water.

YMMV.
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ABC123

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Re: 30 year mortgage doesn't make sense
« Reply #41 on: May 11, 2015, 01:33:22 PM »
We bought our house almost 6 years ago for about $150k with a 30 year mortgage.  We put 20% down.  In the past 6 years, we have down another $11k of the principal.  Not a huge amount, but more than $0.  We have a modest, 3 bedroom 1500 sq. foot house, with a nice yard.  Every inch of the house gets used.  For about the same amount, we could maybe get a 2 bedroom 900 sq. ft. apartment.  Even that would likely be more than what our monthly payment is.  It would be very very cramped.  Our monthly payment with this mortgage is an amount we can easily afford.  With a 15 year mortgage, we would be fine most months but those times when some big car repair or something comes up it would be very tight.  It would also mean absolutely no money to be saving in other investments.  In our case, I just don't see any reason for doing anything other than a 30 year.

thd7t

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Re: 30 year mortgage doesn't make sense
« Reply #42 on: May 11, 2015, 01:49:06 PM »
I guess I have a different attitude towards houses entirely. To me, the house you live in is not an investment or an asset. The value of the house is excluded from your net worth, but the mortgage is included in the net worth calc. If you're not going to live in a house for 5+ years, then you shouldn't be buying a house at all. This also has the benefit of helping keep the housing price in check when you buy, because it's going to murder your net assets number.

If you own a house and it is a rental (you don't live in it), then it's an investment and everything is included in your net worth.

And yes, I realize I have a very different viewpoint on this, you don't have to agree with me. I'm even a certified public accountant, but this is how I do house math.
I'm curious about what you'd call an asset.  I calculate my net worth with and without my house, because it has associated debt and therefore belongs on the balance sheet.  I don't consider it an appreciating asset, but I don't consider cash to be that, either.

purplish

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Re: 30 year mortgage doesn't make sense
« Reply #43 on: May 11, 2015, 02:59:40 PM »
For the masses, a 30 year mortgage is typically used for the wrong reason:  More house for a lower monthly payment than with a 15 year.  For the more sophisticated, a 30 year mortgage allows for more investment.

Exactly. I own 2 properties, and get rent from each (while also lIving in one). I have a 30 year mortgage on one, with an interest rate of 3.15%. I have no reason to make higher monthly payments for shorter time, with that low of a rate already. Also, that one has gone up almost $70k in value, in less than 2 years! I'll probably sell it in a couple years making $100k over the initial price. To me the mortgage simply helps me to get to that point. Leverage can be a very good thing!
« Last Edit: May 11, 2015, 03:03:28 PM by purplish »

RexualChocolate

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Re: 30 year mortgage doesn't make sense
« Reply #44 on: May 11, 2015, 04:30:52 PM »
The 30 year mortgage is also heavily subsidized and encouraged by the US government. The creation of mortgages is encouraged with cheap insurance against default and easy financing from all sorts of government sponsored entities. This easy credit then massively inflates the prices of homes at all levels. So it's great that interest rates are low, but all of the home prices just go up almost linearly due to the ease of affordability.

The same thing can be said for student loans except there's no securing asset. The bubble has already burst, but since the government secures all of the loans, the taxpayer gets canned this time instead of the banks. It's also a much smaller market.

However, agreed that mortgage interest deduction is a writeoff for rich people and should be canned immediately, no question about it. Tax policy to encourage behavior is barf but will never go away.

TL;DR The 30 year mortgage makes a ton of sense from the consumer perspective because it is so heavily encouraged by the taxpayer

Eric

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Re: 30 year mortgage doesn't make sense
« Reply #45 on: May 11, 2015, 04:43:57 PM »
The social pressure for young professionals to buy a house is insane. People act like you are crazy if you are in your 20s, working a professional job, and don't want to buy a home. Most people cannot understand any reason you would ever want to rent. "Renting is throwing money away!" is probably the most common financial myth, ever.

No one cares about the "it's not throwing money away" perspective at all. ITS ALWAYS THROWING MONEY AWAY GUYS.

... or not.

FYI -- the pressure somewhat abates by the time you're close to 40 and have rented your whole working life.  I guess people must switch you from "loser who wastes money on rent" to "loser who is a lost cause" in their minds.  :)