30 year vs shorter mortgage

[maisymouser]

I have always thought that shorter mortgages were better since you end up paying less interest overall. But if interest matches inflation, now and into the future, does it really matter how long the loan term is?
     Especially in a situation where you will sell soon and open a new mortgage on another house, maybe you actually want a longer loan if you want to pay less principle and keep more in stocks. I just ran some numbers, and you would only pay about 10% less in interest during the first 5 years of a 3%  15 year loan compared to the interest you would pay during the first 5 years of a 3%  30 year loan.  ($26000 vs $28400 in interest over 5 years).
     Am I thinking about this right? I guess I am assuming the interest rate will be the same for both 30 and 15 year loans, when in reality it is usually lower for 15 yr., yeah?
   

[Ichabod]

I like the calculator linked here in this article: https://thefinancebuff.com/borrow-30-year-and-invest-the-difference.html. The article suggests 15-year mortgages are underrated, but the calculator lets you run the math yourself.

Main thing is the interest savings applies to the entire balance of the mortgage, which dwarfs the amount you'd be able to invest in the market with smaller payments.

Plenty of factors could push you either way though. The rate difference between 15 and 30 years changes, how long you think you'll stay in the home, and whether you think you could refinance at similar rates in the future.

[Dicey]

Every calculator I've seen just figures the raw amount of interest you'd be paying, not things like returns on other investment vehicles, opportunity costs, etc.

The biggest reason for that it that most people can't save, so they will just blow through anything that a lower mortgage payment allows them to buy. For those people, it does make a certain sense. However, mustachians are not those people.

[bearcat1]

Posting to follow, thanks for that calculator link. I've wondered about this since whenever I buy, I'm definitely buying later in life than most people, and the shorter mortgage seems a no-brainer for me.

[mckaylabaloney]

I like the calculator linked here in this article: https://thefinancebuff.com/borrow-30-year-and-invest-the-difference.html. The article suggests 15-year mortgages are underrated, but the calculator lets you run the math yourself.

Main thing is the interest savings applies to the entire balance of the mortgage, which dwarfs the amount you'd be able to invest in the market with smaller payments.

Plenty of factors could push you either way though. The rate difference between 15 and 30 years changes, how long you think you'll stay in the home, and whether you think you could refinance at similar rates in the future.

Yeah, but it doesn't necessarily dwarf your investment gains -- it depends completely on the assumptions you apply. If I change the expected investment returns on that calculator from 5% to 7% (assuming average returns rather than below-average returns), and lower the mortgage rates a little (which are more in line with average rates today), the results swing wildly in favor of the 30-year mortgage, with the 30-year mortgage coming out ahead (for my loan numbers) in less than 5 years, and winning by more than $40k after 15 years. That's without messing with any of the tax stuff.

[PMJL34]

Mathematically speaking , all else being equal....

Yes, take a 30 year mortgage everytime, especially at the current rates.

[Ichabod]

Yeah, but it doesn't necessarily dwarf your investment gains -- it depends completely on the assumptions you apply. If I change the expected investment returns on that calculator from 5% to 7% (assuming average returns rather than below-average returns), and lower the mortgage rates a little (which are more in line with average rates today), the results swing wildly in favor of the 30-year mortgage, with the 30-year mortgage coming out ahead (for my loan numbers) in less than 5 years, and winning by more than $40k after 15 years. That's without messing with any of the tax stuff.

Mortgage savings are risk-free, so when I was running this I did use a number that was lower than my expected investment returns.

The slam-dunk case for the 30-year is when you expect to carry the loan for the full-term, but that's much rarer than most people plan for. Similar to the rent vs buy calculations there are reasonable differences in assumptions that can lead to different outcomes.

When I ran my numbers two years ago, I think I was looking at 10 years for the 30 year to come out ahead, and I'm betting I won't have my current mortgage in 10 years. It would not surprise me if the current environment was more favorable for 30 years.