DISQUS

Randy · 2 months ago

I'm currently 6 years into a 15 year fixed rate loan. In the past, I've had 30 year fixed, 30 year adjustable and 20 year fixed.

One piece missing from your analysis is the rate difference. As of this post, bankrate.com shows a 30year fixed rate as 5.26% vs 15 year at 4.67%. Going with a 15 year loan saves you just over 1/2%.

cukamunger · 2 months ago

The important thing is to evaluate your circumstances and then do something about it. Don't come to the conclusion that you could afford an extra couple hundred dollars a month payment on your house and then not do it. Make setting up the automation part of the activity. That's like doing all the hard gorcery shopping and then letting the milk sour because you didn't feel like taking that last step to move it from the counter to the fridge.

I agree with the statistics, but I also wonder at their implications. Even paying off a mortgage in 18 years is a mighty big accomplishment. How many people do it that way?

Susan · 2 months ago

We bought our house with a 30 year fixed mortgage at 6%. We refinanced to a 10 year mortgage a couple of years ago for 4% fixed. So our total will be an 18 year mortgage (which is better than 30). :)

Ellen · 2 months ago

Something else to consider about the 30-year fixed rate mortgage, is that it has lower monthly payments, meaning that you can invest the money you aren't spending for the higher 15-year option in other avenues, and potentially make more money to pay it off. Say, if the stock market takes a drastic turn for the better: If you have lower monthly payments from your 30-year and can invest more in stocks, you have the ability to earn more from all of your stocks that increased in value. With the money you make selling them, you can pay off your mortgage, maybe even sooner than you had planned.

Steve · 2 months ago

I'm surprised the table doesn't include the numbers for paying off a 30 year mortgage in 15 years. So here they are:
Monthly Payments: $1,607.76
Interest Paid: $89,395.98
Total Paid: $289,395.98

Also, the flip side to "Could you use that $112,901.39 for something else?" is "Could you use that $477.18 per month for something else?" But I guess us humans aren't wired to think of things over the long term - the average caveman probably didn't even live for 30 years, never mind have a mortgage for that long.

MichaelM · 2 months ago

We are pretty confident that on average over 15 years we would have enough for monthly payments on a 15 year mortgage. We decided though that we would get the 30 year instead.

We currently have a car payment (1.5 years left) and student loans (1 year left) which would make it very tight for the next couple of years while we get those paid off. We also wanted to keep some budget money un-allocated for now for doing home repairs and improvements. We needed a new furnace and to refinish the basement (a need because of mold problems), and who knows what else will come up!

When these one-time and time-limited costs are behind us, we will accelerate our payments but for now we are happy to make the smaller 30 year mortgage payments.

Tim · 2 months ago

We got a 30 year mortgage through WF and signed up for their bi-weekly payment plan. I know it has been discussed before, but WF has seemed to improve this as it does not cost anything. Since I get paid bi-weekly it is nice to have my mortgage payment get paid the same day my direct deposit slips in. This equates to paying an extra payment per year, cutting our 30 year mortgage to nearly a 24 year one.

fern · 2 months ago

thanks, Steve. That was a key piece of missing information. Also overlooked was the added flexibility that sticking with a 30-year loan but making prepayments gives the borrower; if you lose your job or h ave sudden, unexpected expenses, like a medical crisis, you can pull back on the prepayments until you find work again (or recover from illness). You're not forced to make those payments no matter what.

I got a 30-year mortgage 14 years ago that i've been prepaying since day 1, and will have paid off in 6 more years, or 20 years instead of 30. I could have possibly paid it off in 15 years, but "life" got in the way. During my 14 years with the house, i was laid off 3 times and so had bouts of unemployment, plus i had lower than normal income for about 3 years when i couldn't afford to prepay by as much as I am now ($425/monthly).

checking off each paid mortgage month on my amortization sheet is a big incentive for me, plus i track my mortgage balance on my blog for all to see; i've never had a problem sticking to my plan becus becoming debt-free, and later, career-free, is a huge incentive for me.

Laura · 2 months ago

Thanks for sharing your thoughts and perspectives! It gives us food for thought as we navigate this new chapter of our lives. The interest rates I used were the actual rates shown to us last week.

We're taking a 30 year loan and working on paying it off sooner. Our first few months will be rebuilding savings. We'll move from a 3 months emergency fund to a 6-8 month emergency fund. Paying the mortgage for us is more a peace of mind issue. Retirement contributions will still be automated, so it's not an either/ or choice.

Jim · 2 months ago

For my Citibank mortgage I can add extra principal to my payment easily via their website. Theres no extra fees or anything. I assume that would hold true for other mortgages held by Citi but can't guarantee they're all the same.

Jason @ MyMoneyMinute · 2 months ago

I think the reason people don't go to 15-year mortgages is because they see how much more house they can "afford" by extending to a 30-year term. How many people are able to resist a $225k home on a 30yr note, and instead buy a $150k home on a 15yr with the same monthly payment?

Not that a 30yr mortgage is the end of the world, but there's a deep-rooted mindset that now entangles the modern U.S. consumer. We no longer ask "how much?" -- rather, we ask "how much per month?" This is the same mindset that enabled us to go from car loans that averaged less than 3 year notes, to about 6 years to pay off. As long as there's a longer-term payoff plan available, humans are more inclined to take it, and buy a more expensive item.

We re-financed to a 15-year last year, and we love it. If/when we sell this house and move, we'll do everything we can to fight off the temptation to buy a more expensive house on a 30yr loan, merely because we can "afford" it. I'd rather set my affordability standard at a 15yr term, which will give us a little less house, but tons of flexibility both now and down the road should a crisis occur.

Evolution of Wealth · 2 months ago

Ellen hints on a point that I would be interested in hearing the discussion. Why give this extra money to the bank? Ellen mentions stock market which scares me a bit because of the risk especially as you get closer to paying off your mortgage. You don't want to go reach for the side fund and have a year like 2008. Then all is lost. Maybe there's a better way though? Maybe there's a way for you to take control and build up a side fund that at any time you can take it and pay off the mortgage if you choose. Then if life gets in the way as some had mentioned it might not be detrimental to your house.

Greg McFarlane · 2 months ago

Is it splitting the difference to suggest paying off a mortgage in about 22.5 years? You can orchestrate just a couple of extra payments a year, which will strike a balance between
-enriching your lender, and
-impoverishing yourself for 15 years so you can finally eat something beyond ramen noodles in the 16th.

Free Your Mind · 2 months ago

I personally do not believe in paying your house off early. Numbers suggest that by paying the minimum on your house and investing the rest, you can come out ahead. And that is even with a low rate of return. Yes, 2008 was bad... but what about the last 30 years... or the next 30 years?

Financial Samurai · 2 months ago

I strongly recommend paying off your mortgage early ONLY if you have the extra money b/c your payments just stay the same until the very end.

It's just accounting b/c you earn interest on your savings if you don't pay it off.

I will pay my rental property off within15 years, going from -$3,000 to + $2,600 cash flow once it's over. that's a big difference come retirement!

Mike L · 1 month ago

What about the tax benefits of paying mortgage interest longer? I will be getting a mortgage in the next coming months and was just wondering if the tax write off has influenced anyone's thoughts.

Jason @ MyMoneyMinute · 1 month ago

Mike,

I hate taxes, but I would never get a loan based on tax benefits!

If you can afford a shorter term, do it. I would rather pay off my mortgage in 15 years and have an extra 15 years of NO payments, rather than make payments for 30 years to get a perceived tax advantage. Your tax advantage will never be more than 25-35% of the monthly interest on your mortgage payment. The rate at which you pay off your house FAR outweighs the opportunity to reduce your taxes.

That's the myth of "writing off" expenses. While you give the bank X amount of dollars, you only receive back 25% of it in tax breaks. If you'd like, you can give me $1,000 and I'll gladly give you $250 back as a 'tax write off' :O) Your taxes may be lower, but you still have less money to spend.

Whatever you decide, good luck with your mortgage!

Mike L · 1 month ago

Thank you, that makes sense!

So then the only reason to pay interest on a mortgage is to take the leftover money to pay off interest on balances that can not be written off on taxes (cc's, car loans, etc). I will start making a list of priorities to pay off in order now - thanks again!