Off hand, what I think you are missing is that the 2.7% and 3.1% are nominal interest rates. You want to compare the real interest rates via APR. To keep the comparison simple I’ll assume you pay of the 30 year mortgage in 15 years.
Loan Amount = 90K
r = 2.7%
t = 15
Payments = $608.62
Total Interest = $19551.68
APR = 1.45%
Loan Amount = 90K
r = 2.7%
t = 15
Payments = $625.86
Total Interest = $22655.00
APR = 1.68%
So just over $3K in extra interest over 15 years and a real interest rate that is 0.23% higher
From my perspective, you have to decide how important it is to you to have your finances be how complicated? How much effort is worth how much savings, and will those costs/savings significantly affect your lifestyle?
The basic idea is that if you can borrow money at a low rate, and save the money you would have spent - earning a higher rate, you will come out ahead. And that makes a lot of sense. Right now, interest rates are crazy low. And stocks are going great. So it makes a lot of sense to take out the max mortgage at the lowest rate you can, and save/invest as much as you can.
What could go wrong? Well, you might not save the extra. The market might slow down. …
I’ve always enjoyed not having a mortgage. I’ve paid mine off as quickly as I reasonably could. I enjoy just having one less account I need to even be aware of. I keep my investments pretty simple. I’ve always bought decent houses in decent areas, so they have always appreciated in value. Just another type of investment.
On a strict dollars and cents basis, you’ll come out ahead by paying off the mortgage. But depending on where you are in your lives and your economic status, the savings may or may not be that big of a deal.
So much to think about. Couple more points of data is yearly income is around $240,000. And the reason for wanting to pay it off in 7 years is that is when we hope to retire. I would love to not have a mortgage at that point.
In that case, 15 year should be a slam dunk. Your income is almost 3X the mortgage. The rule of thumb used to be the other way around (don’t borrow more than 3X your income) and that was when rates were 6-8%.
I’d agree - go w/ the 15. I would prefer to pay it off early, so as to remove this recurring cost when retired.
But for those of you more financially astute - why SHOULD he pay off, if his situation allows him to repay? Even in retirement, won’t his savings be (over time) expected to grow at a rate exceeding 2.7%? Or is the idea that when retired, he will reallocate his savings out of stocks?
This. In response to the recession, when forced by the gov’t to be kind to those of us in extremely tight circumstances, my mortgage company offered to refinance my house with a 40-year mortgage from 30. I went with it because it was that or lose the house. A few years later, I sold. I’m now in a smaller, cheaper condo. Losing my job due to Covid hurt, but I dropped my condo payment to the minimum due and have survived. I start a new job next week (thank goodness) and plan to up my mortgage payments again so maybe someday I can retire.
Based on my experience, I still say, go for the 15-year and work on paying it down as quickly as reasonably possible.
One useful fact in this consideration is that 30-year mortgages are heavily subsidized by the government and 15-year mortgages aren’t (or aren’t as much). So the difference in interest rate that you’ll pay between a 15 and 30 year mortgage probably doesn’t actually compensate you for the option value of having a lower payment. So that is one factor that might push you toward a 30-year vs a 15-year.
Another useful fact is that rates are at historic lows, so if you have any risk tolerance at all, it’s better to take out a longer loan and invest the excess in something else. That’s not for everyone, and the leverage might turn out badly, but on average it’s going to turn out better.
The flip side of that is that while rates are at historic lows, most forms of investments are at historic highs. So you’d be buying high and hoping to sell even higher, which is riskier.
That is a good point, but over the period of a mortgage, still very likely comes out in favor of leverage.
My mortgage is under 3%. If my investment portfolio returns less than 3% a year (nominal, even, not real!) over the next 30 years, I have much bigger problems than choosing the wrong mortgage.
That’s not certain. Of course, if all this recent spending produces a lot of inflation, then it’s likely that you’ll have over 3% nominal returns. Though I would think the market consensus driving mortgage rates as low as they are is a bet that there will not be 3% niminal returns. (Conversely, one could argue that the mortgage rates are being skewed by Fed MBS purchases and are not a true market consensus. Basically it’s complicated.)
The other complication is taxes. I believe current tax law limits deductions of interest expense for people who don’t itemize. But you’ll be paying taxes (both federal and state) on your investment returns, whether capital gains or investment income. That means you need a much higher return to break even.
In real world terms, the difference is relatively miniscule compared to both of your total lifetime earnings. In the end, do the plan which allows you and your SO to sleep better at night. It may cost more, given your decision, but a good night’s sleep is usually worth it.
IMHO, you won’t likely find money cheaper than what you’re offered. while I’ve been mortgage free for some years, the rates we paid were highway robbery compared to today’s rates. I’d take the longer term as I can only see rates going up longer term, not down.
In the mean time, squirrel as much money away as you can.
The difference reminds me of a few years ago in the Dominican republic, haggling with a Dominican beach merchant for another 20 pesos off the price of a box of cigars. Took a while to realize I was arguing about 45 Canadian cents.