Mortgage Queston: 30 yr vs. 15 yr

I’m looking to sell my condo and buy a house this spring/summer, and will be facing this question: Get a 30 year mortgage or a 15 year?

The challenge for me is that I would be able to cover the 30 year’s monthly payments through my income alone, while if I were to go the 15 year route, I would need to dip into savings each month to cover the balance. Here’s some math:

(numbers pulled off a random house listing for examples, but the price range is right where I’m looking)
House sells for $229,000.
20% down
30 yr @ 4.139% = $893 per month
15 yr @ 3.134% = $1282 per month

Taxes and other stuff will be equal regardless, I should think, so I’m leaving that out of the equation. I can do 20% down and still have plenty leftover in savings for a cushion without touching retirement funds. Let’s say 50K leftover, just to put out a number. For what it’s worth, I’m single, and 47, so a 15 year loan would be convenient in that it would be paid off right around the time I might be thinking of selling to move somewhere warmer for retirement.

So I would need to pull $389 a month out of savings to cover the difference between the 30 yr and 15 yr. Logic would seem to dictate that if my return on my investment account is over 3.134%, I’d come out ahead by doing so - leaving aside the fact I’d be paying the loan off 15 years ahead of time, etc. But I’ll be damned if I can figure out the math to back that up.

What sayest the Straight Dope?

Many lenders now offer 20 or 25 year mortgages, as well. That may be worth looking into.

My wife and I faced this same decision. we decided to go with a 30 year mortgage but pay extra each month. We will end up paying the mortgage off in about 17 years, but we’re not on the hook for the extra money if we should happen to have a tight month.

Yes, the interest is a little higher, but we decided the peace of mind id worth it.

This was going to be my suggestion as well (if you can be disciplined enough to make the extra payments), for the same reasons - your basic payment is lower, so if you run into a tight spot, you’re less likely to lose the house.

Also look into making bi-weekly payments instead of monthly - that’s the payment plan we’re on, and it will take about seven years off of our mortgage, just with that one change (we make 26 payments per year).

ETA: You may be able to (should be able to?) make all kinds of extra payments - our mortgage allows for increasing our regular payments, making lump sum payments, etc.

It is dangerous to depend on savings to pay off part of your mortgage every month. I wouldn’t even consider it. You may need all that money for unexpected expenses or to do work on the house later.

However, you can get a 30 year mortgage and pay it off early if you choose to. You can pay it off on a schedule that is the same as 15 year mortgage if you somehow come up with the extra money. The only thing you lose in that scenario is the extra percentage point in the interest rate but I don’t think that is a big enough factor to force yourself into a 15 year mortgage rather than a 30 that you can pay off early.

I’m currently refinancing my fifteen year mortgage, which only has seven years on it, to a 30 year mortgage for cash flow reasons. I’m doing an ARM, which will adjust in five years, and in five years I intend to take the money out of the stock market and just pay it off - depending on what interest rates, the stock market, and my dividend portfolio looks like in five years.

A longer term means a smaller payment which means that you have more flexibility. As long as there isn’t a prepayment penalty - you can always pay down the mortgage faster. But if you get laid off, and suddenly want a smaller mortgage, you can’t change your 15 to a 30.

So, if I wanted to make an extra payment on my mortgage (30-yr,) do I need to specify that I want the entire payment to go against the principal? Or will that happen automatically if I’m paying a non-scheduled payment?

Every mortgage company that I have ever had has an entry on your mortgage slip that let’s you tell them how much to allocate to principal. If you pay online, there should be a space for it as well on the web site. They usually default to interest+principal payments if you do not specify otherwise so make sure you indicate that it should go to principal when you make extra payments.

If you plan on dipping into the savings specifically for the mortgage anyway, just put that money down to begin with. To have enough to pull out $389 a month for 15 years means you’ve got about 70 grand additionally in savings budgeted.

If you put 77k down, your monthly for 15 years will be lower than your current 30 year rate.

Thanks. I have my mortgage set to be auto-paid through online banking. I don’t use their own website. I’m sure I can make a single payment from their website though.

:dubious: How does that work? If you pay more than the specified montly payment, the only thing the extra money can do is pay down the principal. There’s no extra interest to pay off, since the basic payment already paid off all of the interest that accrued that month.

One other thing for the OP to consider is that less interest paid on the 15-year means less income tax deduction. So in addition to making larger monthly payments, your April-15 income tax refund will be smaller:

30-year mortgage, first year of interest = $7500
15-year mortgage, first year of interest = $5600

Look at the tax tables for your most recent tax return, and figure out what your marginal tax rate was. If it was (for example) 20%, then the 15-year mortgage will reduce your refund by $380 compared to the 30-year mortgage.

Why not take the 30 year mortgage, but pay as if it were a 15 year?

Absent any wording in the contract to the contrary, this will give you the best of both.

If you pay it off in 15 years, you will pay the least interest in the long run. But you have the flexibility of paying at the lower 30 year rate if economic times get tough.

I once accepted a mortgage a little like that. I was unsure of my ability to make a regular, large payment, so I opted for the lower one. As it happened, my income increased favorably, so I just boosted each payment by a dollar. Before I knew it, the balance was nearly paid off, and the bank considered me an exemplary customer.

If you don’t specify it is for principal, the mortgage company may just treat it as the next month’s payment. In that case, you would be ahead on the payment schedule but the principal would not be reduced the way you intend it to.

“Clarify What It’s For
If you do send an extra principal payment to your mortgage company make sure you clarify that its for extra principal. In some cases the mortgage company could apply it to either your next month’s payment or late fees due on your account. You can send the extra principal in a separate mailing, include a note specifying that it’s for principal and write “extra principal payment” in the memo area of your check.”

I just checked my online banking and there’s a spot to include a memo with a payment, so that should work.

The cost of that flexibility for the OP is an interest rate that is 1 percentage point higher (4.139% for the 30-year vs. 3.134% for the 15-year). Sure, you’re paying less interest if you pay the 30-year mortage off in 15 years, but you could be paying even less interest than that if you’re willing to lock yourself into the 15-year schedule.

If you can fit a 15-year loan into your existing income, perhaps by making reasonable sacrifices elsewhere (used cars instead of new ones, a strictly fixed budget for dining out, etc.) it’s one of the best financial moves you can make. You will save hundreds of thousands in interest and can be a 100% homeowner long before retirement age.

But as others have said, don’t do it if keeping up the payments would be financially marginal for you. It’s a long 15 years of financial slips, unexpected expenses, unemployment, etc. Keep some safety margin.

That said, though, I think any financially able person or couple who can afford to go with 15 years and opts for 30 to give them more monthly pelf are… deeply misguided.

This is what my wife & I did. Worked fine, and gave us a bit of flexibility if we’d had some kind of financial setback.

OK, but consider the alternative – missing a payment and getting a black mark on your credit. It all depends on how reliable you feel your revenue source is, and how much backup you have in case of a problem. In effect, you are paying a premium for flexibility, but the premium can be reduced if you can afford it.

A two-income family will have more flexibility and might opt for the 15 year. A single income might not want to take the risk.

I disagree. If you take the money you would have been paying as interest and plug it in a reasonable investment, especially at these interest rates, you’d be better off. That said, I have 15-year mortgage and we paid off our mortgage on another property way early (but that’s because it was at a 6.5% rate). I could pay off my current mortgage tomorrow if I really wanted to, but I would prefer to keep the low 15 year rate and invest the equivalent amount of money than pay it off early.

I also remembered that if we max out all of the extra payments we are able to make without penalty, we could have our 25 year term mortgage paid off in five years. I don’t see a down side to going for the 30 year term and turning it into something much shorter.

I’m not sure this would have been a workable strategy over the last 5-8 years; saving 4% or so on debt greatly outweighed any reasonably safe investment return. We have an excellent investment strategy and have managed returns well over the prevailing rates, but I’m not sure equivalent returns are available at the $3-500/month level. CDs and cash instruments have been below 1% for a long time. IF you have an existing investment structure you can keep feeding and it’s returning better than mortgage rates, great, but for most investors with a mortgage, debt costs and investment returns are going to be in the same ballpark. I’d advocate paying off your greatest asset as the best investment strategy.

But it’s all individual. Very much so.

Note also that I meant “so they would have more free income” - that is, spending their future on extended interest costs so they can buy his-n-hers jetskis. Bad choice.