I’m not sure how factual of an answer I can get to this. I’m not thinking of getting a house in the near future, but I was just playing around with the numbers. I assumed a 5% interest rate as I believe that’s pretty close to average and didn’t even consider the down payment so add that to the value of the home. If you buy a $200,000 house (a pretty nice house around here but the numbers scale) with a 30 year loan, you’ll pay roughly $187,000 in interest alone, nearly as much as the house. After 5 years, you’ll have paid only $16,300 of the principle.
On the other hand, you’d be making nearly the same monthly payments if you bought a $135,000 house/townhouse/whatever on a 15 year loan, would only pay $57,000 in interest, and after 5 years, you’ll have paid off $34,300 of the principle. If you move in a few years, you’ll be much better off with the 15 year loan with very little chance of owing more than it’s worth and if you stay, you can pay off the cheaper house and trade it in for that better house and get another 15 year loan. Sure house values will have risen by then but the interest you saved and rising wages should more than make up for it. You’d have to settle for a lesser home for a while, but most people get a lot more house than they really need anyway and 2/3 the price isn’t exactly going from Beverly Hills to Compton.
So why do so many people get these 30 year loans? Is there a financial reason or are they just trying to get the best they can regardless of the debt they’re putting themselves into?