Why would anyone get a 30 year loan on a house?

This…and also:

My house is my home. It’s not a stopping point on some journey to someplace else. The neighborhood was carefully chose, we renovated an existing house, so the design and layout were chosen to fit on the piece of land the original house sat on. We bought with the idea that we’ll still be in the house in 30 years, indeed that it would someday pass to our kids. So we spent more on the renovation than the house is really worth, so what? We’re not in this to flip it. We can grow with the house…getting a smaller home for less money for a shorter loan would have gotten us a house that couldn’t grow with us. That doesn’t make any sense at all.

If you’re single and just looking to get something so you’re not renting, then maybe it makes sense, but not if you have a family and are setting down roots in an area.

Also you do know that whatever interest you pay on your loan can be deducted from your gross income during tax time, right? So if I’ve paid $16K interest on my first mortgage, and $3K on my second, I can take $19K right off of my income. So instead of making $80K for tax purposes, I make $61K. You see the benefit?

Yes, exactly this.

We have a small two-bed house with a small garden in a nice part of town. Only cheaper options locally are flats (appartments), so no garden, extra overhead for maintenance fees, and stairs to haul a buggy (stroller?) up. Plus they are not 2/3 of the price, more like 4/5. So not worth it.

Where we are is walking distance to shops, and on bus routes to my wife’s university campus. Moving further out means buying an extra car, with additional monthly costs, and extra pressure on our time.

Our 35yr loan means we’ve had a stable environment to bring up our 3y/old daughter, and it’s allowed my wife to complete her medical degree. Friends who opted for a cheaper option have either struggled with lack of space, or have had to put up with the normal antisocial crap you get in rougher areas.

The extra we’ve paid over 5 years in mortgage interest will be balanced by her first year’s salary as a doctor, with that benefit growing as her career progresses.

Plus in the UK it’s normal to remortgage every couple of years - we are on our third two-year fixed deal, again to allow us to budget while every penny counts.

Exactly. I looked at dozens of houses before I found one I thought I’d be happy in, even though all of them had water, power, four walls, and a roof. House hunting is an endurance trial.

Yes. The government wishes to encourage home ownership, so interest on mortgages is tax deductible.

Don’t forget about the effect of the market on equity. We haven’t paid off much of our loan, but the market value of our home is about 1.5x what we bought the house for 8 years ago. Rent on a three bedroom apartment would be substantially higher than our mortgage payments for a three bedroom single family home.

Also, a lot of the cost of a home is location. We have a quite modest house, but we’re within walking distance of the Metro and the kids go to really good schools.

Because what you pay for a house is an investment that’ll most likely increase in value in the long run. What you pay on interest is money that you’ll never see again.

You don’t exactly match my scenario then.

I’m not sure what you can get for what there so I don’t know if they could’ve gone smaller, but one certainly could raise a small family in a cheaper house here.

No they wouldn’t. They’d be paying the same amount and since it sounds like they’re asking for more than it’s worth, they’d be hurt a lot less if it was a cheaper house that they had built a lot more equity on.

You wouldn’t be locked into a higher payment at all. Utilities and maintenance on it would likely be cheaper. Everything you list is a good reason to get a cheaper house with a 15 year mortage.

Well that’s an exception then. I live in East Texas where the median income will get you a decent place on a 15 year mortgage, probably even 10. I know not all places are like this.

Oh, and about the interest being tax-deductible, so you may get a small amount of it back… That doesn’t negate the fact that you’ll still be paying an obscene amount of it.

Where I live, $200,000 is about the absolute minimum you can pay for any decent abode with more than one bedroom and one bathroom. Something even remotely liveable for $135,000? Good friggin’ luck.

So, in my case, the answer to your question is “Because I don’t want to live in a crap-hole.”

I don’t recall saying that at all. I’m sure there are plenty of people with 30-year mortgages on homes that are much more than they need- I drive by some of them every day. I wasn’t speaking for the entire population of New Jersey.

But when you say “would come out better in the long run”, ‘better’ how? With more money in their pocket after 30 years? Maybe. But money isn’t everything, my friend. There are many factors that go into the blender when one considers buying a home. Location; quality of neighborhood; quality of schools; proximity to schools, shopping, jobs, family and friends; affordability; crime; quality of the house itself; type of home; room for pets, kids & gardening… Sure, a smaller home or townhouse in a neighborhood with middling school quality that was 20 minutes further from my job than I am now and further from my family and my inlaws with no yard for my kids or pets- that was certainly an option. But after 30 years, would I really be better off in so many ways that matter, other than financially? No, I wouldn’t.


This is my story exactly. I paid off my 30-year loan two years ago.

Every time you sell your house and buy a new one, assume that you are going to spend about 8% of the value of your old house (not your equity, but the sale price) on that sale. You’ll be paying a real estate agent to sell the old one, closing costs on the new loan, and time and/or money to physically move your belongings.

Your “small amount” of it can be 1/4 to 1/3 of your interest payment. Mortgage interest, in the US, is fully deductable from your federal income tax, which means it’s deductable from your state as well, in all the places I’ve lived.

Moving every 5 years, with any kind of mortgage, is a great way to never get any closer to paying off a mortgage. Assuming a $200k mortgage, 30 years, at 5%. At the end of 5 years, you have paid off $17k. If you sell the house for $200k, you will pay $12k to the realtor, and $2k-4k for closing costs on a new loan. You’re much better off staying in place, instead of house hopping.

Which is all the more reason to buy a cheaper house until you’re more stable and have more equity.

You’d have to be making in the millions to have that much of your income taxed. For more average people, it’s more like 10 to 15%.

Millions? Try $34,000 AGI for single, $68,000 AGI for married. That’s where you get into the 25% marginal tax rate for 2010.

Because people would rather pay a little more to live in a place they actually want to live than pay less and hate coming home every day. And if the monthly payments are almost the same, it won’t feel like paying much more anyway.

If there are equally-good houses available for $200,000 and $135,000, then people would indeed be insane to choose the more expensive ones. But there must be reasons why the more expensive ones are more expensive.

Mortgage payments also have side-advantages. They often get taken into account if you are eligible for any financial help in the future, or at least the interest part does. Like, in the UK, when calculating how much loan (or even grant) a university student under 21 is entitled to, the parents can deduct their mortgage payments from their income. If they become unemployed, their mortgage interest can be paid by the government - for a time, and not always in full, but it’s better than nothing. I bet there are similar side-advantages in the US.

When we bought our house for $225K we had a combined household income of $90K a year. We could not afford a 15 yr mortgage, but it was just post 9-11 and we knew we had to get in on the housing market then or we wouldn’t be able to get the neighborhood we wanted. 9 years later, our household income has doubled and we can afford to pay extra on our mortgage and will be able to pay it off earlier.

We have a lot of friends in situations similar to ours. We live in a high cost of living area. A house in a middle of the road school district will easily be priced 30% lower than a comparable house in a much better school district. Comparable homes in a low ranking school district will be as much as 50% lower.

For example:
this house is in a low ranking school district. 5 bedrooms and 5 bathrooms, 0.25 acres. Closest I could find in a high ranking school district was a 5 bedroom, 2.5 bath of similar age and similar lot size was this one. $200K price difference and they are only about 5 miles from each other.

But most people with that income take the standard deduction.

But anyone who does have an AGI above that, and itemizes, is getting back 25% of what they paid in mortage interest. Or at least 25% of the amount that the mortgage + all other deductions is greater than the standard deduction.

I took out a 30 and paid it in 10 only because I realized 5 years into it I could pay it in 5.

I suppose it comes down to whether or not you want to house hop up to your dream home or work your way up.

Isn’t there a perfectly rational economic argument to take the 30-year loan instead of paying off the house? Suppose I have the ability to buy a house outright. Instead of putting $200K straight into the house, wouldn’t the math work out in your favor to take that $200K, invest it in say an S&P500 ETF (assuming you believe the market to grow at a 7-8% rate), rather than pay the house off outright? I’m in a position where I can liquidate my non-retirement assets and almost pay off an entire house. I don’t see any good reason to do so–it seems to me that keeping the money in the market and taking out a long mortgage should be better financially in the long run. Plus I get to deduct mortgage interest. What am I missing?

Part of it is houses (till recently) usually went up in value. And people didn’t stay.

This was the plan behind balloon payments

To oversimplify here’s how it would work.

You take a 30 year mortage on a house and pay $800/month. Now you can’t get a flat as big for that rent.

The house is worth $150k.

After five years your $800/month payment triples to $2,400

So after living in the house 4 years you sell it. But the house value went up. Now it’s worth $200k

So you sell it and use that bit of earned money to buy a $250k house.

The payments on his are $1,000/month for 5 years, then the balloon payment kicks in

So again you live there for four years and sell the $250K house, but it’s now worth $400K

And so forth, then by the time you’re ready to retire, you buy a less expensive $100K condo and keep all the money you made.

This only works if housing prices consistantly go up. And for awhile they were. This of course didn’t work, but still over the long term houses are good investments, 'cause they will go up in value over long, LONG periods of time.

Again, that was just a vast oversimplification. It’s not the length of the mortgage that matters as you’re only going to live there a few years.

In the UK it used to be common to do exactly that, and was called an endowment mortgage. One of the reasons they’re not popular now is that there’s always the risk that you’ll lose the money, and this happened to a a large enough proportion of homeowners that other people were scared away.

But yeah, it’s true that a mortgage is one of the best value loans you can ever get.