30yr or 15yr mortgage?

[♥ms.pacman♥]

We are 3 years into our 30year mortgage and are looking to refinance (again, we did it last year) soon, since the interest rates continue to drop. In looking at the various options, we found out that we could end up saving a lot more $$ if we went to a 15year mortgage...of course, this would mean higher mortgage payment (~$600 more per month). The thing is, this higher payment would mean major belt-tightening which would be really hard right now, with me not working. Thing is, when we bought this house in 2008, we expected we would have two incomes, but that ended up not working out due to the economy, timing, etc. I do plan on going to work FT soon, but that'll probably take a year or so. So the thing is, if we do end up doing a 15year, it would only be difficult for however long I'm not working (probably a year or so). I should add we live in a low COL area.

Another option would be to just keep the mortgage as 30year and just pay it down in 15. But i'm just wondering what the major drawbacks to that are. The advantage of this is that it's more flexible so in the next year or so, we can continue to make our regular payments, then once I start working (I would probably make at least 2/3 DH's salary) we can easily pay down much more.

any BTDT, thoughts, advice appreciated!

[SnuggleBuggles]

We are refinancing to a 15 because I just want to be done with it! Price will be comparable since the interest rate will be lower and we will get rid of the PMI we currently carry. The mortgage person also suggested the lesser known 20y mortgage as a good compromise- maybe you should look into that?

Beth

[ahisma]

Unless you know, beyond a shadow of a doubt, that there is no way that DH could be laid off, get a pay cut, or that unexpected expenses could come up I'd do the 30.

We thought that DH's salary was secure. It had been for 15 years. Then, the laws changed. Between rising health insurance co-pays, necessary prescriptions for a completely unexpected heart attack and salary cuts we've lost a LOT of income. It's hard. Our mortgage is safe, but we'd be SOL if we had a 15 year.

[♥ms.pacman♥]

We are refinancing to a 15 because I just want to be done with it!

hehe, i was thinking this too. i don't want to have a 30year and then just say we will pay it down early and not end up doing it, if that makes any sense. i am wondering if it will be good to be forced to really pinch pennies and do it . the idea of having no more mortgage payments right before the kids go off to college sounds awesome.

and i didn't know about 20yr option, i'll look into that..

[KrisM]

If you're disiplined to pay as a 15, the slightly higher rate of a 30 year won't make a huge difference. We are currently 2.5 years into a 30 year, but are paying it as fast as we can and should be done in 4 more years. But, it could be easy to fall back on the lower amount and use that extra for other reasons. It'll depend on your personalities for whether you can pay ahead or not.

I'd also look at a 20 year.

[scrooks]

Unless you know, beyond a shadow of a doubt, that there is no way that DH could be laid off, get a pay cut, or that unexpected expenses could come up I'd do the 30.

We thought that DH's salary was secure. It had been for 15 years. Then, the laws changed. Between rising health insurance co-pays, necessary prescriptions for a completely unexpected heart attack and salary cuts we've lost a LOT of income. It's hard. Our mortgage is safe, but we'd be SOL if we had a 15 year.

:yeahthat: i would get a 30 but pay it like a 15 year.

[kristenk]

Do you know what your interest rate would be for a 15 year vs. a 30 year mortgage? Find an amortization table online and plug all of your numbers in and see how things change. See when your pay off date would be if you paid your 30 year mortage as a 15 year.

Our mortgage payment is on autopay and we pay a specified amount extra each month. We're really looking forward to having our house paid for!

[niccig]

Do you know what your interest rate would be for a 15 year vs. a 30 year mortgage? Find an amortization table online and plug all of your numbers in and see how things change. See when your pay off date would be if you paid your 30 year mortage as a 15 year.


I ran the numbers for us, and a 15 year is best over the long term as less interest paid, but it won't decrease our monthly costs and that's what we need for now. The worst scenario for us as in the house 7 years, is to refinance to 30 and not pay any extra, as that means more interest over the long term. Staying with current loan is better than that. Middle scenario was refi to 30, but do extra payments. If you make it an auto. payment that might help to make it happen.

[JElaineB]

I agree to look at the possibility of a 20 year mortgage. We refinanced about a year ago and went from a 30 year (w/ about 27.5 years left) to a 20 year and after getting rid of PMI and some escrow changes we ended up paying a bit less per month than if we had stuck to the original mortgage. 20 year mortgages aren't always advertised, but all we had to do is ask our banker.

[wellyes]

We did a 15 and don't regret it even though I just got laid off. The interest rate was markedly lower for a 15. It feels good that so much more of each months' payments are actually going to principal. But we do have a good emergency fund.

According to Dave Ramsey (http://www.daveramsey.com/article/the-truth-about-mortgages/) (quoting the FDIC), 97% of people who plan to treat a 30 year mortgage like a 15 year mortgage don't end up doing so. He has this snarky line: "The really interesting thing about 15-year mortgages is that they always pay off in 15 years. Thirty-year mortgages are for people who enjoy slavery so much they want to extend it for 15 more years and pay thousands of dollars more for the privilege. If you must take out a mortgage, pretend only 15-year mortgages exist." He's being harsh for rhetorical purposes, of course, but I get where he's coming from. If you can afford it, get the lowest rate you can and get rid of your mortgage as fast as you can.

[Uno-Mom]

If you're disiplined to pay as a 15, the slightly higher rate of a 30 year won't make a huge difference. We are currently 2.5 years into a 30 year, but are paying it as fast as we can and should be done in 4 more years. But, it could be easy to fall back on the lower amount and use that extra for other reasons. It'll depend on your personalities for whether you can pay ahead or not.

I'd also look at a 20 year.
Wow, that's awesome Kris. Way to go!!

Yeah that on the 20. It might be a good comprise for you. I agree that very few people are able to do what Kris is doing. We are refinancing to a 30, sadly. That's just the reality of our budget right now. I really, really hope we will be disciplined about extra payments once we get our other debt paid off. I hope the debt-killing momentum carries on for us but I don't know if it will or not.

[echoesofspring]

We have a 15 yr. We're also hoping to have it paid off very soon. The cool thing is you hit this point where there's so little principal left you really see the momentum of it moving down each month, it makes you want to pay it off quicker, quicker, quicker.

I would say look at your budget, make sure you have an emergency fund of at least 6-12 months of expenses and then if you think you can do it w/out living too close the edge, go for it. If you're able to do it on 1 salary imagine how quickly you could crank it down when you start working again!

[♥ms.pacman♥]

thanks everyone for the replies, very helpful. so many things to consider!!

we did plug in stuff in one of those calculators, and the difference between refinancing to a 15year vs a 30yr &paying it off as a 15year were really negligible.

anyway, i was talking with DH more about this. i guess his thing is that, while paying off the mortgage as soon as possible would be nice, he also thinks that with interest rates so low, it's very likely that putting that money into other investments instead (401k, IRA, college fund) would be more profitable in the end. so, paying down a house early can come with an "opportunity cost", if that makes sense.

anyway, while DH's job is really secure, it does seem like doing a 30year and just paying it off early may be the best option for us now. Once I start working we will be able to max out our 401ks, IRAs and put money into the kids' college fund and still be able to put more $$ into the paying down the mortgage earlier. We do use autopay so we could have it set up to pay down a certain amount and I think that could help.

[niccig]

anyway, i was talking with DH more about this. i guess his thing is that, while paying off the mortgage as soon as possible would be nice, he also thinks that with interest rates so low, it's very likely that putting that money into other investments instead (401k, IRA, college fund) would be more profitable in the end. so, paying down a house early can come with an "opportunity cost", if that makes sense.


I've read this as well. I think it depends on how much of a burden you feel a mortgage is. I also don't like putting all my eggs in the house basket. We have a couple of friends close to retirement, who can't sell their houses because of the market. They're stuck and have told us to put some money into house as it needs some work, but to remember that you may not be able to get it out when you want to.

We're going to be in a better spot once I'm done with school and working again. If we can refi, I can see us doing a 30 year to get lower monthly cost while I'm still in school, and then ramping up payments once I'm working.

[HannaAddict]

thanks everyone for the replies, very helpful. so many things to consider!!

we did plug in stuff in one of those calculators, and the difference between refinancing to a 15year vs a 30yr &paying it off as a 15year were really negligible.

anyway, i was talking with DH more about this. i guess his thing is that, while paying off the mortgage as soon as possible would be nice, he also thinks that with interest rates so low, it's very likely that putting that money into other investments instead (401k, IRA, college fund) would be more profitable in the end. so, paying down a house early can come with an "opportunity cost", if that makes sense.

anyway, while DH's job is really secure, it does seem like doing a 30year and just paying it off early may be the best option for us now. Once I start working we will be able to max out our 401ks, IRAs and put money into the kids' college fund and still be able to put more $$ into the paying down the mortgage earlier. We do use autopay so we could have it set up to pay down a certain amount and I think that could help.

I think your husband is right, and a mortgage is a great hedge against inflation. And we are looking at inflation coming down the line. It is also one of the largest tax deductions for some and I would not want to be on the edge to have to make the payment and have one big issue upset the apple cart. Pay it off early if you can. We paid off our last house when my husband had a great year (after fully funding all retirement options), but decided to have a mortgage for some of this house since rates are so low and we can do better with our investments. It is nice mentally to have your house paid for, but in the current economic climate, it isn't always the best solution despite what Dave Ramsey thinks.

ETA If you want to see what the 15 year feels like, set up autopay to deduct that extra amount and put it in short term savings money market for six months or more. You'll save and be able to see what having that money really gone feels like in your budget. We did that when we saved for our first house, just had the difference from our rent to what we projected we could afford put directly into a money market every pay period. Raised a down payment with it.

[KrisM]

Wow, that's awesome Kris. Way to go!!

Yeah that on the 20. It might be a good comprise for you. I agree that very few people are able to do what Kris is doing. We are refinancing to a 30, sadly. That's just the reality of our budget right now. I really, really hope we will be disciplined about extra payments once we get our other debt paid off. I hope the debt-killing momentum carries on for us but I don't know if it will or not.

Thanks. We got lucky with my first house that I bought in 1997 and sold in 2002. We did really well with that. Then, we lived in a house that DH bought for himself only and for a few years had double income, so we were able to really pay it down. We knew I'd stay home, so we never lived on my salary and paid off the house instead. So, this house, since 2006, has never had a big mortgage. We could have bought much more house, but thought this was enough and it gets us out of a mortgage before college starts. And, we are disiplined to still pay extra for the house, even though it's tempting to have the extra in the bank or do other fun stuff :)

[vonfirmath]

:yeahthat: i would get a 30 but pay it like a 15 year.

IF you are disciplined enough to do it. Most won't.

[SnuggleBuggles]

Thanks. We got lucky with my first house that I bought in 1997 and sold in 2002. We did really well with that. Then, we lived in a house that DH bought for himself only and for a few years had double income, so we were able to really pay it down. We knew I'd stay home, so we never lived on my salary and paid off the house instead. So, this house, since 2006, has never had a big mortgage. We could have bought much more house, but thought this was enough and it gets us out of a mortgage before college starts. And, we are disiplined to still pay extra for the house, even though it's tempting to have the extra in the bank or do other fun stuff :)

You're going to be living large when the kids go off to school (or, maybe after they graduate ;)). All of a sudden the $ will be there and the kids will be off. I foresee a lot of good adventures. :)

Beth

[egoldber]

We've re-financed 3 or 4 times in this house. We currently have a 30 year fixed, but had a 15 for a long time. We have also accelerated the payments so that our payments now are almost all principal. But for us, there is really no advantage to paying off our mortgage completely because then we would not be able to itemize on our income taxes and that would be a big blow for us.

So you really do need to take a look at the whole picture.

[wendibird22]

We refinanced last month going from 30yr to 20yr.

[emily_gracesmama]

We are not accelerating payback now with our new 30 year. The rate is 3.85 and with itemizing the effective rate is ridiculous. It's the cheapest money you can get and there are stocks that yield twice what my effective tax rate is. It's a struggle to not pay it off but it makes the most financial sense for us not to.

[roseyloxs]

Look into the 20. We are in the process of refinancing. I really wanted the 15 because we can easily afford it. Hubby doesn't feel comfortable with the higher payment with so many AF pilots being 'laid off' right now. So we settled on the 20 year and plan to put an extra $20 or more towards the principal every month.

[vonfirmath]

We are not accelerating payback now with our new 30 year. The rate is 3.85 and with itemizing the effective rate is ridiculous. It's the cheapest money you can get and there are stocks that yield twice what my effective tax rate is. It's a struggle to not pay it off but it makes the most financial sense for us not to.

You do realize that if you don't have enough to itemize, you still get a standard deduction, free and clear without having to spend any money at all for it?

When I had a mortgage, mortgage + charitable giving = just a handful of dollars more than my standard deduction. I had no problem getting rid of the mortgage. the money in pocket is much more valuable than the deduction ever was. BONUS! I still get my standard deduction. So the "Value" of the mortgage itemized deduction needs to take into account that you'd get your standard deduction (which is sizeable) even without it. Without having to spend the money every month out in order to get some of it back at the end of the year.

[Tinochka]

We had 30 years mortgage, ref. to 15. The same year had a proposal to buy newer house with some $$ help. We sold our house last year, received about 25% in $$, after 11 years of paying... I do not get it.
My DH had some “tail” to clear, which we had been paying for 3 years now (thanks to D.Ramsey course). Yes, it is difficult, especially when you see how other people buy big items, but I would rather pay off and take off the worries from my shoulder...
We have 15 years mortgage on a new house, while still cleaning other stuff. Hoping within 1,5-2 years to start to put more money to DH 401 K and IRA on my name, because I am SAHM right now, buy would like to feel more secure financially.
My kids have a very nice hand me downs, I am shopping at thrift shops (have luck finding new ones, but for a lot $$ less) or online when it is really, really nice deal. I buy only good deals on educational toys for my kids (new, tapping on Amazon right now:), but also do not hesitate finding items on GSs and CL.
I think when you are thinking about 30, but paying like 15, be honest to yourself, if you can do it, especially if you see that your friend bought a brand new car, etc...

[wellyes]

The rate is 3.85 and with itemizing the effective rate is ridiculous. It's the cheapest money you can get and there are stocks that yield twice what my effective tax rate is.

Please tell me what these stocks are cause I'm not finding them!

I agree paying down debt isn't always the best financial decision. But I don't agree that having debt + a mortgage deduction is better in any way than just having money in your pocket. You only get to deduct the interest, which is money that goes entirely to the bank, not the principal of your home. Really, you get to deduct a small portion of the money that you're getting nothing for.

[AnnieW625]

I think this might be a minority opinion but unless you know that the mortgage deduction is going away I would keep the 30 yr. mortgage for tax reasons esp. if you are at the higher end of your tax bracket.

We have a 30 yr. arm, and a 15 yr fixed second payment and we have never been able to refinance so I truly have no experience with what you want to do though.

[nfceagles]

I'm financially conservative, a big saver, free of all debt except my mortgage, and a fan of Dave Ramsey, but with interest rates as low as they are I agree with your DH and HannaAddict. I don't think it makes sense to pay down a mortgage right now. You're earning a pittance on that "savings" and losing access to it. I think inflation is a risk in the near future and I'd rather have the extra money in savings where I can earn higher interest rates on it in an inflationary environment and have access to it in the event of an emergency. Under today's rock bottom mortgage rates, I believe it is better to have a $100,000 mortage and an extra $100,00 in savings, then no mortgage and no extra $100,000 savings. You can use savings to pay a mortgage payment if income became an issue. You won't be able to use your extra equity to do that.

[KrisM]

You're going to be living large when the kids go off to school (or, maybe after they graduate ;)). All of a sudden the $ will be there and the kids will be off. I foresee a lot of good adventures. :)

Beth

When DS2 graduates high school, we'll be in our mid-50s. I figure it'll be fun times for a few years before retirement!

[o_mom]

Please tell me what these stocks are cause I'm not finding them!



No kidding!

DH was moaning about the poor performance in one of our accounts and I had to pull records to show him that yes, there has been pretty much zero growth in the market in the last 5 years.

[secchick]

If you have an interest rate of 3.85%, after taxes the effective rate could be as low as 2.6%. SDY and DVY, both ETFs for dividend paying stocks both have a yield in the mid 3% range (and it was higher before the market went up 7% last week). It's a great time to buy on dips. Many individual stocks also have a higher yield, especially in the MLP space (which I avoid because I don't want to have to deal with a K-1 on my taxes, but that's a personal hangup).

I never understand people who want to keep paying interest for the tax deduction. While I would not accelerate payment on a mortgage at 3.X%, there is nothing better than not paying interest. You still get the standard deduction and it is nonsensical to want to pay a bank interest so you can get 1/3 back at tax time. If the rest of your deductions fall below the standard deduction, the you get to take a bigger deduction that you expenses warrant. That's a bonus!

[nfceagles]

Please tell me what these stocks are cause I'm not finding them!

I agree paying down debt isn't always the best financial decision. But I don't agree that having debt + a mortgage deduction is better in any way than just having money in your pocket. You only get to deduct the interest, which is money that goes entirely to the bank, not the principal of your home. Really, you get to deduct a small portion of the money that you're getting nothing for.

I'm not the poster who originally made the claim, but a 3.85 mortgage rate after tax (use 25% for the sake of example) is an effective rate of 2.89%. There are many stocks yielding way more than this in dividends and the tax rate on dividends is usually not more than 15%. Some examples: AT&T, Southern Copper, Verizon, Sun Life. Obviously, these dividend yields aren't guaranteed to continue, but at least you'd have access to the money. If you pay down a mortgage you won't be able to touch that money unless you sale your house and don't reuse the money to buy a new one. Yes, you could access it through a home equity loan, but you won't be able to get one if you're unemployed and if you are able to get one it would be at a higher rate than a normal mortgage which would sort of defeat the purpose of paying down a mortgage.