The 15 vs. 30-Year Mortgage Loan Debate: Why 30 Is Better

According to Freddie Mac’s most recent survey, there is currently a spread of 0.79 percent between the 15- and 30-year fixed rate mortgage benchmarks, which just so happens to be the largest spread since Freddie started tracking the 15-year mortgage 20 years ago; for comparison purposes, the average spread over that same time period has been only 0.47 percent.

I think most people naturally assume that, when it comes to choosing between a 15- or 30-year fixed rate mortgage, the 15-year loan is usually the better option anyway.  Throw in this historic spread, and I’m sure a lot of folks out there are now beginning to think they’d be absolutely crazy to take out a 30-year loan.

On the surface, it makes sense. All things being equal, a 15-year mortgage allows you to pay off your mortgage twice as fast while saving a significant chunk of money on interest.

That being said, I still think the 30-year mortgage is a more logical choice for most people because it has so many more advantages over its shorter-termed cousin.

Here are several big reasons why I think a 30-year fixed rate mortgage is the more pragmatic choice:

1. Lower payments. Of course, the biggest advantage of the 30-year mortgage is that it comes with lower payments that can be used to invest or save as you see fit.  In fact, it doesn’t take a rocket scientist to know that 30-year mortgages are much…

2. More budget friendly. Those lower payments not only take the strain off tight budgets but, if need be, they also allow you to stretch your dollar enough to purchase a more expensive home.

3. Increased flexibility. Two years ago, with my employer in a bit of trouble and potential layoffs looming, I refinanced from a 15-year to a 30-year mortgage in order to lower my monthly payments by over 40 percent. Today, with the layoffs still going on, you can bet I sleep a lot better knowing that my mortgage payment is only $600 per month instead of $1000.

4. More control. With a 30-year mortgage you are almost always free to make additional principal payments necessary to pay off your loan in 15 years without penalty. However, you are never obligated to do so, and can always change your mind as life’s circumstances dictate. With the 15-year loan, you are hopelessly committed to giving that extra money to your lender each month — whether you can really afford to at the time or not. This leads to another big advantage of 30-year loans…

5. Reduced financial vulnerability. By committing to give your lender that additional principal each month you could be needlessly tying up too much of your money into your house. While it’s true that the shorter loan builds home equity faster, you still need a lender’s permission to tap into it with a home equity loan. If I lost my job tomorrow, it is highly unlikely my bank would agree to give me such a loan, making that equity useless to me in time of need.

6. More opportunity for financial balance. Yes, building home equity and getting that house paid off is a noble goal. However, for young people just starting out, there are often other very important financial obligations that need to be addressed too. The higher payments that come with a 15-year mortgage makes little sense if it leaves you unable to build an emergency savings account, or contribute anything to your 401(k) plan, IRA, and perhaps your kids’ college funds.

7. Bigger tax deductions. I can hear all those keyboards banging out the nasty emails to me right now.  Len, you dummy, agreeing to pay more interest in exchange for a bigger tax deduction is like spending a dollar to save a dime. I get it. This should never be the only reason for taking a 30-year mortgage over a 15-year mortgage. However, all things being equal, the larger tax deduction for the 30-year loan does temper the interest savings of a 15-year loan — if only a little bit.

8. Effective inflation hedge. Inflation erodes the value of the dollar over time. As a result, payments made during the last 15 years of a 30-year loan are significantly lower in real terms than the day you first get the loan. That’s why banks hate sustained periods of high inflation: folks with longer-term fixed-rate loans end up repaying those loans with dollars that are worth far less than the value of the dollars they originally borrowed.

No matter how you look at it, the faster inflation rises, the less sense it makes to pay off the mortgage early. With that in mind, a 30-year loan is definitely your best opportunity to stick it to the bank. For many people, I suspect that’s probably reason enough to choose one.

Photo Credit: Casey Serin

73 comments to The 15 vs. 30 Year Mortgage Loan Debate: Why 30 Is Better

  • Outstanding advice Len! That’s exactly what I told my customers when I was in the mortgage business. Take the 30 year loan–to keep the payments at a minimum–but make the payments based on a 15 year term. That way you aren’t locked in to the higher payment should cash become tight.

    It’s especially important given that the job market isn’t as certain as it used to be. The high payment you took on a 15 year loan when you worked at Employer A may be unsustainable if you’re layed off and now working for Employer B.

    The only ways to get out of a 15 year loan is either to refinance it back to a 30 year or to sell the house. You can’t call up the lender and say “I need to go back to the 30 year”.

  • Or, exclude #7 & #8, and you have six reasons to buy a home you can actually afford. ;)

  • Spedie

    After saving for a significant down payment, I bought a house with a 15 year, fixed loan. I am not sorry that I did this when I bought the house in November 2007.

    I have lots more equity than a lot of people that bought at the same time, all other factors being equal.

    I still manage to put nearly 15% into my retirement.

    I still manage to make an extra principle payment of $450 per month.

    I got laid off twice, as a single mom. My emergency fund sustained me until I got another job. In both cases, I got paid more in the jobs – both times. I saw a pay increase….a big one.

    I sleep well knowing my 15 year loan will be paid for in about 12 years time total, then I can take all that money for principle and interest and SAVE MORE for retirement.

    I look foward to those remaining and last years of my working life – I will not be eating Alpo for my main course.

  • I used to have this same method of thinking — “oh, we should get a 15-year.” I’d run the numbers through a mortgage calculator and see the massive savings in total interest paid.

    Then my boyfriend had a better idea.

    “If you really want to pay off the mortgage quickly,” he said, “get a 30-year, and commit to making payments on it like its a 15-year. You’ll still get most of the interest savings. Granted, your interest rate will be marginally higher — but for that price, you get the flexibility of opting NOT to make those extra payments if you need the cash for something else.”

  • Unfortunately, the overwheling majority of first-time home buyers won’t have a choice, because they will only be able to qualify for a 30 year mortgage. That’s what happened to us and it turned out to be a blessing. We pay extra each month and are on schedule to pay it off after 21 years. And, when I was laid off for 6 months, we weren’t stressing over it. We just paid the minimum payment.

    I’m not surprised the 15-year loan is almost 1 percent cheaper than the 30-year. Bankers know inflation is higher than reported in the CPI. And, they know interest rates are going back up at some point.

  • It depends on someone’s financial strengths and weaknesses. 15-year is not always bad. On the same token 30-year may be better.

    It used to be 20 years – just one option.

    I bought my previous home in Oct 1985 – 20 year mortgage. We were lucky to pay it off in 8 years. Come to think of it, we just bought groceries, paid utilities and occasional clothes. We were on a financial diet even though we lived better.

  • Barb

    I don’t find any of your arguments compelling.

    1-2-3-5-6 all amount to the same thing: you need a lower payment as a hedge because you can’t really afford the house. 4 is a sign of a bad lender – I currently have a 15-year mortgage with no prepayment penalty. 7 you are wrong – you are arguing that recovering a dime out of a dollar spent JUSTIFIES choosing a longer term loan.
    8 is sound if and ONLY if you are saving/investing the difference in payments EVERY month. Otherwise it’s an excuse to go for a lower payment that is quickly forgotten and then the money gets spent and the advantage lost.

    My mortgage history is a 30 on an easily affordable home, a 30 on a home I could barely afford, and now a 15 on an easily affordable home. Bottom line for me is I am loving the 15 because after 3 years of payments I only have 12 years left rather than 27!!! Really stop and think about this: after paying 5 years I will have 10 years left and you will be facing 25. *cringe* Every month I am building more equity than you and paying out less interest (as a percent of total loan). It is really amazing to watch the balance reduce this rapidly after having had 30 year loans in the past.

    Bottom line, IMHO, if arguments 1-2-3-5-6 resonate for you then probably you bought too much house; next time don’t purchase the MOST house you can afford and those arguments disappear. Go with a 15 year mortgage and the largest down payment you are comfortable with (but don’t tap into your emergency fund for it). My down payment was more than 50% of my home value.

    A 30 year mortgage makes you someone’s slave for THIRTY years of your life. Paying the mortgage off early is a pipe-dream for most people. Somehow after we move in we lose the motivation to make those extra payments, or we need them for maintenance costs etc, etc, etc.

    Here’s another argument against 30 and for 15: at any time that I have a major financial emergency I can refinance my 15 to a 30 and drop that payment amount lower. Can you? With a large down payment I have a huge equity that has been relatively unaffected by the housing price slump, so I can also take out some of that equity if I need to refinance. That is REAL peace of mind, and for me it turns out to have been a better option than putting it in the stock market three years ago.

    Although I disagree with your position on mortgage loan terms I enjoy your blog and would be interested to hear if these counter-arguments change your opinion. Keep up the good work!

  • We started with a 30 year because that was more affordable. Then, interest rates dropped and we refinanced to a 15 year. The percentage rate was lower, and the monthly payment was not much more than what we were paying on the 30 year mortgage.

    I think if more people did 15 years instead of 30 year loans, we wouldn’t have had as big a housing mess as we have. (People would have possibly had at least some equity in their homes, at least hopefully.)

    Many people plan to make that 15 year payment on a 30 year loan, but often, that extra money is the first thing that is used when the homeowner needs/wants cash.

  • Sandy E.

    Oh, have to agree w/Barb. Re Len worried about losing his job and becoming laid off? If it had been me, and I had that kind of worry, I would have taken out a home equity line of credit, before being laid off, and not refinanced from a 15 to a 30, because you don’t make any payments on the line of credit unless you use it.

    • But Sandy, with a HELOC I’d be borrowing money at a higher interest rate to help cover my mortgage payments. Why do that when, with a 30-year loan, I could simply dial back the extra payments I was making to pay off my 30-year loan in 15 years? :-)

  • @Kevin: I’m not surprised you agree with me. We seem to be on the same page on a lot of things, Kev. :-)
    @Derek: Absolutely! Or, even better, do as I did and buy less home than you could afford AND get a 30-year loan. Over the course of a dozen years, I went from a 30 to another 30, then to a 15 and finally back to the 30.
    @Spedie: I think that’s terrific! Still, determined, disciplined people like you can do all of that with the 30-year too while giving yourself the flexibility to change course in midstream if need be. :-)
    @Paula: Exactly my point — I couldn’t have said it better myself!
    @Bret: I think that is a very wise observation about the increasing discount for the 15-year loan. With our ever-expanding government and the Fed’s reckless money printing to cover the costs, a period of high inflation like we last saw in the 70s is inevitable — which is yet another plus for those folks holding a 30-year loan.
    @Doable: Agreed. I would recommend a 15-yr loan only for undisciplined people who want to pay their loans off as early as possible, but are afraid they would blow the extra money left in their pocket by a 30-year mortgage — and that’s only assuming they still have enough money left over to feather their retirement nest egg, as well as money left over to pay for everything else they desire after making the mortgage payment.
    @Barb: Wow. Thank you for the detailed comments, encouragement and very nice words! :-) Although I appreciate your arguments, you didn’t change my mind, Barb. :-) I’m very disciplined with my finances. When I bought my last house I didn’t stretch — I could have stretched and bought a bigger home but I didn’t. We live in a very modest 2000 sq ft home in Southern California. My original payment was almost $1500 in 1997 and through numerous strategic refis, I’ve since dropped that payment down to $600. I’ve also managed to pay down the mortgage from $200k to about $117k today — although I stopped my quest to pay down the mortgage two years ago after I noticed a lack of government enthusiasm to curb its runaway spending. The high inflation that is surely coming because of our high debt will eventually make that $600 payment virtually “free” over the next 25 years. As I mentioned to “Doable,” my position is this: if you are disciplined, that is all the more reason to take the 30-year loan and pay it down as a 15 — why voluntarily give up some of your options and flexibility by committing to the payments of a 15-year loan if you don’t have to? :-)
    @Everyday: You’re right, Kris. Like I said, people who are undisciplined but really want to pay off that mortgage quick should by all means go for the 15. However, us disciplined folks should take that 30 year and pay it down as a 15. Because we ARE disciplined we don’t have to worry about betraying our desire to pay down the mortgage early — so why not take the financial flexibility that comes with the 30-year loan just in case? :-)

  • Sandy E.

    @Len, I was basing my comment on the fact that HELOCs usually come without closing costs so they can be $2,000 to $3,000 cheaper than a mortgage refinance, and because banks offer their lowest rates on shorter-term equity loans, whereas long-term equity loans tend to have rates higher than fixed-rate mortgages.

  • Dan

    Interesting post, Len! There are definitely some firm lines drawn between the two camps. I’m still planning on taking a 15, and plan to pay off my condo in five years, but I think it certainly comes down to each person’s individual levels of self-discipline, risk of investments, liabilities and expenses and a variety of other factors. Thanks for your insights.

  • Paying a 25-year mortgage (in our case) in 15 years, that is our goal! We keep the minimum payment low and have a low interest but we pay the mortgage on a weekly basis and calculated with a doubled interest rate. BUT if something would happen to our jobs or any other critical circumstances, then we would still be able to pay the monthly payment for a while.

  • I often recommend my clients take a 30 year loan but use the 15 year schedule to make prepayments. I split the difference myself. I took out a 20 year loan and will have my mortgage paid off after 13 years.

    While I was responsible for providing financial help to my mother-in-law, it was a big help knowing that we didn’t have to make larger payments. Now that she’s passed, we’re making up for the years where we made smaller prepayments.

    However, I would add to #2 that the best reason to buyer a more expensive home is if less expensive houses in your market have such steep repair costs that you’d end up spending more in the long run.

  • Thanks for sharing your insight and breaking it down in an easy to understand way.

  • Len, It’s like you are in my head. As we are moving soon and will be taking out a new mortgage, I have been deliberating just those mortgage issues. One point you missed in favor of a 30 year mortgage is this: With mortgage rates at historical lows, there is a possibility that you can take out a 30 year mortgage at 5% and invest the difference between the 30 and 15 year payment in a stock index fund and earn 7-8%/year (should long term averages hold) thereby making a bit more return on your cash.

  • @Dan: It’s definitely comes down to what the individual is comfortable going with.
    @DoNotWait: We’re on the same page. I’d do the same thing — assuming I was planning on paying down my mortgage, which I no longer am.
    @Pamela: Yep… it’s all about flexibility. It’s invaluable when you get into a financial bind — or decide that you no longer want to pay down the mortgage because high inflation has reared its ugly head.
    @Jenna: :-)
    @Barb: You’re right. (BTW, I’m looking forward to posting your guest article tomorrow! Stay tuned!!)

  • Hi Len, I would agree with you if I had a mortgage. It’s true that a lot of people get the 30 year mortgage so they can stretch into a fancier house, but you didn’t do that yourself. :)

    I think the best reason is #8. Credible estimates of price inflation in the US are running at 6-8% yearly, a lot more than the spread between the 15 and 30 year mortgages. I agree you are better off having that extra money to invest and the flexibility in your budget should you have a financial emergency. You can’t assume that a bank will let you refinance if you are laid off.

  • Jeff

    #8 says it all for me…I agree with you Len!

  • Until Point #8, I was anchored onto my orginal position of a 15-year being a better move. That said, Point #8 is actually a very interesting proposition. You’re paying the same amount, but inflation erodes purchasing power….very true! Over time, that mortgage payment will not seem like as big of a deal, assuming steady inflation. I can see the argument either way.

  • Len, you hit all the points, mostly.
    To clarify one – just take your rate and subtract your marginal bracket. 5% mortgage costs say 3.75%. That’s it. You don’t borrow for the sake of the deduction any more than I have a child for the sake of the write-off. But we agree, I believe.
    To the anti-Lens, no matter how conservative a loan, say 10% of income even, the ability to drop the payment to the 30yr rate is an extra guarantee. By the way, I am old enough to recall tbills over 10%. What if Len has a 30 yr mortgage and rates shoot up. Now he takes all his extra money and buys 10% tbills while paying the bank 5%. That sound you hear is Len laughing all the way to the bank. Creepy, I know.
    Barb – a major emergency, and you’ll NOT be able to refi. That emergency may include no income and no bank willing to help.
    Last – When we bought the house, we planned a child. So first five years included a nanny (An American with a masters in early childhood development) whose salary exceeded my mortgage payment. The kid is now 12, college account full up, funded 100% for private school, and the mortgage has less than 7 years left. All planned.
    People have different feelings unrelated to the reality of finance. My feelings have me with no mortgage when my daughter goes to college. That’s my heart. My head says I should have borrowed out every cent I could today for 30 years, as I have confidence I’d beat the 3.75% cost of money.

  • @Jennifer: No, I didn’t stretch and buy more house than I could afford. As a result, over a dozen years later, the mortgage is more affordable than ever! (Ridiculously so.)
    @Jeff: I think #8 is not only one of the most important reasons, it is really underrated by most folks too.
    @Squirrelers: Oh, don’t underestimate the power of #8, Wise Squirrel!
    @Joe: Thanks for having my back, Joe! LOL Like I said, I was going for the mortgage pay off until two years ago. My head started telling me a couple years ago to stop it — so I listened. (I just hope my head is right this time.) LOL

  • Am I the only one impressed that Len is managing to live in a 2000 sft home in Southern CA for $600/month?

    I know several people who did the same thing (refinanced again to a 30 year mortgage to lower payments to reduce their fixed expenses as a hedge against layoffs). I did the opposite..After I knew I wasn’t going to get laid off, I went into warp speed to pay off our primary mortgage. I didn’t have a ton left on it, so it was an easy decision and I also feel much better having a lower fixed expenses. Different approach but same general idea.

  • DC

    Len,

    Here’s what we did when we bought our current house.

    We owned our previous small house outright, having paid off its mortgage a few years earlier. We did have the funds to put 20% down, but instead we put 10% down, then evenly split the remaining amount: 45% on a 30-year 1st mortgage, and 45% on a 2nd HELOC. This way, we avoided the escrow and PMI requirements for the 1st.

    The 10% saved on the down payment was spent on painting the new house, and doing some fixing up in the kitchen prior to moving in.

    Once the old house was sold, the proceeds were used to pay off the 2nd, a car loan, and the rest socked back for future college funds.

    Meanwhile, on the remaining 1st mortgage, we are making accelerated payments with the money freed up from the 2nd. And as you point out, if times become hard, we always have the option to reduce the payment to the minimum required, which is less than the cost of a 2-bedroom apartment since the loan balance was based on 45% equity in the first place.

    • Len Penzo

      Wow. Now that is some clever money management. Just curious, what strategy did you use for paying off your first home and how long did it take?

      • DC

        We bought our first small starter home in the early 1980’s, before the Internet and ready-made online financial calculators were available.

        I created a spreadsheet (remember Lotus 1-2-3?) to calculate how much house we could afford. You plugged in your annual salary, it took about 23%, divided by 12 for a monthly payment, subtracted an amount you could vary for an estimated escrow, did a reverse-payment calculation to arrive at a loan amount, then added in 5 or 10 percent to represent varying down payments to arrive at a range of housing prices. You could also enter a range of interest rates too. The results were an eye-opener, and caused us to scale back the houses we were initially looking at.

        BTW, interest rates were a killer back then. We assumed the 1st mortgage at 10%, plus took on a 14.5% 2nd mortgage. Combined, the two had a weighted average of about 11.5%, which was still better than the going rate of 12.5% for a new 1st mortgage.

        When we bought our first small starter home, we could barely afford it, plus we had two car loans and credit card dept. But I was working in the IT field, which was a boom time compared to now. In those days, you could count on a steady job and annual pay-raises to ease the financial pain.

        When my wife became pregnant, we got better organized about our finances. We read financial advice books and created a budget comparable to a paper version of the envelope system. Then we systematically targeted our debts, starting with the credit cards with the highest interest rates, and paid them off one by one. Any money freed up from a payoff was rolled over towards paying off the next target. Then the cars loans were paid off early.

        But the key things are, we researched (libraries and book stores in those days), we did the math, we did not buy more house than we could afford, and we stayed there for 18 years, by which time I was earning more than double what I had when we first moved in. We had both mortgages paid off by year 11, though in fairness that was partially due an inheritance I received that knocked about 3 or 4 years off the timeline.

    • daniela

      Hi everyome,
      I am 1 week tp close everything for my first home.
      I am so confuse, i chose the 15 year loan with a 2.875% 0 points and no penalties for paying it off before time, or ballon payments.
      Now, the lender just asked me this

      We are already locked at 2.875% with a 1.9% credit so there aren’t any points, underwriting or processing fees.

      Here are some options: Current credit to you is $2675
      2.75%, lender credit will be reduced to $1689 (by $1k)
      2.625%, lender credit will be reduced to $994
      2.5%, lender credit will be reduced to $290

      Our loan is 140.800 usd since we are doing a 20% down payment. We dont mind paying a bit extra at closing, we just want the best deal but i am so confused.
      Our payment will be 963+ 304 of taxes and insurance. How does this sound to you? 1268 usd per month.
      We just got married, no kids. Our current rent is about same as our future mortgage so we thought it was a good idea to buy a home.
      Please help me,
      We can pay up tp 1500 usd per month, around 50% of my husband salary.

      Thanks
      Daniela

  • Mark

    But if you believe #8 is true … then the strategy promoted in #3 & 34, of making higher payments, kinda mitigates this advantage. To reduce the term of the loan you have to make the bulk of the extra payments early in the term to get max effect. But if you do it early, you have no idea if there is a good reason to not do that because #8 is in effect …

    • Len Penzo

      True, Mark. If I could accurately predict/forecast the future with 100 percent certainty I’d be a rich man right now! :-) Alas, I’m not, so it’s all about hedging your bets. At least with the 30 year loan you have the flexibility to more effectively take advantage of those options based upon how you read the macroeconomic tea leaves, so to speak.

  • Alan Fogelman

    So Len you went from a 15 year to a 30 year mortgage.
    I would bet that you did NOT consult a tax adviser.
    Why? There is something called acquisition indebtness that deals with both the initial loan amount and the time frame of the loan. Just let me say this, check whether you have a deduction issue in the 16th year.
    And be careful how you advise people of whose situation you have no knowledge

    • Len Penzo

      The underlying foundation of this article is solid. If you’d like to share the potential tax implications, why don’t you come out and explain to us so we can all learn something, instead of making cryptic comments and unfounded assumptions regarding how I handle my taxes (for example, blindly assuming that I plan on deducting from my taxes the paltry amount of mortgage interest I’ll still be paying 16 years from now)?

      “And be careful how you advise people of whose situation you have no knowledge.” Coming from you, that statement turned out to be more than a bit ironic.

  • Alex Brown

    Hi,

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    Please let me know your thoughts. Waiting for your positive reply.

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  • David

    The tax-deductible thing is a *perfectly* valid argument; depending on your marginal tax rate, a 100K difference in interest over the term of the loan can really be a 60K difference after taxes. Since this difference factors into your decision, the tax thing is important.

  • tim

    I have three properties and two of them are 15 year loans and one is a 30 year loan.
    I’ve refinanced one 30 to a 15 and I’m trying to have all three in 15 year mortgages.

    The only regret I’ve made is not having the every loan on a 15 year loan. I personally don’t see why anybody would do a 30 year loan unless its something you can’t afford.

    Having a house you live in paying biweekly and having it the loan for only 12 years is amazing.

    The amount of equity you get on a 15 year loan is crazy compared to a 30 year loan.

    Most countries don’t offer a 30 year loan for a reason. 30 year loans are just bad, they inflate prices and people don’t have equity.

    • Len Penzo

      You are assuming that because you can afford the 15-year loan now, you will be able to in the future as well — but that assumption is only valid as long as that assumption holds up. There are no guarantees in life.

      With respect to your equity statement: I guess I don’t follow your logic. You can pay off a 30-year loan in 15-years (or even quicker if you wish) by increasing your payments. There is nothing stopping you from doing so. Also, if I take out a home loan for, say, $250,000, then the amount of equity I have at the start of the loan is the same whether I take on a 30 year or 15 year loan. And if prices drop immediately after buying, the amount of equity I’m building in the first 5 or 10 years will not make much difference anyway, regardless of loan length, because most of the payment is going toward interest.

      I think your claim that 30-year loans inflate prices is dubious at best.

      But other than that, I think we agree, tim. ;-)

  • jp

    How about a couple just starting out at 25 years old, for example. Use a 15 year loan to purchase a starter home. At some point this home becomes a rental property and you purchase a larer home with a 30. Starter home is paid for at age 40. That would be a nice position to be in at 40. You could sell that home or continue to rent as income.

    • Len Penzo

      Why not purchase the starter home with a 30 and make payments on it as if it were a 15? The house would be paid off in virtually the same amount of time — to me, the added flexibility would be well worth the relatively small additional cost.

  • mv

    Why not take this argument further, and plug a 40 year loan? Or maybe just get a lifetime, interest-only loan (call it rent)? It seem to me there are 2 ends of the spectrum 1) pay as much as you possibly can on your home, and reduce interest, or 2) pay as little as you can, assuming arguments of inflation and using your extra cash for investments. Everything in between is just that. The question is, which end of the spectrum is best?

  • scent of reason

    Wow, if I had only followed this adive I could still be making house payments! Instead, I paid off my house in 13 years and am free and clear. Started my own business (construction related) in 2008 just as the bubble broke. Had I had house payments I would not have made it until now. Always buy a home well within your budget, and always pay it off asap (provided you plan on living in the same town for the forseable future).

    • Len Penzo

      Congrats on paying off your house! That is an admirable accomplishment. However, I can’t stress this enough: for people looking at it from a pure dollars and cents perspective, it is not always the smartest move financially — especially if your mortgage has a low interest rate. And especially in this day and age when the US government is racking up trillions of dollars in debt and hastening the devaluation of the US dollar at break-neck speed. Those who choose to pay back their loan over a long time frame will not only have more to spend now, but also essentially have Uncle Sam paying off their mortgages for them early by default!

      (And if the government suddenly becomes fiscally responsible and inflation becomes a thing of the past, then folks always have the option of going back to paying down their mortgages early again.)

      • msp

        Considering the volatile job market, owning your house (paid off) is a great freedom. I can survive on very little when I do not have a house payment. As long as I can afford the utilities, food and property tax, I do not need to tap into 401K or kids’ education fund. I can actually last on a pay check from McDonald’s. The sense of relief is worth a lot more than the few dollar and cents.

        By the way, a lot of people who cannot afford a higher monthly payment is due to their lack of discipline, in purchasing a much cheaper house, in saving for a larger down payment, in delaying buying. Their lack of discipline means they will not be able to take advantage of the extra money not used for mortgage even if the lower the payments. So it is pretty much a moot point for them. Only those disciplined enough to invest the difference can take advantage of it. I doubt there are many of them out there.

        For the longest time I pay extra in my mortgage as well until my oldest started college. Money was a bit tighter and so I stopped paying more. When things improve, I still didn’t put the extra money back in the mortgage because there were always something else came up to eat up the difference. By the way I am one of those disciplined ones. Our house is paid off now. Just imagine the ones less disciplined. I doubt that they can take advantage of the lower payments.

  • Oscar

    Hmm.

    Let’s just look at these points one at a time, shall we?

    1 – This only makes sense if your return on your investments outweighs the interest on your mortgage. Otherwise, paying off the debts and using the freed up income to save will build your savings faster. Consider: current bank rates are below a half a percent. The DOW has averaged a meager 3% over the last twenty years. Oh, and don’t forget – returns on investments are fully taxable.

    2 – If you are stretching your budget to buy a more expensive home, you are buying more than you need.

    3 – Getting a longer mortgage is not a smart move to prepare yourself for layoffs. Laid off or not, you are still indebted for the principal of your mortgage and will pay it one way or another. Building an emergency fund is the smart way to deal with this, and should be done before a house purchase. But if worse comes to worst, then selling the house and downgrading or renting is always a viable option. Paying thousands more than necessary in interest is not the smart way.

    4 – If you have the option to pay extra, you have the option to not pay extra, and Murphy’s law dictates that something can and will often come up that will tempt you to not pay the extra. Take Murphy out of the equation with a 15 year payment you can afford.

    5 – HELOCs should not be used as the measure of the equity in your home. What you owe vs. what your home is worth should be the measure, and what you owe will go down much, much faster in a 15 year mortgage. Bottom line – if and when you sell your house, you are going to have to pay your principal balance, and that will be significantly easier if that balance is significantly lower. Your house doesn’t sell for any more or less based on your mortgage.

    6 – 401k, IRA, college investments are all investments, covered under #1. And as I said before, an emergency fund should be built before buying a house. If you are just starting out and don’t yet have an emergency fund, RENT.

    7 – You defeated this in the point yourself. No need to say more.

    8 – Higher inflation hurts no matter whether your money is being invested or is tied up into a loan – your purchasing power is reduced either way. If you want to hedge against inflation, buy inflation-protected securities or commodities. Taking out a long-term loan is not a good solution.

    Bottom line is this: paying $60,000 for a $30,000 car is stupid. Anybody would say the same.

    Why is it no less stupid when the same is done for a house?

    If you had the cash on hand and your two options of buying a $100,000 house were for $125,000 or $200,000, which would you choose? DUH.

    OK, OK, most people have to borrow to buy a house. Granted. That’s a bullet that has to be bitten. But it doesn’t negate the fact that paying a lot more over the course of financing than is necessary is still stupid.

    If you want to be SMART, try this. If a 15 year mortgage monthly payment makes you squirm, you are buying too much house. Find a house whose 15 year monthly payment fits within your budget. Maybe even gives you some wiggle room to pay extra on, which will save you even more than paying extra on the 30 year would.

    • Len Penzo

      I’m not sure if you are just playing around with me or not. Frankly, I think your advice is absolutely terrible, and your logic is flawed, if not shortsighted. But assuming you’re not having a little fun with me, I’ll address your points anyway:

      1 – Not true, Oscar. It also makes sense if you want lower payments for, say, peace of mind, which you can’t put a price on.

      2 – That makes no sense. How exactly does lowering one’s mortgage payment to stretch your budget (assuming it’s a sound budget) equate to buying more house than you need?

      3 – Really, Oscar? What I don’t understand is, how do I build that mega-emergency fund I’m going to need to make the higher mortgage payments when my mortgage is, say, twice as high with a 15 than 30 year-loan? And what if it takes an inordinately long time to find a job? How big is my emergency fund supposed to be anyway? Why not get a 30 year loan and make extra payments if you’re worried about paying the extra interest and then ratchet the payments down if I get laid off? How does your way make more sense again if I’m worried about being laid off? (Answer: It doesn’t.)

      4 – Oscar: Please help me with your logic. How does taking the 15 year mortgage take Murphy out of the equation? The only thing that happens is you have less flexibility if Murphy does strike. Sweet Jesus, Mary and Joseph!

      5 – Okay, now I think you are just pulling my chain … “HELOCs should not be used as the measure of the equity in your home.” Huh? Seriously, bro, what are you talking about? Never mind that you also seem to keep ignoring the fact that you can pay down a 30-year loan just as quickly as a 15-year loan by simply making additional payments.

      6 – You make another poor assumption, Oscar. What happens if you have an emergency that depletes your emergency fund after you bought your house? It’s a lot harder to rebuild emergency funds — and contribute to your retirement funds — if you’re stuck with the higher payments you’re locked in with on a 15 year mortgage.

      7 – Well, I’m glad I got one right. ;-)

      8 – Actually, it is the absolute smartest solution if one expects a period of high inflation at some point over the course of the loan. It doesn’t even have to be a long bout of high inflation; a significantly high-enough bout over a short period of time will also do the trick. Do me a favor and read up on something called “the time value of money.” Then get back to me if you don’t understand it, and I will do my best to figure out a way to explain it so you do. :-)

      As for your car analogy… While I agree no one should intentionally overpay for a house, people often do it unintentionally. Hey, it’s easy to do. The problem with your analogy is there is one big difference between overpaying for a car and overpaying for a home: The impacts of overpaying for a car are far far greater. Given a long enough time horizon, homes appreciate (thereby eventually correcting any overpayment mistake) — cars generally don’t. In fact, most all of them depreciate to almost nothing. So you’re comparing apples to oranges there.

      You know what. Upon further reflection, Oscar, I’m certain you were joking with me. At least I hope you were.

  • Guy

    You have a few points and I’m not sure I agree with them in general.
    1-3) Lower payments are easier to manage:
    This is like paying off your credit card at the minimum so that you have more flexibility in your budget. Yeah, you could put that difference in a savings account but in general you will lose out a lot more than the flexibility of having a large savings account in case of an emergence. Don’t really think paying interest on that is worth while. I’d rather have less savings and less debt than have more savings and more debt. But that is me.
    4-6) Peace of Mind of paying low monthly balances:
    You take a 30 year and pay it off at the 15 year rate just in case you ever need to slash your payments. Not a bad hedge and probably your best point but I’m not sure I personally would like paying the higher interest for that hedge. And for most people they won’t pay the higher rate but whatever the bill says to pay. Probably not useful for most people, but like you if your job isn’t secure it is nice to know that it is easier to cut back if need be and that might be worth the more interest.
    7-8) Tax and Inflation:
    This comes down to taking a long-term loan, investing it in inflation protected goods, and hoping the returns are higher than the loan+interest. Pretty much a margin loan but using your house as collateral instead of your stocks. And although your interest on the mortgage is tax deductible your profits from the investments are taxed. At least with a margin loan you can write the interest off as a cost.

    Another issue is that the points are somewhat exclusive. You can’t pay it off at the 15 year rate and still hedge against inflation. It is one or the other. And you are gambling that paying more interest will be okay because inflation and investments will produce better returns. I don’t think that is a worthwhile gamble.

  • Sophie

    I’m shocked at this article. Well not really. That’s the American way. Buy way more than you can afford. Just permanently stay in debt till you die. ANYONE can do a 10 year or a 15 year if they buy a house they can actually AFFORD. But people try to stretch every $ to buy the biggest McMansion they can get away with. My husband and I could most definitely “afford” a house twice in cost of what we have now if we went with a 30 yr. mortgage. Instead we did a 15 year (I even hate paying that long) and have a smaller house. What’s even worse is when people refinance into another 30 year mortgage. So they will never be done! Is living in debt just the american way? It’s so insane to me cuz it’s nowhere like this anywhere else in the world. People buy what they can pay CASH for–not get loans for.

  • Brian

    I bought in July and refinanced in February, (4.5 vs. 3.8%). Most of my mutual funds made about 20% over the past 6 months. Every cent that I can put into the market right now will earn me 16% over the interest I am paying for it. Not only that but the interest is tax free.

    The advice should really be that everyone and anyone that can find a 30 year mortgage around 4% right now should run to find a brand spanking new 30 year mortgage and pour the money they get out into mutual funds. Even when the market returns to a more traditional 7-10% growth over the next 10-20 years, you will be making that money which you borrowed for next to nothing.

    The balance of the $ can be a nice savings account for emergencies. Even if the value of the house falls at some point you will still be way ahead of the game.

    Paying off your house is for suckers and the undisciplined. As long as you “trust” yourself to send a check every month, wealth is worth much more than less mortgage. You will always have property taxes and insurance so its not like you will live “for free.” Growing wealth to generate long term income is a much better objective then “not having to pay a mortgage.”

  • I didn’t know you could pay off THAT early without penalty. That’s great information and will probably lead more people to just go with a 30 year. We have a 30 year fixed and have a rental and it covers the mortgage, taxes and insurance. We plan on keeping it a while so we’re happy with the term.

  • Allan

    Take the 30yr and sink the rest in your 401k account at an interest rate of
    4% with you putting $22,000 a year up until your retirement. Chances are you are going to sell the house anyway. Use it as a tax write off and save in the long run for retirement. Never pay a home off fast when you can be saving early with your money growing faster than later in life. Why wait for your money to grow when you are a lot older? Enjoy your autumn years and save while you are young! After retiring roll it over at a higher interest rate and live off the interest…

  • Long Money

    Good food for thought regardless of one’s position. I am about to refi a $400k loan from a 30 down to 15. Like everyone I am also concerned about layoffs but I would rather pay down my balance faster. I’ve noticed by comparing amortization schedules that even though my payments would be about $700 per month less on a 30 than a 15 that the principle actually is paid down faster (by about $280 per month) on a 15 even if I were to add the whole $700 on to my payment because of how the interest is calculated.

  • I would say a 30-year mortgage is preferable if, and ONLY if, you can prepay it with no penalty. Then you have the option of, as you recommended, taking out a 30-year loan and prepaying it as if it were a 15-year, yet with the flexibility to revert to the 30-year payment schedule if your budget gets tight.

    When we bought our house, we initially got a 30-year loan at 6 percent. After two years, and quite a lot of prepayment toward the principal, we were able to refinance to a 15-year loan at 4.5 percent and actually lowered our monthly payment in the process. Now, you might argue that we should have refinanced into a new 30-year loan, since the interest wouldn’t have been that much more and we could still pay it down early–but why would we reset the payment clock back to 30 years when we could drop it to 15 and still lower our payment? (Of course, you could argue–and have–that it’s dumb to want to pay off our mortgage quickly when the money that we’ve borrowed could be paid off with cheaper dollars due to the looming crisis of massive hyperinflation, booga booga. But frankly, I’m not convinced that this kind of inflation is inevitable–certainly not convinced enough to make choices that hurt me financially in the here and now because they could help me in the future if the crisis comes to pass.)

  • Mike

    Len,
    My current 30 year adjustable rate mortgage, taken in 1999 has never been more than $100 a month. Currently, the payment is just over $32 a month with a 2.75% interest rate. Each month, I pay nearly double the payment and the balance is now below $5000. I would pay it off, but I can’t help but using the prime – .25 % HELOC (fixed) to go on vacations, buy things and otherwise enjoy life. What have I done wrong? I feel like I have failed somehow.

    I guess that it’s because I don’t believe for a minute that donating money to the stock market via my employer is a good thing. See, they offer a choice of about 8 funds out of I’ll just say 100+ through TRowe Price. None of the stock, bonds or other investments is in the upper earning range of all the TRP funds. I’d say that most if not all are in the lower 50%. So my employer is matching (50%) my donation to the stock market because I’m only allowed to buy dogs that dont keep up with the top 10, 25 0r even 50% of the market. So Do you think I might be better off to forego the enticement to lose money every month and just invest in profitable stock an other money making vehicles?

    Just a thought. Actually a question.

    Also just as the big meltdown was beginning a few years ago, I just about wiped out my 401K at the office paid the 10% penalty and the 8.5% taxes due on nearly 100K earned income (I used to teach taxes, law and prep so I’ve only paid 10% once in my life) almost literally put the money in my mattress and watched the DOW fall by 50% but only lost or actually reduced my fund value by 20%. I then began investing in the market as it started to go up, but did so as quickly as I thought was wise so I would be able to avoid ST Cap Gains if I had to liquidate again. Do you think this is a mistake? Employer matching is such a riop off.

    • Len Penzo

      I don’t see the employer match as being a rip off, Mike.

      Remember, you are earning 100 percent on the first 50 percent of your donations (because of your employer match). For that reason alone, I would continue “donating money” via your employer.

      I’m certain the funds you are allowed to invest in aren’t so bad as to result in a net loss after including your 100 percent return courtesy of your employer.

  • Maura

    Thank you for the tip about being able to pay off 30 year mortgage at leisure, versus being stuck with higher monthly payment. With more cash in hand, I contribute more to my retirement funds which currently yield 6% annually, after my contributions and employer matches. My mortgage interest is 5 1/8%. To your point, as my income and contributions increase, so will my investment return, even as my mortgage remains fixed. The gap will increase. In six months my retirement funds will be higher than my mortgage obligation, which will increase the gap exponentially. Thank you for your contributions to my financial sanity.

  • Ann Delphin

    Your advice to take a 30- over a 15-year mortgage is what we have advised our young nieces and nephews. We have had both. Our first house in 1978 was a 25-year loan. After a short time in the first house and a job transfer, I believe the second load was for 25 years. After several other home purchaces and making money on the sale of the homes, we were feeling flush enough to take a 15 year loan and make add’l principle payments when the budget allowed. After about 8 years on that loan, we were paying the IRS because we were whacking down the principle and had little mortgage interest write-off, despite having only one wage-earner in a family of three.

    We sold that house and bought a more expensive house that needed lots of work. We took a 30-year loan because we didn’t want to be under pressure with a larger-than-necessary mortgage payment and we wanted to fund the reparirs out of income. I went back to work when our daughter was in junior high, which allowed us to do about $60,000 in repairs and updates of the kitchen and master bathroom over the first 8 years in the house.

    We got an amortization schedule as soon as we could and started making an extra principle payment as soon as we started making regular mortgage payments. As the cost of private school and college tuition for our daughter went away, we plowed that amount into extra principle payments.

    We paid off the mortgage in 11 years. We paid off our car loans in 2+ years by making extra payments and plowed that money into retirement savings.

    I think the 30-year loan is the best bet. If the home-owner is irresponsible, nothing will help. If they have a plan for financial security, the longer loan period offers the flexibility to accomplish things in addition to owning a home.

  • Lynn

    I am 68 years old. I sold my two-story paid-for house, put $130k in bank at .90%. It is there for grands kids college if necessary or family emergency.

    I am buying a one-level townhouse in supportive retirement community but financing 100% (VA) w 30-yr loan at 3.229%APR. The kids can sell it down the road as it is desirable location.

    It is cheap rent in a nice place. My fixed income easily covers payments plus ability to save for repairs, upgrades, etc.

    There are many ways to play monopoly. It just depends on which board square you currently sit.

  • daniela

    Hi everyome, I am 1 week tp close everything for my first home. I am so confuse, i chose the 15 year loan with a 2.875% 0 points and no penalties for paying it off before time, or ballon payments. Now, the lender just asked me this We are already locked at 2.875% with a 1.9% credit so there aren’t any points, underwriting or processing fees. Here are some options: Current credit to you is $2675 2.75%, lender credit will be reduced to $1689 (by $1k) 2.625%, lender credit will be reduced to $994 2.5%, lender credit will be reduced to $290 Our loan is 140.800 usd since we are doing a 20% down payment. We dont mind paying a bit extra at closing, we just want the best deal but i am so confused. Our payment will be 963+ 304 of taxes and insurance. How does this sound to you? 1268 usd per month. We just got married, no kids. Our current rent is about same as our future mortgage so we thought it was a good idea to buy a home. Please help me, We can pay up tp 1500 usd per month, around 50% of my husband salary. Thanks Daniela

  • Lori

    When we bought our first house, we had a 25 year mortgage. After many years, we purchased a second home with a 30-year mortgage. A banker in the family said that it is always better to take a long-term mortgage for flexibility. You can always make additional principal payments if you wish. His point (remember, he’s a banker) was that inflation would make those payments far less painful over the years. And all those years, you also have a tax deduction. He was right. The payment that seemed like a lot in 1990 is now an easy check to write, due to the ravage of inflation.

  • Al

    “…stick it to the bank”
    I think your last reason is the best :)

  • Al

    “..stick it to the bank”
    On another note, when I did a no-paper refi that was brought to you be your govt., I found out that my bank did not even own my loan anymore but was just servicing it for the govt. which had bought it. I was happy and mad at the same time: got some of my taxes back (good), dumb govt. giving a lower interest rate and paying for the refi’s for no good reason at all (mad). :)

  • Amanda

    NEED SOME OPINIONS. I wanted to know if I owe 50k on my heloc, and refinancing my first mortgage to lower rate. I am in the 8 year of 30 mortgage. I cannot combine both into one. Value is not there. Should I go for 30yr refi or 15 year refi??

  • Amanda

    Actually should I refinance to 20 or 30 year term when rates are the Same for both terms.

    • Len Penzo

      I am not a financial advisor, Amanda, so you will have to make your own decisions. If I were presented with 20-year and 30-year mortgages at the same rate, I would go with the longer term — but that’s just me.

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