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Choosing A Fifteen Year Mortgage Is Not A Good Idea

Written by on Tuesday, 21 April 2015 4:32 pm
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Question: For some time I have been wondering if I should consider getting a fifteen (15) year mortgage, as I do not want to be burdened with a mortgage in addition to condominium fees. Assessing how and when to consider such a change is confusing to me, and I would appreciate your advice on the advantages and disadvantages of the fifteen (15) year versus the thirty (30) year mortgage.

Answer: I must state at the outset that I am biased against the fifteen (15) year loan. While there have been many commentators who have praised what they perceived to be the benefits of a fifteen (15) year mortgage, in my opinion, such a mortgage rarely makes sense for the average homeowner.

Let's look at some examples. You want to compare a $300,000.00 loan to be amortized on a thirty (30) year basis as compared to a fifteen (15) year basis. Lenders typically will provide a lower interest rate if you take a fifteen (15) year loan rather than the thirty (30) years. So for comparison purposes, let us assume that a 30 year loan is 4 percent and a 15 year loan is 3.5 percent.

To amortize the loan over fifteen (15) years, your monthly payment of principal and interest (P&I) is $2,144..65. On a thirty (30) year basis, the P&I is $1,432.25. As you can see, this is a $712.40 cash savings per month on a thirty (30) year loan. On a yearly basis, this is a savings to you of $8,548.80. That's a lot of money.

Keep in mind that the interest deductions for tax purposes will, by and large, be the same for the first few years, but as your principal balance goes down faster with the fifteen (15) year amortization, accordingly your interest payments will also be smaller.

Thus, the major benefit of the fifteen (15) year loan is that you will save a lot of interest over the life of your mortgage. You are also putting up, in our example, over $8,500 a year toward principal, thereby reducing your mortgage balance and building up your equity.

Equity is the difference between the market value of your house and the mortgage or mortgages which you owe. In good real estate market conditions, property values increase on a yearly basis as much as ten to fifteen percent. Even in bad times, we all hope that property values will at least keep up with inflation, although obviously there will be dips and decreases in market values on a periodic basis. Many homes impacted by the "mortgage crisis" several years have now rebounded.

And assuming that we anticipate growth over the next decade, the equity in your house will grow regardless of the amount of your mortgage. This equity is "dead equity" and in my opinion, you might as well be taking that extra $8,548.80 and burying it in your back yard. In effect, that is my analogy for the fifteen (15) year mortgage.

I would rather take the extra $8,500.00 a year and invest it somewhere. I could put it in a pension plan, I could invest it in the stock market, I could give it to my children, or I could spend it on a vacation with my family.

After all, what will you do with your house fifteen (15) years from now when your mortgage is paid in full? I know of too many people who are currently house rich and cash poor. When you are in retirement, you may not keep that house, or if you do, you want to make sure that you also have some sort of nest egg to be able to enjoy your retirement years. If you have put all of your money into your house, and then you retire, you may not be in the financial position to tap into that equity at that later date.

The Department of Housing and Urban Development (HUD) has just tightened up the loan requirements for a Reverse Mortgage, so you may not be able to count on that down the road.

Accordingly, in my opinion, take the extra $8,500.00 a year and invest it in a conservative, long-term investment for the next fifteen (15) years. Even without any computation for interest, this will grow in the next fifteen (15) years. That will be the start of this important nest egg for the rainy day.

However, the advice I give is obviously general. You are advised to discuss your specific needs, plans and tax considerations with your own advisors.

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  About the author, Benny L. Kass

10 comments

  • Comment Link Jim Friday, 08 May 2015 11:44 pm posted by Jim

    10-15% increase in property value is dreamy. No guarantee you'll make gains investing the money. Paying off your home is a investment in yourself. "Dead money" comment is not based in fact. Consider the market value of your home each year with current rates. Not having a mortgage payment lets you keep this cash for other purposes...it's like a perpetual bond that by paying off you unlock. The tax advantage is bs for the average family...it might give you a few hundred to $1,000 but laws like this are created for the wealthy to buy more house for less.

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  • Comment Link Matt Cook, SRA Wednesday, 22 April 2015 9:02 pm posted by Matt Cook, SRA

    And one more thing to consider is you can always pay down your 30-year loan in 15 years ($2219/mo) if you really have no better use for the money, but having a 30-year loan will give you the flexibility to revert to your lower $1432 payment if money gets tight, you lose your job, etc. You avoid being locked in to the higher 15-year payment.

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  • Comment Link Anastasia Schmoll Wednesday, 22 April 2015 8:59 pm posted by Anastasia Schmoll

    My spouse is conservative, I am not, at 3.25% on a 30 yr we can pay bi monthly and have it paid off in 18 years. Having to option to make 2 additional pmts VS being strapped to the higher monthly pmt is luxury. When I'm making imptovements or remodeling I go to a monthly so that I have the extra cash to invest into the property.

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  • Comment Link Dylan Wednesday, 22 April 2015 2:21 pm posted by Dylan

    If you can afford to do the 15 YR, do it. Yes, you will save 8K a year if you did the 30YR in this particular example, but take a look at an amortization schedule for the two loans. The 30YR loan will total $215,608.52 in interest payments, while the 15YR loan will only total $86,036.57 in interest payments. That's a $129,571.95 difference in interest payments, and you are cutting a 30YR obligation in half.

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  • Comment Link Philip Wednesday, 22 April 2015 1:30 pm posted by Philip

    If I were to take this guys numbers at face value, the answer would be to get an interest only loan and not get a 30,15 or any other term mortgage

    that way you have the lowest payment and can invest even more money for the future.

    The caveat to all of these, is some people like being out of debt, and not having a mortgage. If you can afford the payment on a 15 year loan, that is 15 YEARS less of payments you have to make on your residence....not a bad deal.

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  • Comment Link STEVE Wednesday, 22 April 2015 12:56 pm posted by STEVE

    I AGREE WITH EVERYTHING, EXCEPT WITH THE FACT YOU WILL "PAY OFF YOUR HOUSE" ITS TRUE, EXCEPT FOR REAL ESTATE TAXES--IF YOU "OWN" OR H.O.A. FEES IF YOU HAVE CONDO. ONLY WAY TO BE TOTALLY FREE IS LIVE ON A BOAT OR LIVE IN RV CAMPGROUND

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  • Comment Link Dawn W. Wednesday, 22 April 2015 12:07 pm posted by Dawn W.

    I disagree. In my personal opinion the goal in retirement is NOT to have a mortgage payment and to live comfortably. Therefore; paying off your mortgage and having no housing expense except for maintenance and necessities is very attractive. Additionally, once paid off, you could in essence, rent the property out creating income for yourself. The largest monthly burden one typically has is housing expense. Imagine if you didn't have that, what your potential could be?

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  • Comment Link jim lubinsky Wednesday, 22 April 2015 12:04 pm posted by jim lubinsky

    Agree. There are a few exceptions. Some people focus on lowest interest rate and a 15 year typically has a lower rate and some focus on paying off the house. When interest rates are near or below normal inflation rates it doesn't benefit one to payoff the loan sooner vs investing the funds in other places ie a good mutual fund. I also like the idea of sharing the risk with a lender vs paying off the loan. I see little real value in a 15 year loan.

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  • Comment Link duane gomer Wednesday, 22 April 2015 11:24 am posted by duane gomer

    I am a fan of your writing, but on this one there are so many factors that a general answer is difficult. I noted that you do have a final sentence qualifier.

    You are obviously a young man, but ideas change when you ripen and especially when you are married to a very conservative spouse. I know the deduction advantage, and when I have no loan on the house I will be only saving 3.67% at this time but the three words for us are "Peace of mind".

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  • Comment Link Harry Mehlman Wednesday, 22 April 2015 8:50 am posted by Harry Mehlman

    I agree 100%. I feel the same way.

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