In the market for a new home and looking for input on whether to go with a 15 or 30 yr mortgage. I've been quoted rates of 3.625 on 15 yr and 4.25 on 30 yr. with 30 yr I would have more flexibility to put more towards savings, retirement, etc but would still likely have a mortgage after retirement. Obviously 15 yr I could be mortgage free after retirement but less disposable income, retirement savings. Thoughts?

The differential in interest expense between the 15 and 30 yr mortgage is around $85k over the life of the loan. That is pretty significant

Stive said:

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BmtAg96 said:

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The differential in interest expense between the 15 and 30 yr mortgage is around $85k over the life of the loan. That is pretty significant

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Now go calculate the difference in the monthly payments, at a 6% rate of return, over the same period of time, and tell me which one makes more sense.

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This. I've always heard the best way to do it is to take out a 30 year loan, and invest the incremental payment that would be made on 15 year loan. If you have the financial disciple to do it, the 30 year makes more sense. Make sure you run the numbers if you do this. If you don't think you can stick to it, I'd go with the 15 year loan.

Stive said:

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BmtAg96 said:

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The differential in interest expense between the 15 and 30 yr mortgage is around $85k over the life of the loan. That is pretty significant

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Now go calculate the difference in the monthly payments, at a 6% rate of return, over the same period of time, and tell me which one makes more sense.

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It's worth asking the question if Dave Ramesy is doing more harm than good.

Dave Ramsey's philosophies are targeted to undisciplined people which is the majority of Americans. I do like the plan of investing the difference between 30 yr and 15 yr in a stock index fund. Provides flexibility and the marginal return should exceed the mortgage differential

Many will disagree, but I think 30 year loans in this day and age are obsolete. In the days of 9+% rates, you almost had to get a 30 year loan to have a worthwhile house. Now, you don't. You just may not be able to get as big a house as you want. The other problem with 30 is that you get in the habit of making mortgage payments, move, keep paying them, etc. My parents, who are by no means financially illiterate or "un-savvy" still are barely halfway through paying off what will be their last house. In the early years, the higher rates and somewhat frequent moving (6-7 years) kept them re-upping. They lived in one house from 1977-1991 that, had they gone 15 years, would have almost paid it off and financed 80% or more of their next one. The two houses they owned after that -- from roughly 1997-2005 were cheaper, so they almost certainly could have paid cash for their current house. They make enough, even in retirement, that it isn't an issue -- and everyone's situation is different. But they also both have pensions for life, something most of us won't have.

Finding someone who financed multiple houses with 30 year loans that now has a paid off house will, in my estimation, be difficult.

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I've always heard the best way to do it is to take out a 30 year loan, and invest the incremental payment that would be made on 15 year loan.

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In theory, sure. This works very well over a span of 30 years. Probably 15 and 20 as well. 5? 7? 10? Not quite as well. When you add the element of risk and the unknown (i.e. when you'll need to sell), you might come up with a wash, at best.

I did a 10 year ARM. Have a strategy to have principle down to very minimal that even if it adjusts, it will not be substantial. Try that route.

BTW, my 10/1 ARM when I locked last August was 2.875, so there's probably some solid deals still out there worth it. I agree with JJA.

In the last 38 years I've closed a lot of mortgage loans with people of all means. Included in that group is a significant number of people with 7 figure incomes and liquidity. Most of them start the conversation asking what's the most they can borrow and what's the longest term they can get.

62.5 basis points doesn't seem like that much of a spread. Considering this, I would likely go 30 year and add principle if desired.

I have 2 15 year mortgages. At both financings there was a spread higher than 70 bps at the time I purchased the houses. The market isn't charging you much of a premium for the extra duration.

BmtAg96 said:

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the difference between the 30 yr and 15 yr note is around $400 per month. If I invest that and earn an average of 6% per year it would be worth $389k at the end of 30 years.

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6% is speculation at best.

The answer comes down to cash flow and liquidity. I got a 15 year mortgage because I didn't buy a lot of house and didn't 'need' the cash flow difference. In hindsight I probably should have done the 30 but at the time the 15 year also allowed me to avoid PMI.

How did a 15 versus 30 allow you to avoid mortgae insurance? That's a funtion of loan to value ratio.

jja79 said:

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How did a 15 versus 30 allow you to avoid mortgae insurance? That's a funtion of loan to value ratio.

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because it was 2011 and there were different rules

I have a 5 year ARM and have paid down 57% of my mortgage.
ARM is adjusting in December. What do you suggest I do?

Wife and I both got new jobs with a very good salary bump so I expect to see more capability to pay off Principal.
Should I just let the rate adjust and not make any changes?


PS: I am financially very responsible.

BmtAg96 said:

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the difference between the 30 yr and 15 yr note is around $400 per month. If I invest that and earn an average of 6% per year it would be worth $389k at the end of 30 years.

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Devil's advocate:

If you do 15 years, after 15 years, you'll have a paid off asset that most likely would have appreciated, along with 15 years of investing much more than $400/mo.

What's your index? 2-2.5% plus LIBOR?

Are you going to live in this home for 30 years?

jja79 said:

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Been in banking/mortgage since 1979 and that's news to me.

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let em restate. The way i remember it being explained to me then was that with 10% down on a 15 year mortgage there was only something like a 1% upfront PMI whereas the same 10% down on a 30 year mortgage would have carried the monthly PMI in addition. i could be remembering incorrectly but I know the facts to be true that i put 10% down, have a 15 year mortgage and have never paid monthly PMI for an under 20% down payment.

That's right. Didn't think of that.

$400 per month invested at 6% annual return would be worth $116,327

Does that $106k pay off the remainder of the 30 year?

Now do the next 15 years.... add the 6% and subtract the payment.

I'll take being debt free at 40.