10 year, 15 year, or 30 year mortgage?

[desura]

Which is smarter to get? Inflation does gradually erode the value of the dollar, so that is in the advantage of the 30 year.

 

[Jaepheth]

I usually get the 30 year and just pay it off ASAP.

That way I have a bit of wiggle room if there's a hiccup in my income stream.

 

[MrDudeMan]

It depends on a lot of things. I always go for longer loans because I actually invest the difference and come out way on top. Most people will say they understand the math, but they won't actually invest the money, so it's better to just pay down the mortgage in that case.

I actually go a step further by taking out a second mortgage on my house and investing that as well. I'm averaging a little under 9% for the last 10 years on my portfolio and my mortgages are all below 4%. Add in the tax advantages of keeping the mortgage and it's truly a no-brainer for me.

I'm assuming you're talking about a primary, not a rental. I definitely get the longest loans possible on all of my rentals, but the primary is up for debate for the average person imo. The other advantage of the longer loan is what Jaepheth said - you can still pay it off in 15 years if you'd like, but you have room to scale back if necessary.

 

[Uppsala9496]

Went with a 30 year and pay extra each month. Will have it paid off in 15 years.
My market return last year was crap, so glad I put the extra towards the mortgage principal instead of investing.

 

[TheGardener]

Which is smarter to get? Inflation does gradually erode the value of the dollar, so that is in the advantage of the 30 year.

You will get a lower interest rate with 10 or 15 year mortgage, as opposed to a 30 year mortgage. Rates are historically low, because inflation is low. Predicting interest rates is something that everyone, including economists, think they can do, but fail miserably at. Stay away from overthinking this.

A determining factor is whether the monthly payments are doable at the shorter end. And what happens if you lose your job, and it takes 6 months to find a similar job at a comparable wage? Can you cover the higher monthly payments? Also make sure that your loan allows you to make prepayments without penalties, if you decide to go out 30 years with an expectation of making extra payments.

 

[Bird222]

It depends on a lot of things. I always go for longer loans because I actually invest the difference and come out way on top. Most people will say they understand the math, but they won't actually invest the money, so it's better to just pay down the mortgage in that case.

I actually go a step further by taking out a second mortgage on my house and investing that as well. I'm averaging a little under 9% for the last 10 years on my portfolio and my mortgages are all below 4%. Add in the tax advantages of keeping the mortgage and it's truly a no-brainer for me.

I'm assuming you're talking about a primary, not a rental. I definitely get the longest loans possible on all of my rentals, but the primary is up for debate for the average person imo. The other advantage of the longer loan is what Jaepheth said - you can still pay it off in 15 years if you'd like, but you have room to scale back if necessary.

How do you do this? Do you just tell the bank you want X number of dollars? I thought they would only loan you the price of the house.

 

[MrDudeMan]

How do you do this? Do you just tell the bank you want X number of dollars? I thought they would only loan you the price of the house.

My post wasn't clear. What I meant was I invest the difference in the payments. For example, a 30 year mortgage may be $1000/mo and a 15 year mortgage may be $1800/mo. I'll invest the $800 instead of applying it toward my house and make way more money than I would have saved in interest on average. When I ask for a second mortgage, I take as much as they're willing to give me, which is usually:

Appraised_Value - Balance - 20% = loan

meaning they won't let me borrow more than 80% of the appraised value.

In my particular situation, investing instead of paying down mortgages has yielded an additional $90k of income. That includes everything - interest savings, tax deductions, trading fees, etc.

With all of that said, there's a pretty obvious bubble right now, so I'm actually scaling back on the investment front until next summer. I think there's too much risk in the market right now, so I'm playing it safer than usual.

 

[Charmonium]

Which is smarter to get? Inflation does gradually erode the value of the dollar, so that is in the advantage of the 30 year.

The fed is committed to 2% inflation so that's a good strategy. If your interest rate is 5%, 2% of that is inflation and your real rate is closer to 3%.

Also remember how amortization works. Front year payments are almost all interest and very little principal. That means that you get more years of bigger interest deductions than you do with accelerated mortgages. Depending on your tax bracket, that can mean some serious savings.

Finally, if you don't get the maximum mortgage you can afford, a 30 year gives you some breathing room if you should ever need it. It's always better to live under your means than beyond them. You still have the option of making extra payments if you want, just make sure that your mortgage doesn't have a prepayment penalty clause. I don't know if they still include those, but check. You want to have the option to pay off the mortgage in 10 or 15 years if you choose to and can afford it. But honestly, aside from selling the house and moving, why would you want to give up that sweet tax deduction.

 

[Red Squirrel]

The lowest one you can reasonably afford. Though I'd lean towards the 30, and just pay more on it than you have to. I personally got a 25 which gave me $400 biweekly payments, but I pay $600 instead.

Also pay biweekly instead of monthly, you'd think it comes up to the same (ex: pay 600 bi weekly vs 1200 monthly) but there's some weird math where it ends up making a huge difference. Mortgage math in itself is odd. Best bet is go to your bank and have them run the numbers on different scenarios.

 

[blackangst1]

The lowest one you can reasonably afford. Though I'd lean towards the 30, and just pay more on it than you have to. I personally got a 25 which gave me $400 biweekly payments, but I pay $600 instead.

Also pay biweekly instead of monthly, you'd think it comes up to the same (ex: pay 600 bi weekly vs 1200 monthly) but there's some weird math where it ends up making a huge difference. Mortgage math in itself is odd. Best bet is go to your bank and have them run the numbers on different scenarios.

Its not weird math. There are several months out of the year there actually more than 4 weeks. Its simple math:

12x1200=14,400
26*600=15600

 

[Mai72]

I'm currently looking at multi family apartments. If I intend to purchase a house my investment(s) in real estate will cover my expenses. But, if I were just using my only source of income then I'd go with 15 years. I don't want to be tied down to one spot for too long. That is just me though.

 

[dullard]

Get the 30 year unless the interest rates are significantly different.

You can always turn a 30 year mortgage into a 15 year or 10 year mortgage as you wish for free (pay more than the minimum each month), and turn it back to a 30 year as you wish for free (go back to paying the minimum each month).

You can not turn a 15 year or a 10 year mortgage into a 30 year mortgage without paying massive refinancing fees.

Thus, the 30-year is better simply due to that flexibility. Now if you happen to find a shorter term mortgage with a much lower interest rate, then it might be worth considering.

 

[dullard]

Also pay biweekly instead of monthly, you'd think it comes up to the same (ex: pay 600 bi weekly vs 1200 monthly) but there's some weird math where it ends up making a huge difference. Mortgage math in itself is odd. Best bet is go to your bank and have them run the numbers on different scenarios.

Like blackangst1 said, biweekly mortgages are for suckers who can't do math or who are paid biweekly and can't budget. Biweekly mortgages only sound better because you are paying far more each year, they aren't actually better. You can turn a monthly mortgage into a biweekly mortgage simply by paying more each year. The reverse isn't true.

 

[JTsyo]

I had a jumbo 30 yr mortgage. Then once the mortgage dropped below the jumbo amount, I refinanced to a 15 with a nice rate drop. I pay an extra $500 a month but get done with the mortgage 10 years sooner.

 

[JTsyo]

Like blackangst1 said, biweekly mortgages are for suckers who can't do math or who are paid biweekly and can't budget. Biweekly mortgages only sound better because you are paying far more each year, they aren't actually better. You can turn a monthly mortgage into a biweekly mortgage simply by paying more each year. The reverse isn't true.

Don't you pay slightly less in interest since you are knocking some amount off each month?

Looking at this calculator:
$100K at 3.5% for 30 years - you save $9,240.74 over the life of the loan.

 

[Genx87]

With these low interest rates. I'd get the 30 year and pay it off as slowly as possible. Take the money that would go into a 15 year and invest.

 

[MrDudeMan]

Don't you pay slightly less in interest since you are knocking some amount off each month?

Looking at this calculator:
$100K at 3.5% for 30 years - you save $9,240.74 over the life of the loan.

Most people don't get anywhere close to paying off a mortgage before they sell their house. Yes, you do pay less interest over the life of the loan, but whether or not that's worthwhile depends on a lot of other factors. With rates as low as they are, it makes no sense to me at all, but I'm also a fairly savvy investor so I have a different perspective.

Get the 30 year unless the interest rates are significantly different.

You can always turn a 30 year mortgage into a 15 year or 10 year mortgage as you wish for free (pay more than the minimum each month), and turn it back to a 30 year as you wish for free (go back to paying the minimum each month).

You can not turn a 15 year or a 10 year mortgage into a 30 year mortgage without paying massive refinancing fees.

Thus, the 30-year is better simply due to that flexibility. Now if you happen to find a shorter term mortgage with a much lower interest rate, then it might be worth considering.

This is a really good point that I forgot to mention. Sometimes the rate for a 15 year mortgage is significantly lower than a 30 year mortgage, which does make a difference if you intend to pay the loan off in 15 years in either case. You can still pay a 30 year mortgage off while paying the same amount of interest as a lower rate, shorter term loan, but it takes even larger payments than the same rate loan over two time periods.

As an aside, you can get a no-cost refi sometimes, which stupidly still has costs, but the price tag is much lower than the conventional (no pun intended) refinance process. I refinanced a mortgage for less than $1,000 after I decided to keep the house as a long term rental.

 

[Charmonium]

Don't you pay slightly less in interest since you are knocking some amount off each month?

Looking at this calculator:
$100K at 3.5% for 30 years - you save $9,240.74 over the life of the loan.

In order to compare apples to apples you have to look at the net present value and that's always going to be the same for any 2 loans because the amount being financed is the same.

You have to remember that a dollar tomorrow is worth less than a dollar today and a dollar 10 years from now is worth even less. So sure, in nominal terms you pay more, but in real terms, there's no difference.

Plus with the 30 mortgage at a similar interest rate, you're getting more money back in tax deductions because you have more years where the majority of you loan payments are mostly interest rather than principle.

In fact if you really want to take advantage of the interest deduction, pay your mortgage for 10 years and then refinance at the same or lower rate (assuming that's possible) and start the process all over again.

 

[dullard]

Don't you pay slightly less in interest since you are knocking some amount off each month?

Looking at this calculator:
$100K at 3.5% for 30 years - you save $9,240.74 over the life of the loan.

You aren't comparing apples to oranges. All biweekly calculators that I've seen are set up that way, to falsely make biweekly look better for the mathematically challenged.

Lets use your numbers. In your calculator, it said the biweekly payment was $224.52. There are just over 26 biweekly payments in a year (there are 52.18 weeks on average in a year divided by 2 weeks per biweekly payment, giving you 26.089 biweekly payments on average per year). Just remember that most years have 26 biweekly payments but every 12 years there are 27 biweekly payments. This really throws people off who live paycheck-to-paycheck and forget leap years in their budgets.

26.088 payments of $224.52 = $5857.41 per year paid on average. Or, $488.12 per month. Now look at your calculator. It compared a $449.04/month payment to a $488.12/month average payment. So of course the biweekly looks like you are paying less interest. But you aren't comparing apples to apples.

Lets look at the interest paid if you did the monthly payment and paid that same $488.12/month average that you would be paying with the biweekly mortgage.

http://www.mortgagecalculator.org/calculators/what-if-i-pay-more-calculator.php
Plug in a $100k mortgage, 3.5% interest rate, 30 year mortgage, and paying $39.08/month extra. Total saving from paying more per month: $9117.95. Compare that to the biweekly savings of $9240.74. So, the biweekly part of the payment saves a grand total of $4.09 per year. The paying EXTRA part that is hidden in the biweekly payments saves $303.93 per year.

It is paying EXTRA per month that is the savings, not the biweekly part.

But wait, there is more. Banks usually charge a fee for the biweekly payments. So, in order to save $4.09/year, you get the privilege of paying a yearly fee! For example here it says that Citibank charges $375 + $39/year to save that $4.09/year. Biweekly payments with fees are a major net LOSS. Plus, you have to remember that every 6 months you have an extra mortgage payment and every 12 years you get an extra mortgage payment. Just for the privilege of paying more fees, when all along you can get all the biweekly benefits without fees by just paying a bit more than the minimum monthly payment!
http://articles.latimes.com/2010/nov/28/business/la-fi-perfin-20101128

 

[soulcougher73]

Id get a 30 but pay it off as you like. 10, 15 etc. But if something unexpected happens you can always fall back on the lower payments etc.

 

[overst33r]

Chose the 30 year for the flexibility. I'm pretty diligent about investing the difference compared to a 15 year. Though I do find the psychology of a paid off home in 15 years rather tempting than the not-guaranteed-premium of investing the difference.

 

[Red Squirrel]

Its not weird math. There are several months out of the year there actually more than 4 weeks. Its simple math:

12x1200=14,400
26*600=15600

There was more to it then that though, they explained it to me, but it was mostly greek since math is not my thing. I think it had to do with paying a bit less interest or something because of how the amortization works out. Of course simply paying more in general whatever way you do it, makes a big difference. it's just convenient to have it come out each pay.