Difference btwn 15yr vs 30yr mortgage+extra payment of 15yr ... 30yr better?

[endervalentine]

I sometimes frequent the FW finance board to look some of the post but mainly keep track of the mortgage read they have stickied there.

One post from this morning caught my attention ...
http://www.fatwallet.com/forums/finance/1026092/m15128485&newest=1#m15128485

Quoted below -- the guy has a point ... why would anyone get a 15yr fixed if the 30yr mortgage is "cheaper" and gives you a safety net?

Updated w/ fixed numbers:
30yr monthly: $1520.06
The difference is between the two is $717.84

Total interest of 30yr monthly w/ extra payments: $117,669.66 it is higher than $102,822.49

Is there a difference between paying a 15yr mortgage vs a 30yr mortgage+extra payments equal to the 15yr monthly payment? At first, I thought since interest was calculated daily, the 15yr mortgage rate would win out, meaning at the end of payment, the total amt of interest paid of the 15yr would be lower since interest on the loan was calculated daily? But I found out that most mortgages calculate the interest monthly, make the two the same w/ no added advantage on the 15yr?

If that's the case, then there is no good reason to go w/ the 15yr loan since the 30yr+extra payments is the same but w/ the added safety of lower monthly payment? Am I missing something here?

I'll put some numbers up:

loan amount: 300k
15yr mortgage: 4.125%
15yr mortgage monthly payment: $2237.90
Total interest paid: $102,822.49

30yr mortgage: 4.5%
30yr mortgage monthly payment: $1097.75
Total interest paid: $247,220.13

Difference in monthly payment: $1140.15

30yr mortgage: 4.5%
30yr mortgage monthly payment+exra payment of $1140.15 total interest paid: $90,709.70

I got the numbers from bankrate's calculator.
So it is actually $12,112.79 less in total interest paid if you took the 30yr loan w/ extra payment PLUS the safety net of paying lower if anything happened. So why would anyone get a 15yr loan ...

 

[Gibson486]

yup, that is what my mom told me. If i want to pay it off fast, just pay more money monthly. Otherwise, just get the longest loan you can. If anything happens, it will result is less white hairs.

 

[Dirigible]

The payment for the 30 year loan is wrong. Should be higher.

 

[Dirigible]

$1520/mo for the thirty year loan, not $1140.


Don't know why or how you got the $1140 number.

 

[PingSpike]

It seems like the math must have went wrong somewhere. With my own calculations I pay a bit more than with the 15yr and also have 6-9 months more payments.

That said, the basic premise I agree with completely. The interest rate discount offered for going with a 15 yr versus a 30 yr + the extra payment difference is just plain not worth it. It's usually half a percentage point. You gain far more flexibility and safety with the second option at the cost of paying a comparatively small amount more interest.

 

[mshan]

I think I read that in more normal times difference between 15 and 30 year should be about 0.5%.

Also, what happens if you only have loan for say 3 - 5 years, vs. holding to maturity?

 

[Vette73]

The payment for the 30 year loan is wrong. Should be higher.

That and intrest on the 15year is in the 3.8 range, not low 4's.


<-- went with 20year

 

[highland145]

Coming up with $1520.06 on the 30.

I agree with the op on the gray hairy. Did this on my first house.

 

[BlahBlahYouToo]

curious at the numbers with a more reasonable principal and APR, like $150-200k.
and a 15 year is closer to 3.875-4.0&#37;
while a 30 year is closer to 4.5-4.625%.

 

[Farang]

Looks like fuzzy math.. without running the numbers I don't see how you have an APR 0.375&#37; higher and end up paying less over the same amount of time. Calculate how much that 0.375% will cost you, and if its worth the safety net, then go for it.

 

[Dirigible]

But even with correct numbers the trade off is the 15 year is a little cheaper and the thirty year you pay a bit more but gain flexibility. At 4.5&#37; I am happy with my 30 year.

 

[Kelvrick]

At least for me, some of those reasons are why I went with a 3&#37; FHA loan when I could have done a larger down payment. Interest was low and it left me with a nest egg for any repairs/costs as well as an emergency fund instead of emptying me out. If you can get it, money seems "cheap" now.

The mortgage insurance made it a close decision, but I liked being able to pay my mortgage for a few months if I got fired the day after closing.

 

[PingSpike]

curious at the numbers with a more reasonable principal and APR, like $150-200k.
and a 15 year is closer to 3.875-4.0&#37;
while a 30 year is closer to 4.5-4.625%.

When I put it in with a ~200K loan the interest savings was about 10K with traditional 15yr @ 4% versus 30yr @ 4.5% making the same total payment every month. The payoff time was about 15 and half years for the 30yr.

 

[BlahBlahYouToo]

When I put it in with a ~200K loan the interest savings was about 10K with traditional 15yr @ 4&#37; versus 30yr @ 4.5% making the same total payment every month. The payoff time was about 15 and half years for the 30yr.

i guess it comes down to discipline. will you make the extra/higher payments?

and use 3.875 or even a 3.750 for the 15 year. the % difference i've seen for the extra 15 years is .625, not .5%

 

[endervalentine]

$1520/mo for the thirty year loan, not $1140.


Don't know why or how you got the $1140 number.

ah, guess the first thing I shoulda done was run the numbers myself, I assumed it was correct.

30yr monthly: $1520.06
The difference is between the two is $717.84

Total interest of 30yr monthly w/ extra payments: $117,669.66 it is higher than $102,822.49. I guess to answer the OP question, you're paying ~15k for the safety of the 30yr mortgage, right?

So why is there a difference in the amt, is cause the interest is calculated daily vs monthly?

 

[vi edit]

If you have good cash flow, but suck at saving the 15 year is the way to go. Even if you "promise" to pay it down it's easy to cheat at the end of the month/year on something else.

If you don't think you'll be in the place much more than 5-10 years and can handle the payments then 15 is the way to go. The amount paid in pricipal those first 5 years on the 15 vs the 30 are quite staggering. You'll gain equity MUCH faster.

That being said, I'll be looking at a $340k mortgage with a $1000 a month escrow (thank you taxes!) and just can't commit to the 15 year with daycare expenses still kicking in. I'd love to do a 15 if I could afford it...but can't.

 

[PingSpike]

i guess it comes down to discipline. will you make the extra/higher payments?

and use 3.875 or even a 3.750 for the 15 year.

Yeah, its pretty much discipline. I think its pretty lame ass that the discount is that low though really.

If I used 3.875 then I'd use 4.375 for the 30. The 0.5 split is what I'm seeing around here at banks. Either way, I don't think that would change the basic premise much.

 

[rcpratt]

The math is fail. The 15-year is fine, but if you did that for the 30-year paying at those rates, you would pay about $117,670 in interest - $15,000 more than the 15-year...due entirely to the interest rate difference.

Now, if that safety net is worth it to you...go for it.

 

[BlahBlahYouToo]

ah, guess the first thing I shoulda done was run the numbers myself, I assumed it was correct.

30yr monthly: $1520.06
The difference is between the two is $717.84

Total interest of 30yr monthly w/ extra payments: $117,669.66 it is higher than $102,822.49. I guess to answer the OP question, you're paying ~15k for the safety of the 30yr mortgage, right?

So why is there a difference in the amt, is cause the interest is calculated daily vs monthly?

that would be the difference in interest rate coming into play, buddy.
math101?

 

[endervalentine]

Yeah, its pretty much discipline. I think its pretty lame ass that the discount is that low though really.

If I used 3.875 then I'd use 4.375 for the 30. The 0.5 split is what I'm seeing around here at banks. Either way, I don't think that would change the basic premise much.

yeah, given how crappy companies are doing ... might be a worth it for the peace of mind and not worried about being laid off.

 

[BlahBlahYouToo]

Yeah, its pretty much discipline. I think its pretty lame ass that the discount is that low though really.

If I used 3.875 then I'd use 4.375 for the 30. The 0.5 split is what I'm seeing around here at banks. Either way, I don't think that would change the basic premise much.

it's .625 here.
i just refi'd.

 

[highland145]

yeah, given how crappy companies are doing ... might be a worth it for the peace of mind and not worried about being laid off.

You still paying that extra 10% state income tax?

 

[spidey07]

At rates this low it's pretty insane not to do a 30 year and invest any potential savings in monthly payment difference. You'll be much farther ahead in the long gun because you'll easily outpace the interest rate especially after taxes.

 

[highland145]

At rates this low it's pretty insane not to do a 30 year and invest any potential savings in monthly payment difference. You'll be much farther ahead in the long gun because you'll easily outpace the interest rate especially after taxes.

In stocks?

 

[PingSpike]

yeah, given how crappy companies are doing ... might be a worth it for the peace of mind and not worried about being laid off.

15 years is a long time. Even if you have a secure job, that's plenty of time for things to change. Personally, I think it's clearly worth it.

The trouble is, you have to stick to it for it to work. With the regular 15 year you'll eat ramen and make your mortgage payment. With the second option, if you have a lean time you might decide to just pay the minimum. And since you're probably broke AND need to buy a bunch of shit right after you buy the house there's a pretty good chance that you'll never even START doing it...and eventually just start buying extra shit instead.

But...that's a person problem, not a problem with the numbers.