I recently posted an article called “3 Tools You Should Use When Deciding to Buy a House”
In it, I recommend that one should go with the 15-year mortgage.
I have received several comments and messages that 30-year mortgages are better for several common reasons.
These reasons — often unexplored by potential debtors and spread by mortgage brokers, banks, and real estate agents trying to get you to buy something — tend to become the status quo.
Marketing works folks!
There may be some truth to them. I take the time to explore these claims because I want my readers to make decisions that will help them become wealthy someday.
Heck, I want to be wealthy someday! So I’m doing my due diligence.
Luckily, I’ve found some answers to these particular claims.
Claims against the 15-Year Mortgage
- More Tax Benefits come with the 30 Year Mortgage
- Inflation over the long term makes the 30-year a better option
- You would be better off to invest the difference in your monthly payment between the 15-year mortgage and the 30-year. (About $500 from my numbers in the previous article. )
- You can pay off the 30-year mortgage like a 15 year mortgage because you have the option to. (Flexibility)
- 30-year loans are great and a better option for starter homes because of the lower payment
Let’s explore these one by one.
Claim 1: 30-Year Mortgage Tax Benefits
The thought here is that you can deduct mortgage interest from your taxes, which is true. This is often touted as a reason to enter into a mortgage, and more especially a 30-year mortgage as you will get the tax benefits for longer.
Unfortunately for you, and for 90% of America, you probably won’t see a tax benefit for mortgage interest. Based off a relatively new law that was passed in December of 2017, tax-payers must now choose between mortgage interest deductions and standard deductions.
This was designed to make 90% of home owners take the standard deduction over the mortgage interest. If you take the tax break on your mortgage, you probably are getting the short end of the stick.
This is explained in more detail here. Thanks Investopedia.
Claim 2: Inflation over the Long Term Benefits the 30-Year Loan more than the 15-Year Loan
This is true.
If you run a NPV calculation for every year on the total amount paid to the mortgage on the 15 and 30-year loans — effectively discounting them into today’s dollars, you would see that that today’s money value would put the 30-Year Mortgage about $28,627.68 more expensive than the 15-Year Loan. (Based off of numbers from the previous article and assuming 3% inflation.)
That is a significant inflation benefit in favor of the 30-Year. You are still almost $30,000 richer in today’s dollars with the 15-Year though, so not big enough of a benefit to justify going with the 30-Year loan in and of itself.
But what if we include the investing claim in all of this? Things get more interesting.
Claim 3: You Will Be Better off Investing the Difference between the 15-Year and 30-Year Monthly Payments ($497 example)
Of course, this is all theoretical, but if you were able to consistently invest $500/mo for 30 years, at 8% you would have $729,670. If you did the 15-Year and invested your mortgage payment for 15 years after that, you would have $662,963.
The difference? $66,707.
Let’s include inflation.
Discounting the $66,707 advantage to today’s dollars, the total benefit would be $28,307.87 in favor of the 30-Year.
Including the inflation benefit to the 15 year mortgage, the final weigh in would put the 15-year ahead $319.81. Crazy!! That’s really not that much. At least on paper.
So taking into account inflation, and equal investment, they really aren’t that different.
My answer to the following claims is why I think a 15-year is the better option.
Claim 4: You can pay off the 30-year mortgage like a 15-year mortgage Because you have the Option to.
The FDIC says that 97.3% of people don’t systematically pay extra on their mortgages.
Think about it. To consistently put more money into your mortgage when you don’t have to is very difficult to do. Things will come up over the next decade or two. Guaranteed. This means your extra payments will spotty, and putting the $500 difference towards your mortgage completely destroys the argument that you can invest the money consistently every month for 30 years.
You have to choose one or the other to get the full benefits.
Can you really commit month after month for 15–30 years when you have the option?
The stats say no. It’s a nice thought, but it isn’t practical.
This is getting into behavioral personal finance which is much more complex than just what our spreadsheets say.
Most people don’t “account” for this.
See what I did there?
The 15 Year-Loan forces you to have built in accountability. You have to make that payment every month. You don’t choose. If you do, you default. It’s not negotiable, so you plan for it. On top of that, you’re more likely to pay off the 15–Year even earlier because of extra payments here and there.
Claim 5: 30-year Loans are a Better Option for Starter Homes Because of the Lower Monthly Payments
Nice try. Because of lower interest rates, you actually build equity faster with a 15-Year.
Here are the numbers:
You would have more than 300% equity with the 15-year in case of a sale within 10 years.
Even if your property increases $100,000 in value, it would apply to both homes with a 15-year and a 30-year mortgage.
If you sold, you’d be in a LOT better position than with a 30-Year.
Interest rates will do that to you.
Avoiding debt and getting out of it has huge payoffs. The people pushing pretty much any product that puts you in debt or keeps you in debt longer tend to be trying to make money off you in my experience. Take these considerations as you consider the mortgage route.
In my mind, the 15-Year Mortgage is clearly worth it. Owning your house and having the freedom to do whatever you want with the money instead of putting it towards your house is a future I want.
Even better than having a mortgage, is buying a house with cash. Which my wife and I hope to do in the next 3–5 years.
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