# 15 vs 30 Year Mortgages – Longer is better!

I read an interesting post that really got me thinking today. It was written by a great blogger nicknamed Money Hawk, if you have never read his blog I implore you to check it out. He wrote a great post titled “Kick Financial Ass With a 15 Year Fixed Mortgage.” His basic premise is simply stated as follows,

The standard mortgage in the United States is a 30 year fixed rate mortgage. The mortgages that got people (as well as the banks and the government) into trouble were adjustable rate mortgages. The best mortgage is the 15 year fixed rate mortgage; the one people pay the least attention to.

I have stated this before, but I work for a high end wealth management firm on Long Island.  Specifically, my job is back office planning creating complex estate and gifting plans, insurance planning, and a “little of this and a little that.”  I deal with all financial planners’ problems, but for the most part the net worth that crosses my desk is in  the range of \$2,000,000 and \$7,000,000.   These people usually have two things in common:

• Personal Residence has no mortgage

As such, let me make myself abundantly clear – I am all for paying off your mortgage EARLY.  The thought of having “an extra” \$1,000 to \$6,000 a month is mind boggling and to get that earlier the better.  This post is merely discussing making that choice between 2 mortgage products and benefits and disadvantages to each one.

## Comparing Mortgages Calculations

I made a basic spreadsheet that will provide us with some observations:

 Mortgage Type Interest Rate Monthly Payment 15 Year 5.40% \$2,841 30 Year 5.70% \$2,031 Monthly Difference \$810 Capital Gains Tax Rate 20% Gross Investment Returns 6.50% Net Investment Returns 5.200% Total Interest Paid \$177,486 \$161,426 \$16,060 Total Gains at 12/2023 \$220,157.87 Total Gains at 6/2024 \$230,857.30

Some observations:

• By putting the difference towards the mortgage you pay it off in 15.5 months, paying an extra \$16,000 or so.
• By putting the difference in a taxable account using our assumptions you will have over \$220,000 (most of which could be used to pay off a huge chunk if not all of the remaining mortgage with cash)
• You will have the freedom of lowering your payment if something were to occur (this is probably a con, but could be a plus if you are disabled or someone gets pregnant).
• You could use that \$800 to fund another business which could turn into another stream of income.
• You could waste the money lol

I prefer options and I think this gives me the most! Any counter arguments?

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December 10, 2008 - 1:11 am

Oooo…me, me, me!

Lol.

My argument is that most your “observations” are assumptions…

Yes, we can base off the market average and even go lower than that for safety, but that doesn’t mean its actually going to happen. There is a chance our “investments” could go down in value, stay the same, or only increase slightly. Paying off the mortgage is a sure thing.

Less than 50% of new small businesses make it to the four year mark and 90% fail within 10 years. If you use the extra to start a small business and bank on that being better than using the money to pay off your mortgage and release your mortgage payment from your budget, the odds are against you. In fact, by opening a business, you could be opening yourself to a money pit if the business doesn’t do well, costing you even more.

The best argument you have is that the 30 year mortgage gives you the possibility of paying like a 15 year, but without the handcuffs should something bad happen. This is a great argument, but how many people do you know will actually look at a \$2,000 mortgage and make a \$2800 payment and do so consistently? Personal finance is about behavior; sometimes forcing yourself to do the right thing isn’t such a bad idea.

December 10, 2008 - 9:34 am

“The best argument you have is that the 30 year mortgage gives you the possibility of paying like a 15 year, but without the handcuffs should something bad happen.”

This was my whole point of writing the post. You are right, most people won’t do it. Most people won’t pay off their mortgage earlier either, nor will most people CHOOSE to take out a 15 year vs a 30 year mortgage product (as you say it is the least talked about product). Sometimes I find it fun to do these academic excercises anyway.

December 11, 2008 - 1:05 pm

I am going to have to agree with The Money Hawk on this one. Although I normally agree with my husband when it comes to these matters, on this one I think he is wishful thinking. In a perfect world his plan would work, but I don’t think that the average person is programmed to be able to make the right choice when it comes to money. Most people never live within their means, which got us to where we are today, and therefore I don’t think they will do what’s right and save the difference or pay early.

December 11, 2008 - 3:56 pm

Wow,

Money-Hawk you have my wife on your side I may have to back off the topic!

February 12, 2009 - 5:37 pm

I would have to agree on some of your points. I am actually in the process of refinancing. I am in a very good position financially because I have always lived within my means.

I like the flexibility of the 30 year with additional payments. The 15 year is attractive, but I want the buffer of those extra bucks if I need them.

I am going to go the 30 year and pay the crap out of the principle. I figure with my financial habits and a possible dual income coming with a marriage we can be clear in 8-10 years.

Then it will be time to look at other properties and or businesses.

January 10, 2011 - 4:13 pm

@ “This is a great argument, but how many people do you know will actually look at a \$2,000 mortgage and make a \$2800 payment and do so consistently? Personal finance is about behavior; sometimes forcing yourself to do the right thing isnâ€™t such a bad idea.”

and “The Wife
December 11, 2008 | 1:05 pm

I am going to have to agree with The Money Hawk on this one. Although I normally agree with my husband when it comes to these matters, on this one I think he is wishful thinking. In a perfect world his plan would work, but I donâ€™t think that the average person is programmed to be able to make the right choice when it comes to money. Most people never live within their means, which got us to where we are today, and therefore I donâ€™t think they will do whatâ€™s right and save the difference or pay early.”

I am one of those people. I AM THE ONE
WHO DECIDES how much to pay a loan off at per month, not the bank. The fact that they send me a bill for \$2000 does not cause me to write a \$2000 check if my long term plan says “\$2800.”

Conversely, with that \$800 per month going into escrow every month (if I do elect to go with only the required mortgage payment), that money only gets touched for strategic reasons, not for consumption/living standard reasons.

Accomplishing this is as simple as putting together a budget every month (I do this ON PAPER, with a pencil and calculator–really, not hard– and budget based on the previous month’s income that I have already banked–spending last month’s earnings this month and banking this month’s earnings for next month) and following it to a “T”. Not that hard, it’s just a habit.

January 12, 2011 - 5:56 pm

Steve,

Thanks for commenting on such an old post! I love when stuff like this gets attention!

What is your mortgage situation? Are you paying the minimum and saving elsewhere? Were you when this post was written in 2008?

November 23, 2011 - 2:59 pm

Thanks for this post. I am researching refinancing our personal residence. Looking at either a 15 or 30yr. However, I ran the ammortization tables and it appears that I can get do a 30yr loan, and pay an extra 475 to have it paid off in 15yr. The difference bt a 15 and 30yr payment is around \$480. So for us, a 30yr makes the most sense bc we actually WILL pay the extra \$475/month BUT it gives us the flexibility if something were to happen and we needed that money.

November 23, 2011 - 3:40 pm

Anne that sounds like a fantastic choice for your family – absolutely the choice I would have made!