Comments on: Choosing between a 15 or 30 year mortgage

By: Augustine

Augustine — Sun, 22 Nov 2009 19:12:15 +0000

Evolution,

I didn’t include dividends because I didn’t have that number. But using Yahoo! charts, the last 15 years have been meager, as pointed out before.

By: JOE

JOE — Sat, 21 Nov 2009 04:35:32 +0000

FS – In my example in the post, I show the spread as 1/2%, that’s what BankRate.com showed, and the same spread I saw when I refinanced to 15 yrs. Note: When I refinanced, the prior mortgage was 20 years, and I was about 2-1/2 years into it. The difference to drop from 17-1/2 to 15 was minimal, given the rate drop.

By: Evolution Of Wealth

Evolution Of Wealth — Sat, 21 Nov 2009 00:58:08 +0000

I don’t believe I ever mentioned “spend more to pay less taxes”. That wouldn’t make any sense.

I never mention a specific investment that’s why I don’t address market risk or rates of return too much. It is meant to be more conceptual than a complete analysis. People’s situations are always different so I’m just trying to open people minds to ways to better their situation.
If you go to http://en.wikipedia.org/wiki/S&P_500 they list a 15-year return as 6.46% and I would assume this includes dividends. Why wouldn’t you include that in your return? Unless you are investing in an EIA.

By: Financial Samurai

Financial Samurai — Fri, 20 Nov 2009 20:22:33 +0000

Good point CCC. That being said, the biggest spread I’ve seen is 25bps between the two, provided you have a great 30-yr fixed rate.

I prefer the optionality.

By: Augustine

Augustine — Fri, 20 Nov 2009 15:35:53 +0000

EoW,

I don’t buy the “let’s spend more to pay less taxes”. You should know that spending 100 to get a discount of 30 one gets underwater by 70.

Besides, there are some intangibles ignored in your analysis, such as market risk, change in fiscal laws, etc.

Finally, an assumption that investments gain 6% is way optimistic. For example, in the last 15 years, the return on the S&P500 has been 2.4% (without dividends), or below the inflation rate.

As a matter of fact, given the risk in both cases, I’d say that they are equivalent with no definite advantage between one or another, boiling down to one choosing what’s more convenient for him.

By: No More Mortgage

No More Mortgage — Fri, 20 Nov 2009 02:19:10 +0000

When making a decision like this you should talk to a financial planner and look at the total picture. Joe brings some critical points to light above when he asks about carrying other debt, the current state of your retirement, and an emergency fund. Also think about the potential loss of the tax write off later which may or may not be a factor for you depending on your expected tax bracket at the point the mortgage would be paid off.
One other thing to really think about is with the 15 year, you have to make a 15 yr payment. With the 30 year, you can pay more but you can always fall back on the lower 30 year payment in a financial emergency.

By: JOE

JOE — Fri, 20 Nov 2009 00:33:06 +0000

CCC – you are right, the savings I show is typically 1/2% going from 30 to 15 yr mortgage. Not free, but not huge.

By: Credit Card Chaser

Credit Card Chaser — Fri, 20 Nov 2009 00:26:54 +0000

@FS

Technically the “free option” is not so free because the cost is the higher interest rate for the 30 year vs. the 15 year mortgage.

By: Financial Samurai

Financial Samurai — Thu, 19 Nov 2009 22:56:10 +0000

I really prefer the 30-yr as it gives mortgage holders a “free option” to pay off earlier if they choose. Why cut off 15 more years of borrowing time, when you don’t have to?

If you want to pay it down in 15 years, simple math gets everybody there.

By: Evolution Of Wealth

Evolution Of Wealth — Thu, 19 Nov 2009 21:58:20 +0000

I wrote a post called about how a 30 year mortgage beats a 15 http://evolutionofwealth.com/2009/09/15/your-mortgage-when-30-beats-15/

I guess I just don’t see the rush in paying off your mortgage and the math supports that. I realize that there is a mentality to pay off debt but is this debt so bad. I just feel as though it should be the last debt you pay off and you should be in no hurry to do so. I, however, might just never pay it off.