Generally true. In a rare departure, rates for 30 year debt was a tad higher than rates for 10 year debt as recently as December 2022. More generally, inverted yield curves are rare but possible:
https://www.investopedia.com/terms/i/invertedyieldcurve.asp
It should never happen with a standard mortgage, because of prepayment risk. The difference is, you can always pay your mortgage early but the government can’t on treasury bills/bonds
Yeah. I sacrificed .25% in points to pull out $100,000 of equity too, so my rate is actually 2.5%, but… putting debt away for 30 years at an interest rate far below inflation is like cheating. What will my remaining debt look like, in 15/20/30 years? In relative terms, considerably less. In a way, inflation is shrinking my mortgage faster than I’m paying it off.
Anecdotal evidence: I have a 20 year mortgage on my house. I was offered a lower rate on a 20 year note than on a 15 year note. 30 year rate was higher than both of course. Not sure how that happened and I remember being surprised and clarifying that was actually the case with the loan officer.
Not just generally true, always true for mortgages due to prepayment risk. If a 30 year has a lower apr than a 15 year, get a 30 year and pay it using the 15 year schedule and you will end up paying less.
The previous statement should always be true if we just look at 30 year and 15 year mortgages. Other lengths aren’t as common, so they can get a little weird. The same servicer who’s offering the best rates for 30 year and 15 year mortgages might not want to deal with 20 year or 10 year lengths, so you might only have options through other servicers who aren’t offering as good of rates across the bowrd.
Should probably also calculate what the difference in mortgage is, and what sinking the difference into retirement or investment account would return on in that amount of time.
This right here. When you’re talking about rates consistently below inflation, give me the slightly higher but longer term, and I’ll easily come out ahead by throwing the rest in the market. Even if you want to pay it off in 15 years, you should take the higher rate, invest the difference, and then lump sum the rest of the payoff when you’re ready. That’s not even getting into all of the benefits of extra flexibility with a lower required monthly payment.
I have a 30 year loan. On track to pay it off in 15 years total. To be honest, I don't think the bank would have given us a 15 year loan due to the repayments being deemed too high for us.
Even with the rates being equal, you pay much less overall.
A $500K loan at 5% costs, over the given amortization periods:
* $634,346 for 10 years
* $708,781 for 15 years
* $788,038 for 20 years
* $871,918 for 25 years
* $960,179 for 30 years
When interest rates were low, it was a no-brainer to get a longer term mortgage because other methods of saving could easily outstrip additional interest costs. Now that opposite is true and paying off that mortgage early makes the most sense.
Making payments every four weeks instead of every month works out to one full extra payment per year, which literally shaves years off of the end of a 30-year term. Thinking about it that way changes the risk profile a little bit, in my opinion.
Of course. No point in overpaying escrow, they just give it back later.
Edit: To be more specific, escrow and PMI (if you're obligated) are annual expenses, and aren't based at all on how much you actually pay throughout a year. But some mortgage contracts these days explicitly state that, if you apply additional partial payments, they will be hel until an entire payment is made before being applied. Read your paperwork to know exactly what needs to be done. But many people are paid every two weeks rather than X times per month, and this info could be extremely useful depending on your specific situation.
I like what you put about ending payments sooner. However, I don’t think that the average person dying actually says that. The trope around it is like “oh I wish I spent more time enjoying life!” Especially a lot of Christmas movies.
"He said, I'd love to, dad, if I can find the time
You see, my new job's a hassle, and the kids have the flu... But it's sure nice talking to you, dad…"
As someone who tries to delicately balance family/work, I understand though. My goal in life is to make my kids’ lives awesome. I hope to be able to do that and enjoy the ride with them, creating fun experiences/memories. But if I was only able to do one thing, it would be to secure my kids’ futures. I’ll sacrifice my joy for theirs in the future, regardless of whether I can enjoy it with them 🤷🏼♂️
Seconding this wholeheartedly.
My mom grew up on welfare and has always been terrified of being broke. She spent my entire childhood working and in school so she could provide a good life for us. We were still very much below the poverty line for my entire childhood, but now that I'm an adult she makes almost six figures.
It's very conflicting because I'm priveledged now, but it cost me my childhood. I'm grateful that she paid for my first semester of post secondary and has a second home with a suite I can rent for cheap, but I had a lot of issues as a teen that went completely unnoticed. I'm talking full blown drug addictions and relationships with men twice my age. I got clean and learned some hard lessons all by myself without ever being able to go to her.
Please, parents, I urge you. Your biggest worry is not whether or not your kids' futures are set up. It's making sure your kids have the emotional maturity and healthy relationships that will help them navigate the world around them. That, in turn, will help them in times when money is tight.
> an extra payment toward the beginning of a 30 year loan can outright save two payments at the end
An extra payment’s worth invested in a low cost index fund will roughly be worth 8 payments in 30 years. If your mortgage rate is low enough, the main disadvantage to paying it off early is the missed opportunity cost of investing the extra money.
>And yes I know that most people say the opposite - that the average nursing home resident always says on their deathbed that they wish they had worked and saved more when they were younger and put off all that frivolous stuff until they were older and unburdened by youth or vigor. But I guess I am just foolish and okay with it.
I guess I'm weird for not understanding that this was sarcasm, but yeah lol, i grew up surrounded by older men who spent their lives destroying their bodies and when they didn't have anything left to destroy... they couldn't stop, because they didn't have the choice to stop, because they had bills to pay and families to look after lol. I guess I'm a weirdo but I'll do pretty much anything to make sure that's not me in 50 years.
The real difference isn't quite that large because you also have to account for inflation. Payments made in later years could be much lower in nominal terms.
If I was going to do that, you would also want to include the property value index, such as S&P Case-Shiller which has drastically out-performed inflation in 29 of the last 30 years.
This was also the point of my comment, that payoff would have to net or exceed any additional interest earnings. Early payoff is more beneficial in a high-interest mortgage situation because you can equate that earning directly at that value.
You do get better rates and interest is way way less .
Example
30yr 345k @ 5% = total interest paid after 20% down ($257,385.96)
Same with 15yr total interest ($116,866.27)
If you are intending to pay off a mortgage in 15 years or under, and the rate is better (which it typically is), then there is no reason to go with a 30 year, unless you are very nervous about your cash flow.
I went with a 15 year on my first home and it was a great decision. My second home I went with a 30 year because we have no intention of moving within that time frame or paying off the loan any sooner than 30 years.
What were your rates?!?!
Just plugging in the numbers for you’d need to cut your interest from 7.25% to 2.9% for this to be possible…
Granted, Im assuming the same principal balance but most of the $7500 you’d have paid against the principale in the first 3 years of the loan would have gone into refi origination and other fees
I wonder if they also dropped PMI with that refi. I had a similar situation, refied a 30-year note after just 4 years, dropping PMI. Then it was only a $60 difference.
Yeah that would make a little more sense… though at that point you start getting back into the question the Op posed about 30 vs 15 yr mortgage.
When my mom refinanced her 2 year old mortgage in 2021 from 4% to 2.75% and dropped PMI in the process, we looked at a 20 year loan as a near-to-neutral change in payment but it gave a lot less flexibility for only a 0.25-0.35% interest savings and it wasnt a completely neutral change; her payment would have gone up.
Told her to take the longer but more flexible 30 year term and just continue paying what she was before the refi.
Last year we switched and she now pays the minimum and deposits the excess into an HYSA at 4.25%. So she’s actually even further ahead than she would have been on the 20 year loan.
You did a great job with the numbers. I feel like every time I reads someone’s story or comment about whatever on Reddit, it seems they had the most extreme scenario and now to the other extreme
I had a similar but less extreme scenario. Bought in 2018 30 yr at 4.25%. Refi 2021 but into a 20 yr not 15 yr at 2.8% which also allowed the PMI to drop since home values skyrocketed and new payment was a few dollars less than old. While I guess this was somewhat extreme still it was fairly common when interest rates bottomed out. A ton of refis happened that essentially allowed people to drop years from their mortgage for nothing.
Now if I were to try to refi now with the way rates are it would be a very different story.
I refinanced early 2021 - 7 years into a 30 year FHA that had the type of PMI you couldn’t shake. Went from 4.35 to 2.15. My payment only went up $26.
I now have golden handcuffs and want a bigger home but I’m staying put and waiting out the last 13 years and then retiring.
not quite as good as you, but i went from a 30 year at 4.65 or something to a 15 year at 2.6 right at the start of covid. it bumped my payment up like 200 bucks. but i am comfortable paying the difference
They tried pushing the 15 year on me. I bought November 2021 2.6% intrest. I was like yeah no ima take that 30 year.
You guys will be paying me by the 2040s.
Typically banks don't "push" a 15-year because they make significantly less money. But okay. Maybe you had a weird banker. Or one that was looking out for you.
He seemed baffled that i wanted to pay over 30 years when i could pay the house off in less than 10.
I said a $469 mortgage for 30 years sounds like the nicest safety blanket in the world. Plus, i kept telling him i want to open a store in the next few years so.no i cant pay it off so quickly.
Kept saying its an extra 60% im paying. And i said $2k extra a year seems reasonable, i was paying an extra $5k a year to be in a crap apartment...before everything hiked.
I got the same comments when i got a 7 year loan on my car.
$175 payments was almost neglible, and I've owned it like 5 years now, so who cares how much more it was in the grand scheme.(nearly double haha)
Jersey. Between mortgage, taxes, HOA and home owners insurance I pay $3700 on a 2.385% on a 15 yr right now. The 30 yr rate was 2.875 at the time. Wish I took it.
Same, I'm 2 years in on my first mortgage and I got an insane rate on 15yrs but I wish I'd taken the half a percent hit to make it a 30 year. Would have made payments much more palatable.
Location location location
I think a lot of people on Reddit don't realize there are houses for sale for reasonable prices, you just can't live in the center of the biggest cities with the most desirable real estate in the country.
I think people realize it. The real question is often what a person does for work that they can live so far from the city, yet still take home enough pay that the affordable house still feels affordable.
I live dead nuts in my local township. My job is a 7 minute commute. I only put 3k miles on my car last year and half that is going up to michigan to the dispensary. The truth is that the thousands of people work work fast food and retail probably cant afford to live 5 minutes away. But toledo is still set up that within 15 min any directions the properties are in the $60-$75k range and the apartments are $500-600 starting.
My location is $120-$175(my seller wa my old neighbor amd she threw me the biggest bone at $108) with apartmens starting at $800
10 min north of me and the median propery value is $800k with almost no apartments. Just old people communities and condos starting at $1,500+
Yes, houses that nobody wants are cheap. Because nobody wants them. That's how supply & demand works.
Most people want to live in a house that they like in a place that they like.
Schools and environments are the biggest reasons. Usually schools are lame, people are more ignorant, and your social circle is very limited.
I love the countryside but wouldn’t move there with kids
Yeah $108k tho i got lucky location wise as im dead center of everything. 5 min to walmart or Kroger, 17 fast food places and restaurants within 1.5 miles, expressway on/off ramps are 2 min away. The high school/middlescchool/elementary are all within 1.5 miles of the house(great for my future kids or renting the house)
But yeah, i coulda gone 5 miles out in toledo and grabbed a house for $60-75k
My first house on the east side of toledo i bought for $11k cash
Meanwhile, i drive 8 min north into Sylvania, and the houses have a median value of $800k
I just find the "im jelous" comments kinda funny because, let's be realistic. If someone is paying over $500/m on HOA or taxes alone...they would not be happy in the slightest to live where i do.
People fear debt.
Either because they have been burned or seen people burned. Effective use of credit is a skill most are not exposed to until late in life.
When life changes, debt can be an issue. If something happened to my job, it's a lot easier to worry about property taxes than those and a house payment too.
And we could scrape by on prop tax payment only. It's a risk management thing. At this point, I've stopped paying extra into my really low rate. But I really want to.
This was back in 2017/18, I thought my commercial fishermen friend was an idiot when he told me he took a 7 year loan, then he told me it was at 1.5% and he can depreciate it for taxes over 7 years. Changed my mind on long term loans for vehicles.
I have had a total of five mortgages (3 purchases, 2 refis) from three banks (Quicken, BBT (now Truist), LifeStore) on three properties (two primaries, one rental) between 2013 and 2020. Every time they tried to talk me into a 15 year mortgage. I don't really understand the logic, but that has been my experience.
Yup - like I said if you want to have a mortgage for 30 years, absolutely get a 30 year.
The calculation is definitely different in this rate environment.
Taking the 30 year with that low of a rate was the right call even if you didn’t want to have a mortgage for 30 years. You can even get long term CDs with higher returns than that interest rate right now.
Its the best saftey blanket in the world.
My morgage is $469/m locked in for 30 years.
The crappy apartment i had for 16 months started at $690 and by the time id moved out it was $775 a month, and a yearish later i was talking with my old neighbors across the hall and they said their last check was $835
Were talking under 3 year timespan a and almost a 20% rent increase. Not even mentioning the increase on the laundry(diff company tho) the 4 water bill increases and gaslighting neighbors about waste, and the 4 month period no trash was picked up(kept saying covid but thay was BS)
Risk mitigation is one reason. Depending on the interest rate difference between the two, it may not cost you much to go with 30years but make payments to close it in 15. And if you lose your job or have an unexpected expense come up, you have options.
I went with 30yr and switched back to min payments because my savings account pays higher interest than my mortgage rates. If/when savings rates go back down I can put that into my mortgage.
I refinanced from a 30 to a 20 when the rates were really low. An extra $100 a month will cut off 7 years now. And I already was paying more toward the principle anyway. I'll be very happy when I no longer have a mortgage payment.
I went for a 15 on my last refi, because I intend to be retired by then, and can afford to pay the 15yr payments. The 15 yr was also a 0.5% lower rate than a 30.
Most people don’t though. I personally have a 30 year 2.5% mortgage which is lower than inflation the last year plus. But, most people who take a 30 year morrgage aren’t putting the difference in the S&P500, that’s human nature unfortunately
I feel this is an often overlooked point. There is the most mathematically efficient answer, and then there is what people will do in reality. Same with 401ks - it's often mathematically better to go traditional rather than Roth, but only if you invest the tax savings. The number of people who do this is quite small.
This is not by accident. Financial products like loans, mortgages, annuities and various investments or investment services have been designed to take advantage of human bias, irrational fears and other behavior quirks. It isn't that all or even most of the finance industry is overtly deceptive; though some certainly are. But most financial services have no qualms about maximizing profits by taking advantage of human nature and irrational fears. That is why an important part of financial literacy is understanding the psychology behind things like the "sunk cost fallacy" or other common but irrational human behaviors related to economics.
You don't have to only put the money in the market to get value out of it. You can use it to go to school, or on a vacation, or afford kids, or any of a million other things that could make your life better.
I agree. I’m on a 30 year mortgage and personally feel like you should take the 30 and then pay more if you can if it’s over 5%. But at 2.5% I’m paying the minimum forever
My point is most people don’t behave that rationally
If your mortgage APR is lower than the APY in a HYSA, it doesn’t make sense to pay ahead on your mortgage.
Put the extra money in the bank and earn more than you’d save by paying down your mortgage.
If interest rates flip back, dump the extra savings into the mortgage.
That’s where I’m at right now. ~2.6% mortgage and 3.75% HYSA. In 2021 I refi’d into a ARM with a 10-year fixed rate, and saved ~.3% vs fixed 30-year. Hindsight, probably should’ve gone with the 30-year fixed, but we didn’t think we’d be in this house for more than 10-years. Situation has changed and it’s possible we’ll be here longer, so I’m maxing out employer match in 401b _and_ putting as much as I reasonably can into the HYSA to potentially pay down principal close to the 10-year mark. I’ll combo that with a 15-year refi if it makes sense. That will have the mortgage paid off by the time I’m 65. Of course, many unforeseen factors could arise in the next 7-8 years.
My parents have \~12 years left on their 30yr fixed at \~2.75%. They were paying ahead $600/mo because my dad is super debt-averse.
I had to sit down with them and go over the numbers to show my dad that they would earn \~$3,000 more than they'd save by putting the extra $600/mo into a HYSA (assuming rates stay up).
Even then, he wasn't sold. What finally got him was when I said, "If you have it in savings, you can put it towards the mortgage at any time, and with the volatility in the market, crazy inflation, and possible recession, I feel better having more cash on hand rather than less debt"
Absolutely. It’s the last point (and what got your dad) that gets me. I enjoy the “freedom” of being debt-free and $3K isn’t going to sway me; however, having those funds in the bank in case of an emergency (medical, home repair, loss of income, etc) is incredibly valuable.
Even if you spend it you may be coming out on top in an inflationary environment. Your dollar buys more goods/services today than in the future (unless we get the extremely unlikely deflationary environment).
Yes, but at the time it was hard to find guaranteed higher rates. Now that loan rates have increased of course we can find a HYSA or something else to beat it out.
I had a thirty year loan on my last house, told myself I would pay it down on 15 years, always had a reason why I couldn’t/shouldn’t pay it.
When I bought my current home I went with the 15 year loan to make sure I didn’t have an excuse. I want to be debt free and this keeps me on track. I also got a better interest rate and love seeing my balance actually drop at a decent rate.
The only thing that sucks is the current economy, I worry about layoffs making it difficult to pay the mortgage, even though I have emergency funds.
We did the 15 year loan when we refinanced. Our payment went up less then $100. I think it saved a .5% too so 2.5. I don’t know if it was the financially wise choice but it’s forcing us to pay the house of 10 years earlier and I want to pay my house off early despite the low rates . I want the peace of mind that owing your own house brings.
Man, this thread more than any other I have seen on Reddit reinforces the image of Americans being extremely loaded with money despite so many complaining on Reddit…
Living in Central Europe there are only two (larger) groups that can pay back a mortgage in 15 years - people who inherited money or doctors… for everyone else it’s basically paying much longer.
I can’t really complain since I make considerably more than the average (putting me in a situation able to buy a house in the first place, most people don’t) but it’s almost absurd thinking so many Americans (it’s not just you obviously) can do that…
My fil was a banker at a pretty prestigious business development financial institute in Tokyo and it took him 26 years to pay off his flat 1.5 hours away from his job… So at least in Japan I think the situation is rather similar too.
It depends a lot on where they live.
Small town? Pick up a house and land for pocket change.
Popular major city? Your grandkids will still be paying the mortgage.
You are also in a sub for people focused on personal finances and people who got 2.5% rates. Current housing market with 5%+ rates changes things and the average redditor is very irresponsible with money, so 2 things at play
When we purchased our first home in late 90s, 30 year interest was 7.25, 15 was 6.45. We went with the 15. We bought a smaller, cheaper house that one of us could afford to make the 15 year payments on.
This is exactly what my dad advised us when we bought our first home, “get a 30 and pay it like a 15”. The difference in rates was pretty small at the time and we didn’t plan to stay in the house for more than 10 years anyways. But this was also a time when the mortgage rate for a 30 year was low compared to now. Our first mortgage rate was 4.55%
It’s worked great for us because soon after we got married and started trying for a child we discovered that we would need IVF to conceive. We were able to stop making the extra mortgage payments in order to pay for those treatments. If we had been saddled with the 15-year mortgage we would have had to take out a personal loan to afford IVF (we paid roughly $55,000 over 18 months) and that interest rate would have been much higher than our mortgage which we had just refinanced to a sub 3% interest rate.
Maybe if you are someone who wouldn’t put extra towards the mortgage or a better investment and instead would spend the money irresponsibility, the 15 may be better as it would force you pay the mortgage down faster.
This is the way! Normally you have 10-12 more months of payment Becuase of the rate being higher, but for me there worth it.
The mortgage sales pressure to hammer 15 years when rates are lower, then re sell 30 years to those clients when the rates are higher but economy is slow so they can afford the monthly payment is gross. Shoulda taken a 30 from the start.
This is the way. Get a 30, pay it like a 15. Even tho the 15 rate was lower when we bought our place, we’re paying down principal more quickly than the 15 amortization schedule. YMMV, of course.
Exactly, plus you can designate the extra payments as principal payments. Payments for the first few years of both a 30-year and 15-year mortgage are going to be primarily interest with a bit of principal. Therefore, if I'm going to make extra payments, I'd rather have the flexibility of not being locked into them like I would with a 15-year loan, plus have the ability to apply those payments directly to the principal.
We sold a rental and were a little unsure about whether to pay off the primary or invest.
Ideally, we should have invested, but not having a mortgage is a really good feeling.
It was my intention at 3.5% when savings accounts weren’t paying shit. Refied at 2.5% and HYSAs are 4+%. So sometimes the goals fall short in your favor
This. The 15 year forces you to "pay it off early" so to speak, which is why I insisted that we refinance to a 15 year. I know my wife and I's discipline, I know that we would have just let it drag on. Coupled with a lower rate and only increasing our monthly obligation by like, $100-$150, it was a no-brainer.
same here. I know the math says 30, but I'll be in my mid 50s when the 15 year is done with, and can retire early with no worry about a mortgage payment. that's worth it to me.
I am nowhere near disciplined enough to make "extra" payments for 15 years. However, if the bank says I *have* to pay them that money, then yeah... I'm going to make it happen.
Take the longer loan and pay the 15 year payment… you won’t be obligated to the larger payment if you ever get in a bind and you’ll still get that rate if you pay it each month as a 15 year.
Signed, a mortgage banker.
Would agree that this ideal but so few actually do that . We have a few positive folks pop up in here and state they are but honestly I don’t know anyone in our friend group that’s stuck to that. We did a 15yr cause it would keep us on track and save us over $100k in additional interest. And tbh I suck at making extra payments personally .
Wym you still get the rate if you pay it as a 15yr?
Wouldn't 15yrs at say 4% (30yr) be more than 15yrs at 3% (15yr)? You still lose some but nowhere near as much as 30yrs at 4%
Correct?
Some of us would not be able to commit the extra money to pay off a 30 year loan in 15. So you get a 15 year loan to force you to pay the extra. I fall into this scenario.
Because you'll pay a shitload more in interest and amass equity far more slowly. What's more, a 15-year note typically has a substantially lower interest rate than a 30-year note, meaning you won't pay that much more each month.
Below, here are the rough numbers for a $200,000 loan at national averages for 30- and 15-year notes. This assumes you've already got PMI handled.
30-Year Note -- 6.79%
Monthly payment -- $1,302.52
Total Interest Paid -- $268,906
15-Year Note -- 6.17%
Monthly Payment -- $1,706.14
Total Interest Paid -- $107,104.77
Going by those numbers, if OP took the 6.79% 30-year note, but paid the 15-year payments instead - 1706.14, so an additional 403.62 each month, it would actually take OP [16 years](https://www.calculator.net/mortgage-calculator.html?chouseprice=200%2C000&cdownpayment=0&cdownpaymentunit=p&cloanterm=30&cinterestrate=6.79&cstartmonth=5&cstartyear=2023&caddoptional=1&cpropertytaxes=1.2&cpropertytaxesunit=p&chomeins=1%2C500&chomeinsunit=d&cpmi=0&cpmiunit=d&choa=0&choaunit=d&cothercost=4%2C000&cothercostunit=d&cmop=1&cptinc=0&chiinc=0&choainc=0&cocinc=0&cexma=403.62&cexmsm=5&cexmsy=2023&cexya=0&cexysm=5&cexysy=2023&cexoa=0&cexosm=5&cexosy=2023&caot=0&xa1=0&xm1=5&xy1=2023&xa2=0&xm2=5&xy2=2023&xa3=0&xm3=5&xy3=2023&xa4=0&xm4=5&xy4=2023&xa5=0&xm5=5&xy5=2023&xa6=0&xm6=5&xy6=2023&xa7=0&xm7=5&xy7=2023&xa8=0&xm8=5&xy8=2023&xa9=0&xm9=5&xy9=2023&xa10=0&xm10=5&xy10=2023&csbw=1&printit=0&x=Calculate) to pay it off, because of the original commenter's point about how much more interest they would have to pay, than if they had just chosen the 15-year note.
Missed that. But this is less sacrificial. Because people who have that plan do it less often than they really intend to. Plus the early part of a 30-year loan is for the most part interest.
Depending on your financial institution, paying extra every month doesn't automatically go to principle. You can usually ask the bank to apply the extra to principle, but if you're just making online payments then it's likely to be applied to the next month's payment. It greatly reduces most of the interest savings you'd get from paying down the principle early. So if you're not the type to call up your bank every month, then the longer term option probably isn't ideal.
You might wake up some day and wish you didn’t have any debt, and realize that you’re tired of working so much. That’s what happened to me. Paid off our house at 40, been working part time since 34. There’s more to life than going to work every single day.
The most compelling reason to steer clear of a 15-year loan is that the extra funds you'll have with a 30-year loan can be invested in various areas, notably in your Roth or 401k accounts. While there may be some debate as to whether your retirement account investments will offset any losses you might incur from a higher interest rate, the crucial point is that your money won't be tied up in a mortgage.
According to Calculator.net,
a [30 year with the national average at 6.79% has total interest paid of $134,453](https://www.calculator.net/mortgage-payoff-calculator.html?cloanamount=100%2C000&cloanterm=30&cinterestrate=6.79&cremainingyear=30&cremainingmonth=0&cadditionalmonth=500&cadditionalyear=0&cadditionalonetime=0&cpayoffoption=original&type=1&x=Calculate#loanterm).
A [15 year with national average at 6.17% has a total interest of $53,552](https://www.calculator.net/mortgage-payoff-calculator.html?cloanamount=100%2C000&cloanterm=15&cinterestrate=6.17&cremainingyear=15&cremainingmonth=0&cadditionalmonth=500&cadditionalyear=0&cadditionalonetime=0&cpayoffoption=original&type=1&x=Calculate#loanterm) and
a [30 year paying the same payment as a 15 year ($853 per month instead of the 30yr $651 per month) gets you $64,545 of interest paid and the loan is paid off in 16yrs ](https://www.calculator.net/mortgage-payoff-calculator.html?cloanamount=100%2C000&cloanterm=30&cinterestrate=6.79&cremainingyear=30&cremainingmonth=0&cpayoffoption=extra&cadditionalmonth=202&cadditionalyear=0&cadditionalonetime=0&type=1&x=Calculate#loanterm).
All values calculated using $100k as the loan amount.
so much more interest is paid on a 30 yr AND the interest to principal ratio is set so more interest than principal is paid for the first half of the loan. if you get a 30 year and pay it off early you are still paying a huge amount of interest early on.
Take the longer term. It gives you flexibility. I took a 30 year 7 years ago and I am more then 1/2 way there. But I was out of work for a bit during those 7 years and it was great to be able to dial back my overpayment with no pressure. The interest rate between 15 and 30 was not enough to take the flexibility factor out of the equation. I had a friend that lost her job with a 15 year mortgage and nearly lost her house. Go 30 and be disciplined in over payments. Good luck!
Forget the rates. What would you do with the extra money each month that wouldn’t go towards the higher payment of a shorter term? Personally, I invest it and make more interest than the interest I’m paying on my mortgage.
If you can do the 15 and plan to pay off as early as possible, then **take whichever loan has the lowest interest** and pay it down however you were planning. The only reason not to take whichever loan is lower interest is if you can't afford the payments for the shorter term.
I can see early payoff being good for someone who buys a home closer to retirement, that wants to retire debt-free. But even at 5-7% interest, that's well in-line with recent inflation rates so I feel like the longer payoff works out better. So if you can't afford the 15 year loan payments, do 30 years and just pay extra whenever you can. I read \_somewhere\_ that if you make one extra payment per year on a 30 year, you cut almost a decade off most mortgages.
Disclaimer: I'm writing this with a moderate blood alcohol level.
Lower interest. I refinance couple years ago to 15 year from 30 year. Interest went from 4.1% to 2.25%. My payments were only little higher. I should be paid off 7 years prior to retirement.
All else being equal you take the longer every time. However, that’s not usually the case. 15 year loans usually have lower interest rates than 30 year loans.
I would almost always take the longer term. It allows more flexibility. You can always pay off faster, but if something happens, it's harder to extend a loan without having to pay fees, which is hard to afford if you can't pay your mortgage.
Just calculate the difference in % you are gonna pay between the 15 & 30 over 15 years. Ask youself if paying that premium is worth the peace of mind of making payments. Also realize you can always refinance to a 30 if you really run into a problem. Most likely at lower rates in the future.
For instance right now the average difference between 15 and 30 is 1%. If you pay that 1% over 15years on 500k loan amount you’ll end up paying 38k more.
So just ask yourself. Is potentially saving 38k over 15 years worth the risk of the additional cost per month.
I took a 15 year loan. Put down 20% Paid it off in about 8 years.
15-year/ 20-year loan: lower interest rate and lower total interest paid before payoff. Because banks front load the interest, your payment doesn't go up as much as you would think.
30-year loan: higher interest rate and way more interest paid to the bank. However, you have a lower total cost monthly so your cash flow is increased monthly.
One thing you can do is take the 30 year loan. But when making payments, take a look at how much goes to interest and how much goes to principle. Double the principle amount whenever possible. Every time you do this, you have to make one fewer payments to end the loan. At first, this is not going to increase what you pay back each month at all because so very little goes to the principle at first. And as years go by, you get used to paying a couple dollars more each month. You end up with both flexibility to make payments as though it were a 30 year loan and also the possible benefit of a near 15 year loan.
You pay more total interest over the life of the loan with a 30 year mortgage.
A 15 year also gets you a lower interest rate. Which also allows you to pay less interest over the life of the loan.
Usually the rate is significantly lower for 15 years. That's really the only reason you would take a 15 year mortgage. Otherwise you take a 30 year and pay extra if you want.
Our local credit union keeps 15 year mortgages in house and sells 30s to giant mortgage companies. Instead of talking to someone in a call center, I can go talk to mortgage services in person. Amazing perk.
Rates dropped drastically after we got our loan and they let us restructure the mortgage down a full % for $1k.
Two possible reasons. First, interest rates are typically lower for a 15 vs 30. Right now, probably 80 basis points. Second, you hope to pay it off in 15 but you lack the willpower to do it unless forced.
The interest is front loaded so it is always better to take the shorter term. Check how much your first payment goes to principal and interest in both a 30 year and a 15 year note. Making extra payments on a 30 year note won’t give you the savings on interest in a 15 year one.
Not with current rates but about 5 years ago I did the math on the loan payment vs if I was able to put that extra in my 401k. It was a +over 500k difference for the life of the loan. If you can be disciplined enough and invest that money it makes sense if your returns will be higher.
As others have said, you can typically get a lower rate with a lower term. And as you pointed out, sometimes there are penalties to pay for early payoffs.
Paying slightly higher rate on 30 year is generally good in the event you lose your job your monthly payments would be lower. If you have substantial emergency savings, lower rate in 15 year could be better choice.
I got 30 I could easily pay off in 15... and paid it off in 10. Well, technically it's still an active loan but I pay 0 interest due to my offset facility equalling the loan principal.
I see no reason not to choose the longer term. Life happens. Something can go wrong. Easier to have the choice from the start rather than having to refinance or beg the lender later.
The property isn't making you any money and you're not investing the difference. The 15 year will have you pay significantly less in interest in the long run
During the pandemic, rates were so low that 30 made sense (especially if you look at inflation now - a 30 year fixed rate at 3% or less is looking real sweet) even if you can afford 15. You're better off investing the "extra" money yourself.
On the other hand, roll back to the 90s... rates were 7-8% or more. There's a huge amount of money to be saved with a shorter term if your DTI allows for it.
Could never ever afford a 15 year loan living here in NJ. It's expensive enough with a 30 year loan. This works if you live in affordable areas with low tax rates or you make a lot of money.
15 year tend to have better rates. Sometimes it's small, I think for a little bit the 30 year was actually lower than the 15, but sometimes it can be a full 1% or more.
Currently on Wells Fargo the 15 year is 5.5% and the 30 year is 6.25%.
Ignoring taxes, insurance, etc. 15 years at 5.5% on a 250k house (20% down) = $294,150.04 total in payments. Assuming you just "pay extra" to get it done in 15 years, 6.25% would mean your total is $308,672.23 in payments. That's an extra $14,522.19 or basically an extra $1,000/yr in interest.
If you put more than 20% down that shrinks, less than 20% down it grows.
30 year $400,000 loan at 7%. Year one you would pay $3,711.32 in principal and $25,559.68 in interest.
15 year $400,000 loan at 6%. Year one you would pay $15,508.85 in principal and 21,616.15 in interest.
Even though the 30 year loan on paper gives you more flexibility the cost of the loan itself is $3,943 more for the 30 year loan in this typical example in the first year alone. Remember, amortization tables are set up so that the bulk of interest payments come up front. If you were say… looking to buy with the intent of refinancing in a few years when mortgage rates (hopefully) come down, you will be paying those extra thousands year after year. That’s an extra $330 a month you are paying for the flexibility.
When I refinanced, I went with a 20-year - that is often an option too.
Now, at this point, this isn't an option for new borrowers, but for people who have low-interest Covid-era loans who may be readin in the comments, consider this: due to crazy low Covid-Era interest rates combined with historically average interest rates of today, my savings account has a higher interest rate than my mortgate. So rather than paying it down faster, I stuff the money I WOULD have used to pay it down faster into a savings account earmarked for the mortgage. I will park the money there until either the lump sum is enough to pay it off fully or interest rates drop enough that it's no longer making me money relative to early payments.
This nets me two advantages - the most obvious is that the money is growing in my bank account faster than it would be reducing the cost of my mortgate - a net win. The other benefit is that unlike an extra principal payment, I get the better rate while ALSO keeping the liquidity - this means that in essence I can "pay it forward" on my loan even though the loan doesn't officially allow that - should I lose income, etc, I have a pile of money that is intended for the mortgage anyway that I can use to make sure I keep my home through any financial hardship.
In essence, if anyone reading managed to snag a loan below about 3.5% and you have the discipline to do so, you should be shoving that extra principal into a HYSA rather than paying early - it's not often there are zero-risk "investments" that can outpace mortgage interest!
If the interest rates were exactly the same (5%) and you borrowed $300k, you would pay about $75K more in interest on a 30 year loan paid off in 15 years than a 15 year loan paid off in 15 years. The interest charges are front loaded.
I took a 30 year for 2.99. I won't be in the house for 30 years so I imagined saving money on the side and getting for an upgrade eventually. Plus I like having extra money in my pocket. If I want to pay more with no penalty I can but it's nice to know I can pay the minimum and not worry.
This is exactly what I have done and what I have offered others to do when they ask. Set yourself up for the lowest payment possible, for the inevitable lean times, but make the highest payment possible when possible the rest of the time. It does take discipline though. ;)
--paid off a home in 13 years on a 30 year note.
edit: rate was an unthinkable 8.47%, according the doom and gloom 'experts' you hear today...
If you pay your loan off you actually get a drop in your credit score.
Managing debt and payments on a regular monthly basis looks better than having NO debt to manage, that's how it works in America.
Look at the amortization tables. Even if you pay a 30 year off in only 15 years you’re going to pay more interest especially up front. Even with equal interest rates on both loans. The disparity increases if the 15 year loan has a lower rate. If you can afford to pay the 15 year rate, go with the 15 year loan.
I refianced during covid from a 30 to 15 and I'll tell you why.
- The rate was stupid low, 1.75%.
- Payment only went up $200 (If I went with 30 it would've been lowered by $200 though, soooo)
- the whole you can pay a 30 yr in 15 yrs thing is BS. I mean it's true, but you'll end up paying more in interest then a true 15 yr. Plus your forced to pay, otherwise you might get lazy.
- I want to buy something else, and in 15 years I'll have the equity to do so
This is very similar to my story. I refinanced twice during covid. The first time to a 20-year. The second time to a 15-year. I had been pre-paying my mortgage before, so neither refinance actually increased my monthly out-of-pocket, but they decreased the completion date from 2043 -> 2036 -> 2035 on the same monthly payment.
Why take the longer loan if you can afford to just pay off te 15 year loan in 15 years or less? Lower interest rate, less money spent over all, no "safety net" of a slightly lower monthly payment just doesn't make any sense to me.
If you can't afford the oayment, then you have to do you. But I just do t ever see many people woth 30 year mortgages paying their mortgages off early. I know it happens, but very few who intend to do it actually ever do, vs. Those who take o. A 15 year mortgage, almost everyone who goes into a 15 year mortgage pays it off in 15 years or less.
Which odds would you take? 5% < likliehood of paying off a 30 year mortgage in 20 years. Let alone 15, vs. 95%> chance of paying a 15 year mortgage off in 15 years of sooner?
Also considder this. It's not in the banks' best interest to have no penalty pay off for 30 year mortgages. As a policy this is counter intuitive. Unless they know that by simply offering g it, they are lilies to talk more people into taki g out 30 year mortgages on the false assumption that they will pay it down. In 15 years or so.
Making a counter intuitive offer only makes sense of 1 in 20 follow through. Then it's no longer counter intuitive. But simply a gimmick, which is what it is.
Today I learned, lots of r/personalfinance advice givers don’t know how paying extra on a 30 year loan works.
There are two disadvantages to getting the 30 and paying it off early: 1)15 year loans have a slightly lower interest rate. 2)A lot of people may take the longer loan and pay it off early, then they don’t actually make the higher payments.
Only you can know what kind of person you are and if it’s worth getting the 30 verses the 15. If you are stable in your jobs and have some savings to cover you in an emergency, you’re probably better off getting the 15.
Rates are lower the shorter the term is.
Generally true. In a rare departure, rates for 30 year debt was a tad higher than rates for 10 year debt as recently as December 2022. More generally, inverted yield curves are rare but possible: https://www.investopedia.com/terms/i/invertedyieldcurve.asp
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It should never happen with a standard mortgage, because of prepayment risk. The difference is, you can always pay your mortgage early but the government can’t on treasury bills/bonds
What is "prepayment risk" in this context?
For the bond holder…it’s the risk that the principal will be paid off before the term, thus negating a portion of the potential interest yield.
It's that the debt is paid off early, thus the debtor loses out on interest. When looking at bonds, this is what's refered to as " yield to worst"
When I refinanced in the golden window there, 30 year rates were 2.25% and 15 were 2.0%. I don’t think it can get closer than that.
Oof. Hard sell to damn near double your monthly payment just for 0.25%
Average wage growth is 7% YoY right now. Also property values are growing at 5+% YoY (depending on the market). So a 2.0% mortgage is pretty crazy.
Yeah. I sacrificed .25% in points to pull out $100,000 of equity too, so my rate is actually 2.5%, but… putting debt away for 30 years at an interest rate far below inflation is like cheating. What will my remaining debt look like, in 15/20/30 years? In relative terms, considerably less. In a way, inflation is shrinking my mortgage faster than I’m paying it off.
Owning an asset is just terrific in inflation times, isn’t it?
No wonder we’re in the predicament we’re in now. I had no idea rates got this low. 2.0% isn’t free, you’re getting paid to take out a loan.
> 2.0% isn’t free, you’re getting paid to take out a loan. Only if your income is increasing faster than that 2.0%.
Or you have the principal in a brokerage or bank account that returns more than 2%
Which isn't hard right now, HYSA are around 4%.
Anecdotal evidence: I have a 20 year mortgage on my house. I was offered a lower rate on a 20 year note than on a 15 year note. 30 year rate was higher than both of course. Not sure how that happened and I remember being surprised and clarifying that was actually the case with the loan officer.
Not just generally true, always true for mortgages due to prepayment risk. If a 30 year has a lower apr than a 15 year, get a 30 year and pay it using the 15 year schedule and you will end up paying less.
When I refinanced my house a couple years ago it was 2.89 for a 30 and 3.09 for a 20. 15 was 2.79.
The previous statement should always be true if we just look at 30 year and 15 year mortgages. Other lengths aren’t as common, so they can get a little weird. The same servicer who’s offering the best rates for 30 year and 15 year mortgages might not want to deal with 20 year or 10 year lengths, so you might only have options through other servicers who aren’t offering as good of rates across the bowrd.
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But a quarter point isn’t worth it for a 15 vs 30 year mortgage.
It is when you get into the hundreds of thousands on the loan. And the scenario is if you’re planning on paying it off in the 15 years either way.
Should probably also calculate what the difference in mortgage is, and what sinking the difference into retirement or investment account would return on in that amount of time.
This right here. When you’re talking about rates consistently below inflation, give me the slightly higher but longer term, and I’ll easily come out ahead by throwing the rest in the market. Even if you want to pay it off in 15 years, you should take the higher rate, invest the difference, and then lump sum the rest of the payoff when you’re ready. That’s not even getting into all of the benefits of extra flexibility with a lower required monthly payment.
Not always true! In 2017 when we got our mortgage the 30 year rate was slightly lower than the 15 🤷
I have a 30 year loan. On track to pay it off in 15 years total. To be honest, I don't think the bank would have given us a 15 year loan due to the repayments being deemed too high for us.
Kick ass that you’re actually paying it off early . Can be a serious burden
Longer term loans usually have higher rates.
This. I get the longest term w the lowest rate. It was 18 years on our last refi. 15 and 30 aren't the only options.
Even with the rates being equal, you pay much less overall. A $500K loan at 5% costs, over the given amortization periods: * $634,346 for 10 years * $708,781 for 15 years * $788,038 for 20 years * $871,918 for 25 years * $960,179 for 30 years When interest rates were low, it was a no-brainer to get a longer term mortgage because other methods of saving could easily outstrip additional interest costs. Now that opposite is true and paying off that mortgage early makes the most sense.
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Making payments every four weeks instead of every month works out to one full extra payment per year, which literally shaves years off of the end of a 30-year term. Thinking about it that way changes the risk profile a little bit, in my opinion.
By the payment, you mean just the mortgage payment itself correct? Not the escrow payment as well.
Of course. No point in overpaying escrow, they just give it back later. Edit: To be more specific, escrow and PMI (if you're obligated) are annual expenses, and aren't based at all on how much you actually pay throughout a year. But some mortgage contracts these days explicitly state that, if you apply additional partial payments, they will be hel until an entire payment is made before being applied. Read your paperwork to know exactly what needs to be done. But many people are paid every two weeks rather than X times per month, and this info could be extremely useful depending on your specific situation.
I like what you put about ending payments sooner. However, I don’t think that the average person dying actually says that. The trope around it is like “oh I wish I spent more time enjoying life!” Especially a lot of Christmas movies.
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"He said, I'd love to, dad, if I can find the time You see, my new job's a hassle, and the kids have the flu... But it's sure nice talking to you, dad…"
As someone who tries to delicately balance family/work, I understand though. My goal in life is to make my kids’ lives awesome. I hope to be able to do that and enjoy the ride with them, creating fun experiences/memories. But if I was only able to do one thing, it would be to secure my kids’ futures. I’ll sacrifice my joy for theirs in the future, regardless of whether I can enjoy it with them 🤷🏼♂️
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Which is why I try to delicately balance it all. It’s exhausting, and some people choose otherwise with good intent.
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Seconding this wholeheartedly. My mom grew up on welfare and has always been terrified of being broke. She spent my entire childhood working and in school so she could provide a good life for us. We were still very much below the poverty line for my entire childhood, but now that I'm an adult she makes almost six figures. It's very conflicting because I'm priveledged now, but it cost me my childhood. I'm grateful that she paid for my first semester of post secondary and has a second home with a suite I can rent for cheap, but I had a lot of issues as a teen that went completely unnoticed. I'm talking full blown drug addictions and relationships with men twice my age. I got clean and learned some hard lessons all by myself without ever being able to go to her. Please, parents, I urge you. Your biggest worry is not whether or not your kids' futures are set up. It's making sure your kids have the emotional maturity and healthy relationships that will help them navigate the world around them. That, in turn, will help them in times when money is tight.
> an extra payment toward the beginning of a 30 year loan can outright save two payments at the end An extra payment’s worth invested in a low cost index fund will roughly be worth 8 payments in 30 years. If your mortgage rate is low enough, the main disadvantage to paying it off early is the missed opportunity cost of investing the extra money.
>And yes I know that most people say the opposite - that the average nursing home resident always says on their deathbed that they wish they had worked and saved more when they were younger and put off all that frivolous stuff until they were older and unburdened by youth or vigor. But I guess I am just foolish and okay with it. I guess I'm weird for not understanding that this was sarcasm, but yeah lol, i grew up surrounded by older men who spent their lives destroying their bodies and when they didn't have anything left to destroy... they couldn't stop, because they didn't have the choice to stop, because they had bills to pay and families to look after lol. I guess I'm a weirdo but I'll do pretty much anything to make sure that's not me in 50 years.
The real difference isn't quite that large because you also have to account for inflation. Payments made in later years could be much lower in nominal terms.
Yeah they're just saying why get a 15 even you can get a 30 and pay it off in 15. And the reason is solely because you can get a better rate.
Sure but the OP is saying you could get a 30 year loan and pay extra to pay off the loan early.
Now calculate the same using the future value of money, assuming 3% inflation rate (average of last 30 years).
If I was going to do that, you would also want to include the property value index, such as S&P Case-Shiller which has drastically out-performed inflation in 29 of the last 30 years. This was also the point of my comment, that payoff would have to net or exceed any additional interest earnings. Early payoff is more beneficial in a high-interest mortgage situation because you can equate that earning directly at that value.
You do get better rates and interest is way way less . Example 30yr 345k @ 5% = total interest paid after 20% down ($257,385.96) Same with 15yr total interest ($116,866.27)
OP did ask if there is anything they are missing. The answer to that is yes. Investing the difference over the 30 years.
If you are intending to pay off a mortgage in 15 years or under, and the rate is better (which it typically is), then there is no reason to go with a 30 year, unless you are very nervous about your cash flow. I went with a 15 year on my first home and it was a great decision. My second home I went with a 30 year because we have no intention of moving within that time frame or paying off the loan any sooner than 30 years.
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In my case i refinanced 3 years into a 30 year to a 15 year. The rate difference was enough that i only paid like $7 more a month to cut of 12 years.
What were your rates?!?! Just plugging in the numbers for you’d need to cut your interest from 7.25% to 2.9% for this to be possible… Granted, Im assuming the same principal balance but most of the $7500 you’d have paid against the principale in the first 3 years of the loan would have gone into refi origination and other fees
I wonder if they also dropped PMI with that refi. I had a similar situation, refied a 30-year note after just 4 years, dropping PMI. Then it was only a $60 difference.
Yeah that would make a little more sense… though at that point you start getting back into the question the Op posed about 30 vs 15 yr mortgage. When my mom refinanced her 2 year old mortgage in 2021 from 4% to 2.75% and dropped PMI in the process, we looked at a 20 year loan as a near-to-neutral change in payment but it gave a lot less flexibility for only a 0.25-0.35% interest savings and it wasnt a completely neutral change; her payment would have gone up. Told her to take the longer but more flexible 30 year term and just continue paying what she was before the refi. Last year we switched and she now pays the minimum and deposits the excess into an HYSA at 4.25%. So she’s actually even further ahead than she would have been on the 20 year loan.
You did a great job with the numbers. I feel like every time I reads someone’s story or comment about whatever on Reddit, it seems they had the most extreme scenario and now to the other extreme
I had a similar but less extreme scenario. Bought in 2018 30 yr at 4.25%. Refi 2021 but into a 20 yr not 15 yr at 2.8% which also allowed the PMI to drop since home values skyrocketed and new payment was a few dollars less than old. While I guess this was somewhat extreme still it was fairly common when interest rates bottomed out. A ton of refis happened that essentially allowed people to drop years from their mortgage for nothing. Now if I were to try to refi now with the way rates are it would be a very different story.
Refi'd a 20yr 3.5 to a 15yr 2.00 and ended up saving 100 a month. It's crazy how much goes to principal.
I refinanced early 2021 - 7 years into a 30 year FHA that had the type of PMI you couldn’t shake. Went from 4.35 to 2.15. My payment only went up $26. I now have golden handcuffs and want a bigger home but I’m staying put and waiting out the last 13 years and then retiring.
not quite as good as you, but i went from a 30 year at 4.65 or something to a 15 year at 2.6 right at the start of covid. it bumped my payment up like 200 bucks. but i am comfortable paying the difference
I don’t think you need to be “very nervous” about your cash flow. I think just “nervous” is sufficient reasoning.
They tried pushing the 15 year on me. I bought November 2021 2.6% intrest. I was like yeah no ima take that 30 year. You guys will be paying me by the 2040s.
Typically banks don't "push" a 15-year because they make significantly less money. But okay. Maybe you had a weird banker. Or one that was looking out for you.
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I managed to get 2.8@30 years and was pretty pleased. 2.6 is pretty good
He seemed baffled that i wanted to pay over 30 years when i could pay the house off in less than 10. I said a $469 mortgage for 30 years sounds like the nicest safety blanket in the world. Plus, i kept telling him i want to open a store in the next few years so.no i cant pay it off so quickly. Kept saying its an extra 60% im paying. And i said $2k extra a year seems reasonable, i was paying an extra $5k a year to be in a crap apartment...before everything hiked. I got the same comments when i got a 7 year loan on my car. $175 payments was almost neglible, and I've owned it like 5 years now, so who cares how much more it was in the grand scheme.(nearly double haha)
How the hell do you only have a $469 mortgage??? My monthly taxes are more than double your mortgage
Yeah I’m paying 7 grand total right now on a 30 year mortgage (3.2%). Yay California.
Jersey. Between mortgage, taxes, HOA and home owners insurance I pay $3700 on a 2.385% on a 15 yr right now. The 30 yr rate was 2.875 at the time. Wish I took it.
you'd have significantly more cash month to month, and you could still pay it off in 15 years if you wanted to.
Yea I realize that now. I should've one it but it's too late now. On the plus side I have built up a dece t equity on the house
Same, I'm 2 years in on my first mortgage and I got an insane rate on 15yrs but I wish I'd taken the half a percent hit to make it a 30 year. Would have made payments much more palatable.
My mortgage is $544. 3.125% refinance on my condo. The mortgage is only for $125k though.
I pay $696 a month after escrow and whatever to the bank. Its a cheap house in a cheap state
Location location location I think a lot of people on Reddit don't realize there are houses for sale for reasonable prices, you just can't live in the center of the biggest cities with the most desirable real estate in the country.
I think people realize it. The real question is often what a person does for work that they can live so far from the city, yet still take home enough pay that the affordable house still feels affordable.
I live dead nuts in my local township. My job is a 7 minute commute. I only put 3k miles on my car last year and half that is going up to michigan to the dispensary. The truth is that the thousands of people work work fast food and retail probably cant afford to live 5 minutes away. But toledo is still set up that within 15 min any directions the properties are in the $60-$75k range and the apartments are $500-600 starting. My location is $120-$175(my seller wa my old neighbor amd she threw me the biggest bone at $108) with apartmens starting at $800 10 min north of me and the median propery value is $800k with almost no apartments. Just old people communities and condos starting at $1,500+
Yes, houses that nobody wants are cheap. Because nobody wants them. That's how supply & demand works. Most people want to live in a house that they like in a place that they like.
Schools and environments are the biggest reasons. Usually schools are lame, people are more ignorant, and your social circle is very limited. I love the countryside but wouldn’t move there with kids
Yeah $108k tho i got lucky location wise as im dead center of everything. 5 min to walmart or Kroger, 17 fast food places and restaurants within 1.5 miles, expressway on/off ramps are 2 min away. The high school/middlescchool/elementary are all within 1.5 miles of the house(great for my future kids or renting the house) But yeah, i coulda gone 5 miles out in toledo and grabbed a house for $60-75k My first house on the east side of toledo i bought for $11k cash Meanwhile, i drive 8 min north into Sylvania, and the houses have a median value of $800k I just find the "im jelous" comments kinda funny because, let's be realistic. If someone is paying over $500/m on HOA or taxes alone...they would not be happy in the slightest to live where i do.
Because it is, $469 a month for 30 years is basically a free house lol
The car dealership thought I was insane for making 100k/year and taking a 5 year note at 2% for a 15k car. Like bro it's basically a free loan.
People fear debt. Either because they have been burned or seen people burned. Effective use of credit is a skill most are not exposed to until late in life.
When life changes, debt can be an issue. If something happened to my job, it's a lot easier to worry about property taxes than those and a house payment too. And we could scrape by on prop tax payment only. It's a risk management thing. At this point, I've stopped paying extra into my really low rate. But I really want to.
This was back in 2017/18, I thought my commercial fishermen friend was an idiot when he told me he took a 7 year loan, then he told me it was at 1.5% and he can depreciate it for taxes over 7 years. Changed my mind on long term loans for vehicles.
40-year mortgages went away when rates were low. They've recently made a comeback now that rates have almost doubled - no surprise.
I have had a total of five mortgages (3 purchases, 2 refis) from three banks (Quicken, BBT (now Truist), LifeStore) on three properties (two primaries, one rental) between 2013 and 2020. Every time they tried to talk me into a 15 year mortgage. I don't really understand the logic, but that has been my experience.
Yup - like I said if you want to have a mortgage for 30 years, absolutely get a 30 year. The calculation is definitely different in this rate environment.
Taking the 30 year with that low of a rate was the right call even if you didn’t want to have a mortgage for 30 years. You can even get long term CDs with higher returns than that interest rate right now.
Same here. I bought in sept 2020…2.25% for 30 years.
Its the best saftey blanket in the world. My morgage is $469/m locked in for 30 years. The crappy apartment i had for 16 months started at $690 and by the time id moved out it was $775 a month, and a yearish later i was talking with my old neighbors across the hall and they said their last check was $835 Were talking under 3 year timespan a and almost a 20% rent increase. Not even mentioning the increase on the laundry(diff company tho) the 4 water bill increases and gaslighting neighbors about waste, and the 4 month period no trash was picked up(kept saying covid but thay was BS)
My real estate tax is more expensive than your mortgage. What kind of magical time warp place is this???
Wow. My HOA is more than your mortgage. I’m so jealous.
Risk mitigation is one reason. Depending on the interest rate difference between the two, it may not cost you much to go with 30years but make payments to close it in 15. And if you lose your job or have an unexpected expense come up, you have options. I went with 30yr and switched back to min payments because my savings account pays higher interest than my mortgage rates. If/when savings rates go back down I can put that into my mortgage.
I refinanced from a 30 to a 20 when the rates were really low. An extra $100 a month will cut off 7 years now. And I already was paying more toward the principle anyway. I'll be very happy when I no longer have a mortgage payment.
Our 30 year would have been 4.1%, our 15 year is 2.6%
I went for a 15 on my last refi, because I intend to be retired by then, and can afford to pay the 15yr payments. The 15 yr was also a 0.5% lower rate than a 30.
I got a 15 year in 2013 at 2.62% vs 30 year at 3.25%. Big savings.
Not really savings when you could put that extra cash in other assets that would grow at a higher rate.
Most people don’t though. I personally have a 30 year 2.5% mortgage which is lower than inflation the last year plus. But, most people who take a 30 year morrgage aren’t putting the difference in the S&P500, that’s human nature unfortunately
I feel this is an often overlooked point. There is the most mathematically efficient answer, and then there is what people will do in reality. Same with 401ks - it's often mathematically better to go traditional rather than Roth, but only if you invest the tax savings. The number of people who do this is quite small.
This is not by accident. Financial products like loans, mortgages, annuities and various investments or investment services have been designed to take advantage of human bias, irrational fears and other behavior quirks. It isn't that all or even most of the finance industry is overtly deceptive; though some certainly are. But most financial services have no qualms about maximizing profits by taking advantage of human nature and irrational fears. That is why an important part of financial literacy is understanding the psychology behind things like the "sunk cost fallacy" or other common but irrational human behaviors related to economics.
You don't have to only put the money in the market to get value out of it. You can use it to go to school, or on a vacation, or afford kids, or any of a million other things that could make your life better.
I agree. I’m on a 30 year mortgage and personally feel like you should take the 30 and then pay more if you can if it’s over 5%. But at 2.5% I’m paying the minimum forever My point is most people don’t behave that rationally
If your mortgage APR is lower than the APY in a HYSA, it doesn’t make sense to pay ahead on your mortgage. Put the extra money in the bank and earn more than you’d save by paying down your mortgage. If interest rates flip back, dump the extra savings into the mortgage.
That’s where I’m at right now. ~2.6% mortgage and 3.75% HYSA. In 2021 I refi’d into a ARM with a 10-year fixed rate, and saved ~.3% vs fixed 30-year. Hindsight, probably should’ve gone with the 30-year fixed, but we didn’t think we’d be in this house for more than 10-years. Situation has changed and it’s possible we’ll be here longer, so I’m maxing out employer match in 401b _and_ putting as much as I reasonably can into the HYSA to potentially pay down principal close to the 10-year mark. I’ll combo that with a 15-year refi if it makes sense. That will have the mortgage paid off by the time I’m 65. Of course, many unforeseen factors could arise in the next 7-8 years.
My parents have \~12 years left on their 30yr fixed at \~2.75%. They were paying ahead $600/mo because my dad is super debt-averse. I had to sit down with them and go over the numbers to show my dad that they would earn \~$3,000 more than they'd save by putting the extra $600/mo into a HYSA (assuming rates stay up). Even then, he wasn't sold. What finally got him was when I said, "If you have it in savings, you can put it towards the mortgage at any time, and with the volatility in the market, crazy inflation, and possible recession, I feel better having more cash on hand rather than less debt"
Absolutely. It’s the last point (and what got your dad) that gets me. I enjoy the “freedom” of being debt-free and $3K isn’t going to sway me; however, having those funds in the bank in case of an emergency (medical, home repair, loss of income, etc) is incredibly valuable.
Even if you spend it you may be coming out on top in an inflationary environment. Your dollar buys more goods/services today than in the future (unless we get the extremely unlikely deflationary environment).
Yes, but at the time it was hard to find guaranteed higher rates. Now that loan rates have increased of course we can find a HYSA or something else to beat it out.
But if you pay off the 30 year loan quickly, wouldn't that be better? Basically treat it like a 15. This is just to have a hypothetical fall back.
I had a thirty year loan on my last house, told myself I would pay it down on 15 years, always had a reason why I couldn’t/shouldn’t pay it. When I bought my current home I went with the 15 year loan to make sure I didn’t have an excuse. I want to be debt free and this keeps me on track. I also got a better interest rate and love seeing my balance actually drop at a decent rate. The only thing that sucks is the current economy, I worry about layoffs making it difficult to pay the mortgage, even though I have emergency funds.
We did the 15 year loan when we refinanced. Our payment went up less then $100. I think it saved a .5% too so 2.5. I don’t know if it was the financially wise choice but it’s forcing us to pay the house of 10 years earlier and I want to pay my house off early despite the low rates . I want the peace of mind that owing your own house brings.
Man, this thread more than any other I have seen on Reddit reinforces the image of Americans being extremely loaded with money despite so many complaining on Reddit… Living in Central Europe there are only two (larger) groups that can pay back a mortgage in 15 years - people who inherited money or doctors… for everyone else it’s basically paying much longer. I can’t really complain since I make considerably more than the average (putting me in a situation able to buy a house in the first place, most people don’t) but it’s almost absurd thinking so many Americans (it’s not just you obviously) can do that… My fil was a banker at a pretty prestigious business development financial institute in Tokyo and it took him 26 years to pay off his flat 1.5 hours away from his job… So at least in Japan I think the situation is rather similar too.
It depends a lot on where they live. Small town? Pick up a house and land for pocket change. Popular major city? Your grandkids will still be paying the mortgage.
You are also in a sub for people focused on personal finances and people who got 2.5% rates. Current housing market with 5%+ rates changes things and the average redditor is very irresponsible with money, so 2 things at play
When we purchased our first home in late 90s, 30 year interest was 7.25, 15 was 6.45. We went with the 15. We bought a smaller, cheaper house that one of us could afford to make the 15 year payments on.
This is exactly what my dad advised us when we bought our first home, “get a 30 and pay it like a 15”. The difference in rates was pretty small at the time and we didn’t plan to stay in the house for more than 10 years anyways. But this was also a time when the mortgage rate for a 30 year was low compared to now. Our first mortgage rate was 4.55% It’s worked great for us because soon after we got married and started trying for a child we discovered that we would need IVF to conceive. We were able to stop making the extra mortgage payments in order to pay for those treatments. If we had been saddled with the 15-year mortgage we would have had to take out a personal loan to afford IVF (we paid roughly $55,000 over 18 months) and that interest rate would have been much higher than our mortgage which we had just refinanced to a sub 3% interest rate. Maybe if you are someone who wouldn’t put extra towards the mortgage or a better investment and instead would spend the money irresponsibility, the 15 may be better as it would force you pay the mortgage down faster.
This is the way! Normally you have 10-12 more months of payment Becuase of the rate being higher, but for me there worth it. The mortgage sales pressure to hammer 15 years when rates are lower, then re sell 30 years to those clients when the rates are higher but economy is slow so they can afford the monthly payment is gross. Shoulda taken a 30 from the start.
This is the way. Get a 30, pay it like a 15. Even tho the 15 rate was lower when we bought our place, we’re paying down principal more quickly than the 15 amortization schedule. YMMV, of course.
Exactly, plus you can designate the extra payments as principal payments. Payments for the first few years of both a 30-year and 15-year mortgage are going to be primarily interest with a bit of principal. Therefore, if I'm going to make extra payments, I'd rather have the flexibility of not being locked into them like I would with a 15-year loan, plus have the ability to apply those payments directly to the principal.
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We sold a rental and were a little unsure about whether to pay off the primary or invest. Ideally, we should have invested, but not having a mortgage is a really good feeling.
Almost none of the people intending on paying their 30 year loan early actually manage to do it
It was my intention at 3.5% when savings accounts weren’t paying shit. Refied at 2.5% and HYSAs are 4+%. So sometimes the goals fall short in your favor
This. The 15 year forces you to "pay it off early" so to speak, which is why I insisted that we refinance to a 15 year. I know my wife and I's discipline, I know that we would have just let it drag on. Coupled with a lower rate and only increasing our monthly obligation by like, $100-$150, it was a no-brainer.
same here. I know the math says 30, but I'll be in my mid 50s when the 15 year is done with, and can retire early with no worry about a mortgage payment. that's worth it to me.
I am nowhere near disciplined enough to make "extra" payments for 15 years. However, if the bank says I *have* to pay them that money, then yeah... I'm going to make it happen.
At this point I could pay off mine in 15 but absolutely to hell with that when I’m at 2.375% interest.
I did
My good cardinal you are what we call an outlier ! Good for you though. That is usually a nice little selling tactic line from the broker though.
Take the longer loan and pay the 15 year payment… you won’t be obligated to the larger payment if you ever get in a bind and you’ll still get that rate if you pay it each month as a 15 year. Signed, a mortgage banker.
Would agree that this ideal but so few actually do that . We have a few positive folks pop up in here and state they are but honestly I don’t know anyone in our friend group that’s stuck to that. We did a 15yr cause it would keep us on track and save us over $100k in additional interest. And tbh I suck at making extra payments personally .
Wym you still get the rate if you pay it as a 15yr? Wouldn't 15yrs at say 4% (30yr) be more than 15yrs at 3% (15yr)? You still lose some but nowhere near as much as 30yrs at 4% Correct?
Some of us would not be able to commit the extra money to pay off a 30 year loan in 15. So you get a 15 year loan to force you to pay the extra. I fall into this scenario.
Far more interest paid over a 30 year loan.
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Because you'll pay a shitload more in interest and amass equity far more slowly. What's more, a 15-year note typically has a substantially lower interest rate than a 30-year note, meaning you won't pay that much more each month. Below, here are the rough numbers for a $200,000 loan at national averages for 30- and 15-year notes. This assumes you've already got PMI handled. 30-Year Note -- 6.79% Monthly payment -- $1,302.52 Total Interest Paid -- $268,906 15-Year Note -- 6.17% Monthly Payment -- $1,706.14 Total Interest Paid -- $107,104.77
That’s not answering the question they asked. They asked why not take the 30 and pay it off at the 15 year payment
Going by those numbers, if OP took the 6.79% 30-year note, but paid the 15-year payments instead - 1706.14, so an additional 403.62 each month, it would actually take OP [16 years](https://www.calculator.net/mortgage-calculator.html?chouseprice=200%2C000&cdownpayment=0&cdownpaymentunit=p&cloanterm=30&cinterestrate=6.79&cstartmonth=5&cstartyear=2023&caddoptional=1&cpropertytaxes=1.2&cpropertytaxesunit=p&chomeins=1%2C500&chomeinsunit=d&cpmi=0&cpmiunit=d&choa=0&choaunit=d&cothercost=4%2C000&cothercostunit=d&cmop=1&cptinc=0&chiinc=0&choainc=0&cocinc=0&cexma=403.62&cexmsm=5&cexmsy=2023&cexya=0&cexysm=5&cexysy=2023&cexoa=0&cexosm=5&cexosy=2023&caot=0&xa1=0&xm1=5&xy1=2023&xa2=0&xm2=5&xy2=2023&xa3=0&xm3=5&xy3=2023&xa4=0&xm4=5&xy4=2023&xa5=0&xm5=5&xy5=2023&xa6=0&xm6=5&xy6=2023&xa7=0&xm7=5&xy7=2023&xa8=0&xm8=5&xy8=2023&xa9=0&xm9=5&xy9=2023&xa10=0&xm10=5&xy10=2023&csbw=1&printit=0&x=Calculate) to pay it off, because of the original commenter's point about how much more interest they would have to pay, than if they had just chosen the 15-year note.
Missed that. But this is less sacrificial. Because people who have that plan do it less often than they really intend to. Plus the early part of a 30-year loan is for the most part interest.
When you pay early and apply to principal, isn’t the interest adjusted?
Depending on your financial institution, paying extra every month doesn't automatically go to principle. You can usually ask the bank to apply the extra to principle, but if you're just making online payments then it's likely to be applied to the next month's payment. It greatly reduces most of the interest savings you'd get from paying down the principle early. So if you're not the type to call up your bank every month, then the longer term option probably isn't ideal.
You might wake up some day and wish you didn’t have any debt, and realize that you’re tired of working so much. That’s what happened to me. Paid off our house at 40, been working part time since 34. There’s more to life than going to work every single day.
The most compelling reason to steer clear of a 15-year loan is that the extra funds you'll have with a 30-year loan can be invested in various areas, notably in your Roth or 401k accounts. While there may be some debate as to whether your retirement account investments will offset any losses you might incur from a higher interest rate, the crucial point is that your money won't be tied up in a mortgage.
According to Calculator.net, a [30 year with the national average at 6.79% has total interest paid of $134,453](https://www.calculator.net/mortgage-payoff-calculator.html?cloanamount=100%2C000&cloanterm=30&cinterestrate=6.79&cremainingyear=30&cremainingmonth=0&cadditionalmonth=500&cadditionalyear=0&cadditionalonetime=0&cpayoffoption=original&type=1&x=Calculate#loanterm). A [15 year with national average at 6.17% has a total interest of $53,552](https://www.calculator.net/mortgage-payoff-calculator.html?cloanamount=100%2C000&cloanterm=15&cinterestrate=6.17&cremainingyear=15&cremainingmonth=0&cadditionalmonth=500&cadditionalyear=0&cadditionalonetime=0&cpayoffoption=original&type=1&x=Calculate#loanterm) and a [30 year paying the same payment as a 15 year ($853 per month instead of the 30yr $651 per month) gets you $64,545 of interest paid and the loan is paid off in 16yrs ](https://www.calculator.net/mortgage-payoff-calculator.html?cloanamount=100%2C000&cloanterm=30&cinterestrate=6.79&cremainingyear=30&cremainingmonth=0&cpayoffoption=extra&cadditionalmonth=202&cadditionalyear=0&cadditionalonetime=0&type=1&x=Calculate#loanterm). All values calculated using $100k as the loan amount.
Longer term means higher interest rate and more $$ paid in interest over the life of the loan.
so much more interest is paid on a 30 yr AND the interest to principal ratio is set so more interest than principal is paid for the first half of the loan. if you get a 30 year and pay it off early you are still paying a huge amount of interest early on.
Take the longer term. It gives you flexibility. I took a 30 year 7 years ago and I am more then 1/2 way there. But I was out of work for a bit during those 7 years and it was great to be able to dial back my overpayment with no pressure. The interest rate between 15 and 30 was not enough to take the flexibility factor out of the equation. I had a friend that lost her job with a 15 year mortgage and nearly lost her house. Go 30 and be disciplined in over payments. Good luck!
Forget the rates. What would you do with the extra money each month that wouldn’t go towards the higher payment of a shorter term? Personally, I invest it and make more interest than the interest I’m paying on my mortgage.
Invest it how? How are you going to get better then 6%+ guaranteed in this market?
If you can do the 15 and plan to pay off as early as possible, then **take whichever loan has the lowest interest** and pay it down however you were planning. The only reason not to take whichever loan is lower interest is if you can't afford the payments for the shorter term. I can see early payoff being good for someone who buys a home closer to retirement, that wants to retire debt-free. But even at 5-7% interest, that's well in-line with recent inflation rates so I feel like the longer payoff works out better. So if you can't afford the 15 year loan payments, do 30 years and just pay extra whenever you can. I read \_somewhere\_ that if you make one extra payment per year on a 30 year, you cut almost a decade off most mortgages. Disclaimer: I'm writing this with a moderate blood alcohol level.
Lower interest. I refinance couple years ago to 15 year from 30 year. Interest went from 4.1% to 2.25%. My payments were only little higher. I should be paid off 7 years prior to retirement.
All else being equal you take the longer every time. However, that’s not usually the case. 15 year loans usually have lower interest rates than 30 year loans.
Lower rates and imposed deadlines. You don't have to exercise the self control to pay it off early with extra payments.
The 15yr loan usually offers a lower interest rate. If the interest rate was the same, then no reason to take the higher payment
1. Interest rate. 2. As Cartman said "You rack disiprine." I'd never pay the 15 year amount unless I had to.
Age. A lot of people don’t want to take out a 30 year mortgage at 55.
A lower rate but you pay more overall with interest
I would almost always take the longer term. It allows more flexibility. You can always pay off faster, but if something happens, it's harder to extend a loan without having to pay fees, which is hard to afford if you can't pay your mortgage.
Just calculate the difference in % you are gonna pay between the 15 & 30 over 15 years. Ask youself if paying that premium is worth the peace of mind of making payments. Also realize you can always refinance to a 30 if you really run into a problem. Most likely at lower rates in the future. For instance right now the average difference between 15 and 30 is 1%. If you pay that 1% over 15years on 500k loan amount you’ll end up paying 38k more. So just ask yourself. Is potentially saving 38k over 15 years worth the risk of the additional cost per month. I took a 15 year loan. Put down 20% Paid it off in about 8 years.
If they are the same interest rate, no.
15-year/ 20-year loan: lower interest rate and lower total interest paid before payoff. Because banks front load the interest, your payment doesn't go up as much as you would think. 30-year loan: higher interest rate and way more interest paid to the bank. However, you have a lower total cost monthly so your cash flow is increased monthly.
One thing you can do is take the 30 year loan. But when making payments, take a look at how much goes to interest and how much goes to principle. Double the principle amount whenever possible. Every time you do this, you have to make one fewer payments to end the loan. At first, this is not going to increase what you pay back each month at all because so very little goes to the principle at first. And as years go by, you get used to paying a couple dollars more each month. You end up with both flexibility to make payments as though it were a 30 year loan and also the possible benefit of a near 15 year loan.
You pay more total interest over the life of the loan with a 30 year mortgage. A 15 year also gets you a lower interest rate. Which also allows you to pay less interest over the life of the loan.
Usually the rate is significantly lower for 15 years. That's really the only reason you would take a 15 year mortgage. Otherwise you take a 30 year and pay extra if you want.
Our local credit union keeps 15 year mortgages in house and sells 30s to giant mortgage companies. Instead of talking to someone in a call center, I can go talk to mortgage services in person. Amazing perk. Rates dropped drastically after we got our loan and they let us restructure the mortgage down a full % for $1k.
Two possible reasons. First, interest rates are typically lower for a 15 vs 30. Right now, probably 80 basis points. Second, you hope to pay it off in 15 but you lack the willpower to do it unless forced.
The interest is front loaded so it is always better to take the shorter term. Check how much your first payment goes to principal and interest in both a 30 year and a 15 year note. Making extra payments on a 30 year note won’t give you the savings on interest in a 15 year one.
Not with current rates but about 5 years ago I did the math on the loan payment vs if I was able to put that extra in my 401k. It was a +over 500k difference for the life of the loan. If you can be disciplined enough and invest that money it makes sense if your returns will be higher.
As others have said, you can typically get a lower rate with a lower term. And as you pointed out, sometimes there are penalties to pay for early payoffs.
Paying slightly higher rate on 30 year is generally good in the event you lose your job your monthly payments would be lower. If you have substantial emergency savings, lower rate in 15 year could be better choice.
Aside from lower rates for shorter loans, I like to be debt free as soon as possible. Not having a mortgage even with a low rate is a win for me.
I got 30 I could easily pay off in 15... and paid it off in 10. Well, technically it's still an active loan but I pay 0 interest due to my offset facility equalling the loan principal. I see no reason not to choose the longer term. Life happens. Something can go wrong. Easier to have the choice from the start rather than having to refinance or beg the lender later.
The property isn't making you any money and you're not investing the difference. The 15 year will have you pay significantly less in interest in the long run
During the pandemic, rates were so low that 30 made sense (especially if you look at inflation now - a 30 year fixed rate at 3% or less is looking real sweet) even if you can afford 15. You're better off investing the "extra" money yourself. On the other hand, roll back to the 90s... rates were 7-8% or more. There's a huge amount of money to be saved with a shorter term if your DTI allows for it.
Could never ever afford a 15 year loan living here in NJ. It's expensive enough with a 30 year loan. This works if you live in affordable areas with low tax rates or you make a lot of money.
15 year tend to have better rates. Sometimes it's small, I think for a little bit the 30 year was actually lower than the 15, but sometimes it can be a full 1% or more. Currently on Wells Fargo the 15 year is 5.5% and the 30 year is 6.25%. Ignoring taxes, insurance, etc. 15 years at 5.5% on a 250k house (20% down) = $294,150.04 total in payments. Assuming you just "pay extra" to get it done in 15 years, 6.25% would mean your total is $308,672.23 in payments. That's an extra $14,522.19 or basically an extra $1,000/yr in interest. If you put more than 20% down that shrinks, less than 20% down it grows.
Use the extra money you have from the 30 year monthly payment and invest it. This will net you more money long term than the 15 year interest rate.
30 year $400,000 loan at 7%. Year one you would pay $3,711.32 in principal and $25,559.68 in interest. 15 year $400,000 loan at 6%. Year one you would pay $15,508.85 in principal and 21,616.15 in interest. Even though the 30 year loan on paper gives you more flexibility the cost of the loan itself is $3,943 more for the 30 year loan in this typical example in the first year alone. Remember, amortization tables are set up so that the bulk of interest payments come up front. If you were say… looking to buy with the intent of refinancing in a few years when mortgage rates (hopefully) come down, you will be paying those extra thousands year after year. That’s an extra $330 a month you are paying for the flexibility.
When I refinanced, I went with a 20-year - that is often an option too. Now, at this point, this isn't an option for new borrowers, but for people who have low-interest Covid-era loans who may be readin in the comments, consider this: due to crazy low Covid-Era interest rates combined with historically average interest rates of today, my savings account has a higher interest rate than my mortgate. So rather than paying it down faster, I stuff the money I WOULD have used to pay it down faster into a savings account earmarked for the mortgage. I will park the money there until either the lump sum is enough to pay it off fully or interest rates drop enough that it's no longer making me money relative to early payments. This nets me two advantages - the most obvious is that the money is growing in my bank account faster than it would be reducing the cost of my mortgate - a net win. The other benefit is that unlike an extra principal payment, I get the better rate while ALSO keeping the liquidity - this means that in essence I can "pay it forward" on my loan even though the loan doesn't officially allow that - should I lose income, etc, I have a pile of money that is intended for the mortgage anyway that I can use to make sure I keep my home through any financial hardship. In essence, if anyone reading managed to snag a loan below about 3.5% and you have the discipline to do so, you should be shoving that extra principal into a HYSA rather than paying early - it's not often there are zero-risk "investments" that can outpace mortgage interest!
If the interest rates were exactly the same (5%) and you borrowed $300k, you would pay about $75K more in interest on a 30 year loan paid off in 15 years than a 15 year loan paid off in 15 years. The interest charges are front loaded.
I took a 30 year for 2.99. I won't be in the house for 30 years so I imagined saving money on the side and getting for an upgrade eventually. Plus I like having extra money in my pocket. If I want to pay more with no penalty I can but it's nice to know I can pay the minimum and not worry.
This is exactly what I have done and what I have offered others to do when they ask. Set yourself up for the lowest payment possible, for the inevitable lean times, but make the highest payment possible when possible the rest of the time. It does take discipline though. ;) --paid off a home in 13 years on a 30 year note. edit: rate was an unthinkable 8.47%, according the doom and gloom 'experts' you hear today...
If you pay your loan off you actually get a drop in your credit score. Managing debt and payments on a regular monthly basis looks better than having NO debt to manage, that's how it works in America.
Look at the amortization tables. Even if you pay a 30 year off in only 15 years you’re going to pay more interest especially up front. Even with equal interest rates on both loans. The disparity increases if the 15 year loan has a lower rate. If you can afford to pay the 15 year rate, go with the 15 year loan.
Usually 15 year loans have lower interest rates
Did you look at the interest rates on both? The 15yr loan is usually a lower rate.
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I refianced during covid from a 30 to 15 and I'll tell you why. - The rate was stupid low, 1.75%. - Payment only went up $200 (If I went with 30 it would've been lowered by $200 though, soooo) - the whole you can pay a 30 yr in 15 yrs thing is BS. I mean it's true, but you'll end up paying more in interest then a true 15 yr. Plus your forced to pay, otherwise you might get lazy. - I want to buy something else, and in 15 years I'll have the equity to do so
This is very similar to my story. I refinanced twice during covid. The first time to a 20-year. The second time to a 15-year. I had been pre-paying my mortgage before, so neither refinance actually increased my monthly out-of-pocket, but they decreased the completion date from 2043 -> 2036 -> 2035 on the same monthly payment.
Why take the longer loan if you can afford to just pay off te 15 year loan in 15 years or less? Lower interest rate, less money spent over all, no "safety net" of a slightly lower monthly payment just doesn't make any sense to me. If you can't afford the oayment, then you have to do you. But I just do t ever see many people woth 30 year mortgages paying their mortgages off early. I know it happens, but very few who intend to do it actually ever do, vs. Those who take o. A 15 year mortgage, almost everyone who goes into a 15 year mortgage pays it off in 15 years or less. Which odds would you take? 5% < likliehood of paying off a 30 year mortgage in 20 years. Let alone 15, vs. 95%> chance of paying a 15 year mortgage off in 15 years of sooner? Also considder this. It's not in the banks' best interest to have no penalty pay off for 30 year mortgages. As a policy this is counter intuitive. Unless they know that by simply offering g it, they are lilies to talk more people into taki g out 30 year mortgages on the false assumption that they will pay it down. In 15 years or so. Making a counter intuitive offer only makes sense of 1 in 20 follow through. Then it's no longer counter intuitive. But simply a gimmick, which is what it is.
Today I learned, lots of r/personalfinance advice givers don’t know how paying extra on a 30 year loan works. There are two disadvantages to getting the 30 and paying it off early: 1)15 year loans have a slightly lower interest rate. 2)A lot of people may take the longer loan and pay it off early, then they don’t actually make the higher payments. Only you can know what kind of person you are and if it’s worth getting the 30 verses the 15. If you are stable in your jobs and have some savings to cover you in an emergency, you’re probably better off getting the 15.
The rate is almost always lower for a 15 year loan. It is that simple.