15 year or 30 year mortgage v.DaveRamsey

[jc3900]

Assuming you are in the same house for 30 years and that you have the mortgage payments that jim used, 1362 and 1000. This situation depends a lot on the return on investment.Over the last 30 years, the S&P has averaged roughly 11.6%. If you used that number the 30 year mortgage beats the 15 year by 64%. If over the 30 years you averaged a 10% return, the 30 year would have returned 37% more. If over the 30 years you averaged an 8% return, you would have returned only 11% more. Also, when you invest over the 30 year period you don't have as much volatility in your investment return. So even if the second 15 years were really good, you most likely would still not be able to catch the the year.

[jIM_Ohio]

Originally Posted by jc3900

Assuming you are in the same house for 30 years and that you have the mortgage payments that jim used, 1362 and 1000. This situation depends a lot on the return on investment.Over the last 30 years, the S&P has averaged roughly 11.6%. If you used that number the 30 year mortgage beats the 15 year by 64%. If over the 30 years you averaged a 10% return, the 30 year would have returned 37% more. If over the 30 years you averaged an 8% return, you would have returned only 11% more. Also, when you invest over the 30 year period you don't have as much volatility in your investment return. So even if the second 15 years were really good, you most likely would still not be able to catch the the year.

Excellent post.

[disneysteve]

Originally Posted by InDebtInDC

if your house gets destroyed, you risk losing more equity with a 15-year mortgage as compared to a 30-year.

I also strongly agree with disneysteve on being flexible with payments on a 30-year and prepaying, as opposed to being fixed to a high payment under a 15-year.


Would you rather a) own your home and have no money, or b) be homeless but have several hundred thousand dollars?

If my home gets destroyed, I collect the insurance, so it doesn't matter what kind of loan I have or how much equity I have.

I'm not sure what you are disagreeing with regarding the payment issue. If my payment on a 30-year would be $800 and on a 15-year would be $1,000, I could take the 30-year and still pay $1,000/month. The extra $200 would go to principal. If, for some reason, things were tight for a few months, I could skip paying the extra $200 and use that money for another purpose. With the 15-year, that wouldn't be an option as I'd be locked into the higher payment. I realize the 15-year would have a lower interest rate, so that has to be factored in, but it still wouldn't make up the difference.

As for your question, I'd pick a). If I own my home outright and needed money, I could take a HEL or HELOC. That would sure beat being homeless.

[InDebtInDC]

Originally Posted by simpleyme

why would you lose more money if your home was destroyed I have insurance ,if my home is destroyed I own the land outright and am insured for the cost to rebuild?

How do you know your payout will = cost to rebuild?

If you own your home outright, you shoulder 100% of the loss. You then have to rely on homeowner's insurance to help you recover some of the loss. I can pretty much guarantee you that you will not get 100% of your appraised value.

If you have a mortgage with mortgage insurance, you will shoulder the difference beteen the appraised value and the mortgage balance. This amount will be less than 100%, and can even be negative if you owe more than your house is worth. You then look to homeowner's insurance to cover the rest.

If you have negative equity and are able to walk away without putting any money down, I consider this a gain.


The big IF in all cases is how much homeowner's insurance coverage you have. I strongly advise everyone to review their policy. You think that you will get enough money to rebuild, but always read the fine print and consult your attorney and insurance agent.

Assuming worst case: your homeowner's insurance doesn't pay anything because you are not covered for something that destroyed your house.

Clearly, if you own your house outright, you lose the improvement value. The land is likely not to be worth as much as well. This is catastrophic loss, and can set your entire family back.

If you have mortgage insurance, you lose the difference between the mortgage balance and the appraised value. In this case, the smaller the difference the less you lose, i.e. the less equity you have, the less you lose.


Even worst case still, let's say your mortgage insurance doesn't pay. You now owe the bank for the entire mortgage balance if you have a mortage, or you're out of luck if you own outright.

The person with the mortgage can file for foreclosure and preserver his money, while the person who owns outright has nothing.



The big assumption with considering primary residence as an investment is that the house will appreciate. What happens when the house depreciates or gets destroyed?

The other big assumption is that you are adequately insured. As above, always make sure you know what coverage you have and don't ever assume that the insurance company will pay regardless of what happens.


All else being equal, this risk alone turns me off from putting equity into my primary residence.

If you own rental real estate, then you definitely want to have no equity in your rental properties because the risk of damage is much greater.

[InDebtInDC]

Originally Posted by disneysteve

If my home gets destroyed, I collect the insurance, so it doesn't matter what kind of loan I have or how much equity I have.

Like I said above, I question the ability to collect insurance payout for 100% of the appraised value after a catastrophic event. I come to this conclusion after many years in the insurance industry. You may substitute your own experience and come to your own conclusion.

To the extent that I rely homeowner's insurance, I count on liability coverage more than anything else to prevent exposing myself to legal liability, which could be infinite.

Originally Posted by disneysteve

I'm not sure what you are disagreeing with regarding the payment issue. If my payment on a 30-year would be $800 and on a 15-year would be $1,000, I could take the 30-year and still pay $1,000/month. The extra $200 would go to principal. If, for some reason, things were tight for a few months, I could skip paying the extra $200 and use that money for another purpose. With the 15-year, that wouldn't be an option as I'd be locked into the higher payment. I realize the 15-year would have a lower interest rate, so that has to be factored in, but it still wouldn't make up the difference.

I do not disagree with you on any payment issue. In fact, I strongly agree with you.

Originally Posted by disneysteve

As for your question, I'd pick a). If I own my home outright and needed money, I could take a HEL or HELOC. That would sure beat being homeless.

Again, you are counting on the ability to access HEL(OC). Any of the following would affect your ability to secure credit: unemployment, disability, any depreciation in the home's value.

[LuxLiving]

Hey InDebtInDC,

Would an umbrella policy help w/this situation at all? Talk slow, I'm not an insurance intelligentsia!

[disneysteve]

Originally Posted by InDebtInDC

I do not disagree with you on any payment issue. In fact, I strongly agree with you.

I could have sworn that said "disagree" and not "agree". No wonder I was confused.

[disneysteve]

Originally Posted by InDebtInDC

Again, you are counting on the ability to access HEL(OC). Any of the following would affect your ability to secure credit: unemployment, disability, any depreciation in the home's value.

If I own the home outright, no mortgage, a depreciation in value might affect how much I could borrow but would it impact my ability to get a loan at all?

[InDebtInDC]

Originally Posted by LuxLiving

I'm not an insurance intelligentsia!

Nor do I claim to be one myself.

Originally Posted by LuxLiving

Would an umbrella policy help w/this situation at all?

My cop out answer with insurance policies has always been it depends on the type of coverage you have. Because when you look at it closely, the type of coverage depends on what the insurer is willing to cover (in compliance with state and federal laws of course).

Generally though, "umbrella" policies have been used to refer to liability coverage to "others", i.e. you do something bad, someone sues you, the insurance company pays the person suing you.

Very rarely do I see umbrella policies covering an insured person for loss to the insured's property, but new types of insurance policies are being created every day.

As far as your mortgage liability, it really depends on the policy.


It would be great though if an umbrella coverage kicks in and puts you back in the same financial position before your home was destroyed.

[InDebtInDC]

Originally Posted by disneysteve

If I own the home outright, no mortgage, a depreciation in value might affect how much I could borrow but would it impact my ability to get a loan at all?

Yes, it would. The higher the loan to value ratio, the less likely you are to be approved. This ratio is a measure of risk in the loan and is observed in view of the market.

If you hold the HEL(OC) amount requested fixed, as you lower the appraised value, the interest rate starts going up to match the risk for underwriting the loan, until a point where you will be denied the loan.

[simpleyme]

Originally Posted by InDebtInDC

How do you know your payout will = cost to rebuild?

If you own your home outright, you shoulder 100% of the loss. You then have to rely on home owner's insurance to help you recover some of the loss. I can pretty much guarantee you that you will not get 100% of your appraised value.

If you have a mortgage with mortgage insurance, you will shoulder the difference between the appraised value and the mortgage balance. This amount will be less than 100%, and can even be negative if you owe more than your house is worth. You then look to home owner's insurance to cover the rest.

If you have negative equity and are able to walk away without putting any money down, I consider this a gain.


The big IF in all cases is how much homeowner's insurance coverage you have. I strongly advise everyone to review their policy. You think that you will get enough money to rebuild, but always read the fine print and consult your attorney and insurance agent.

Assuming worst case: your homeowner's insurance doesn't pay anything because you are not covered for something that destroyed your house.

Clearly, if you own your house outright, you lose the improvement value. The land is likely not to be worth as much as well. This is catastrophic loss, and can set your entire family back.

If you have mortgage insurance, you lose the difference between the mortgage balance and the appraised value. In this case, the smaller the difference the less you lose, i.e. the less equity you have, the less you lose.


Even worst case still, let's say your mortgage insurance doesn't pay. You now owe the bank for the entire mortgage balance if you have a mortage, or you're out of luck if you own outright.

The person with the mortgage can file for foreclosure and preserver his money, while the person who owns outright has nothing.



The big assumption with considering primary residence as an investment is that the house will appreciate. What happens when the house depreciates or gets destroyed?

The other big assumption is that you are adequately insured. As above, always make sure you know what coverage you have and don't ever assume that the insurance company will pay regardless of what happens.


All else being equal, this risk alone turns me off from putting equity into my primary residence.

If you own rental real estate, then you definitely want to have no equity in your rental properties because the risk of damage is much greater.

I really am afraid I do not understand most of your points

if you owe money on a house and it gets destroyed and insurance does not pay you cannot walk away you must pay for it so if you owed 100k you would still be responsible for that ,if you owed nothing you would lose the value of the building but would not be paying on a house that does not exist( unless you have some sort of other insurance, but you already said not to count on a insurance of any kind so I don't get it )

also why would the land be worth so little the first house I bought lived in then rent out the land alone is worth more than what I paid for the house, people who have been in real estate only during this bubble do not quite get the idea of long term investment

never want equity in a rental? risk opf damage is greater ?

[jc3900]

What the heck.Why are you guys talking about insurance and if your house is destroyed? Last I checked like 1 out of many 1000's of homes ends up destroyed. How does this have relavence to the op's question?

[simpleyme]

I think the relevence with the OP question is some folks(not me) believe you should never own your home as it is likley to be blown down and all your money will be lost so whats the point of paying it off at all?

[jIM_Ohio]

If you own home and it is destroyed you have much more risk than if you have a mortgage and it is destroyed.

The risk if you own it is to your own net worth. The risk with the mortgage is transferred in part to the bank.

[simpleyme]

sorry that did not clear it up for me
so you are saying that if the home is destroyed it magically voids my contract and I owe nothing and I get to keep all the money I have shrewdly invested elsewhere as the bank will not come after me?

[sweeps]

If your home is destroyed, you still owe your entire balance on your mortgage. You can't just walk away from your mortgage if you didn't have enough insurance to cover the cost to rebuild.

[brig2221]

I would like to chime in on the entire own your own home vs. mortage debate.

My wife and I have been lucky enough over the past several years to save up enough money to pay off our entire mortage. For the longest time, as we got closer and closer to having enough money to pay off the mortgage, I could not wait. Then my views started to shift....

What is I pay off my home completely, and my house burns down. Who is responsible? I am of course, being the sole owner of the property. That said, if I have any problems at all in collecting insurance money, or a lower than expected amount, that hits me directly. Even worse, if for some strange reason my claim were to be denied outright, I would be out $150K+. Complete financial ruin!

Now lets look at the flipside. Same house burns down, I get screwed around by the insurance company, or I get completely denied by the insurance company. Guess what, the bank that holds my mortgage note is the one now solely in the spotlight for risk. Not that I would ever want to walk away from a loan, but if my house were completely destroyed, and the insurance company denies my claim, I am walking, and only losing whatever equity that I had in the home.

To me, what it comes down to is this. Why take on any additional risk that I don't have to, no matter how miniscule the possibity? Lets not forget, although the risk is very very small, it is a HUGE risk none the less.

For now, I have my money sitting in CD's and MM's earning me interest, and the money is still always there for me to pay off the home at any time if I would want to. That said, I am more than happy to try and make money off of what I have saved now, and to take advantage of the tax breaks I get from having my low interest 30 year fixed mortage.

Where I think this applies to the OP's original question is that I would always go with the 30 year note. I believe that DisneySteve framed it perfectly. Have the mortgage company run the numbers for you on a 15 year and a 30 year note, and purchase your home based on what your payments would be on the 15 year note. This does several things. It helps to prevent you from stretching yourself too thin in how much you borrow, and, it gives you leeway to pay the lower 30 year payment when times are tough.

The other factor that I haven't seen taken into consideration is the ability to save more money. What would you rather have in a serious financial emergency situation, $10K in an emergency fund and half your mortgage paid off early, or $30K in your emergency fund and a larger mortgage payoff?

I pose that question because this is exactly what I see a lot of people doing. They establish some set amount for an emergency fund, $10K in my example, and then cease to continue funding in that area. They then turn their attention to doubling up on morgage payments, or paying a few hundred extra per month in order to pay off their mortgage early.

As I noted above, I see a lot of problems with this plan myself. What if you lose your job for an extended period of time, lose medical insurance, and have other problems? Believe me, $10K can vanish in a flash. Guess what, even though you have been paying down that mortage early all these years, you still have a minimum mortgage payment to make every month, and now don't have any money! I would much rather have been putting that extra cash every month into my emergency fund, not my mortgage.

[noppenbd]

I don't get it either. Say you have a home valued at 200K and it is destroyed in a total loss in which your insurance only partially covers the rebuilding. Say the land is valued at 50K and the insurance company covers you for 50K. So here are 2 possibilities:

1) Over the years you took every cent you could and paid down the mortgage with the result that it is completely paid off on the day it is destroyed. So you have assets of 50K (land) + 50K (insurance payout) = 100K, and no debt. Net worth is 100K.

2) Instead of paying down the mortgage, you invested that money and made a return equal to your mortgage rate so that you owe 100K in a mortgage and have 100K investments. In assets you have 50K (land) + 50K (insurance payout) + 100K (investments) = 200K. But you still owe the bank 100K for the mortgage, which has nothing to do with whether the house is destroyed. So net worth is still 100K.

Are you assuming that you would default on the mortgage situation 2?

[sweeps]

So, are you folks saying that your mortgage lender is going to let you walk away from your mortgage? That they're going to let you pocket the insurance money you got and say, "Well, that's a bummer."? Um, yeah, right.

Even if you don't get insurance money, they're coming after your assets, plain and simple.