15 year or 30 year mortgage v.DaveRamsey

[project15]

Started listening to Dave Ramsey's cd again - specifically on mortgages. He recommends NEVER buying a 30 year fixed mortgage and stick only to the 15 year fixed with at least a 10% down payment and to stick to 25% of your NET income for a monthly payment.

I was thinking about this since the idea of paying a mortgage off in 15 years is enticing and I COULD afford it, but it's not ideal as we would have to move our price range down by about $25k which knocks us out of the neighborhood that we really love at the moment. However, that extra $25k added to the mortgage, plus another 15 years would probably come out to an extra $100k in payments over the life of the loan. His argument towards extra payments with a 30 year is that not many people stick to them.

I know that most of you have 30 year fixed, but would you have gone 15 year if you had the chance even if though it bumps your price range down?

[maat55]

I compromised to a twenty year note that I intend to pay in 15 or less. My wife is not on board so I can't do all the things I would like to do.

If your wife is on board with the plan, I would do it in a heart beat. You can always move up in house later and be better off when you do.

In this market, I wouldn't be so sure you can't get the house you want if you work at it.

[disneysteve]

No. This is one of many places where I don't agree with Dave Ramsey. I would rather get a 30-year mortgage and pay it off in 15 than to get a 15-year mortgage and be locked into the higher payments. A 30-year gives you more leverage and more breathing room if things get tight while still giving you the opportunity to prepay if you choose to.

Also, I'm not a big fan of prepaying the mortgage because over time (the past few months being an exception), my investments earn far more than my mortgage costs me so by keeping the mortgage as long as possible I will come out way ahead financially.

[maat55]

Originally Posted by disneysteve

No. This is one of many places where I don't agree with Dave Ramsey. I would rather get a 30-year mortgage and pay it off in 15 than to get a 15-year mortgage and be locked into the higher payments. A 30-year gives you more leverage and more breathing room if things get tight while still giving you the opportunity to prepay if you choose to.

Also, I'm not a big fan of prepaying the mortgage because over time (the past few months being an exception), my investments earn far more than my mortgage costs me so by keeping the mortgage as long as possible I will come out way ahead financially.

The idea is to buy a house that you would have the same payment as if you had a 30. You get a little less house, but a much better investment. The payment difference between the 15 and 30 is not that great to make it a bad investment. To say that a 30 gives more breathing room, in most cases, is not true. Most people just buy more house and still live on the edge in a worse investment.

[disneysteve]

Originally Posted by maat55

The idea is to buy a house that you would have the same payment as if you had a 30.

That is certainly different. I was curious how that would play out so I just ran some numbers as if we were about to buy the house we live in.

House value is 300K
20% downpayment is 60K
Mortgage needed is 240K
30 years at 5.6% is $1,377/month
15 years at 5.1% is $1,910/month, a difference of $533.

If we wanted to buy a house with the same payment for 15 years as this house would cost for 30 years, we could only borrow 174K, so with a 20% downpayment, that would mean we could buy a house costing $217,500.

That sounds very nice but you would have a very tough time finding a decent house around here for $217,000.

[jIM_Ohio]

One size advice does not fit all. I disagree with Dave Ramsey.

I bought my first house on 30 year fixed and second house on 30 year fixed. I even refinanced and extended term on current house by a year.

Cash flow and investments need to be evaluated beyond just the period of the mortgage payment. I invest quite heavily, mortgage payment is much more than 25% of net (around 25% of gross), and I will be retiring before Dave Ramsey, I think.

If I followed his advice, no way I could retire in 15 years.

[maat55]

Say you buy a house that you can afford on a 30 year note and pay on it for 30 years. Then say you buy a house that you can afford on a fifteen year note and pay it off, then sell and buy another house with the same payment for another 15 years, which house has the most value.

[LuxLiving]

We have a 15 year.

IF we buy again we will probably go for a 30. We'll likely put in as little as possible towards a down payment as well and take most of our equity and invest it. Hubster is approaching retirement age and I will (possibly) have many years to live in the downsized quarters. The lower the house payment the more of my cash flow I can keep to buy my groceries and meds with.

Read Ric Edelman's 'The Truth About Money' for advice on keeping the money out of the house.

This is all hard for me as emotionally I would surely love a paid for home, but financially by the numbers it will likely make better sense for my overall cash flow to go for a 30 on any subsequent purchase.

IF we were better prepared for retirement? Ehhhh, I'd pay off the house in a heartbeat.

[maat55]

After you pay a house off in 15 years, you can invest your house payment for another 15 years. After 15 years on a 30 year note, your just beginning to pay down the house. If I want more house later, I can just pay cash without the interest.

[project15]

Originally Posted by maat55

Say you buy a house that you can afford on a 30 year note and pay on it for 30 years. Then say you buy a house that you can afford on a fifteen year note and pay it off, then sell and buy another house with the same payment for another 15 years, which house has the most value.

I would think the 2nd house in that dual 15-yr situation because chances are that I would upgrade at that 15 year mark since I would have a huge down payment and probably make more.

If it's just one 15 year fixed vs. one 30 year fixed, the 15 year would have the most value at the end of the 30 years because I'm paying less overall on it but it's still worth a similar amount as the 30 year fixed.

[Like2Plan]

Originally Posted by project15

Started listening to Dave Ramsey's cd again - specifically on mortgages. He recommends NEVER buying a 30 year fixed mortgage and stick only to the 15 year fixed with at least a 10% down payment and to stick to 25% of your NET income for a monthly payment.

I was thinking about this since the idea of paying a mortgage off in 15 years is enticing and I COULD afford it, but it's not ideal as we would have to move our price range down by about $25k which knocks us out of the neighborhood that we really love at the moment. However, that extra $25k added to the mortgage, plus another 15 years would probably come out to an extra $100k in payments over the life of the loan. His argument towards extra payments with a 30 year is that not many people stick to them.

I know that most of you have 30 year fixed, but would you have gone 15 year if you had the chance even if though it bumps your price range down?

project15,
It all depends on your overall goals. If my goal was pay off the mortgage AND live in the neighborhood of my dreams, I would sign up for the 30 year note and make additional payments.

Our first loan was a 30 year loan (this was back in the 1980's when the interest rates were terrible--we paid close to 10% interest). It was a no-brainer to go to a 15 yr note when the interest rates came down and we refinanced. The payments were lower AND we shortened the length of our loan. Our house is paid off now.

We did make additional payments every month because it was a goal to have the house paid off before we retire. It was really easy to stick with this when we set up the automatic electronic payment with the mortgage company. I would plan for how much extra we would send in for the upcoming year and set it up on the automatic electronic payment. If I had been sending in payments by mail, I think there would have been more of a temptation to not send in extra if I had a lot of expenses in a particular month.

[FrugalFish]

We did not have an option when we bought. Prices were going up, DH was underpaid, and we had to stretch a little thin on a 30 year to buy.

Since then, circumstances have changed and we are prepaying the 30 year (will end up paying for less than 15 years). I realize that with a lower payment of a 30 year, if something changes financially for us, making the 30 year payment is much easier than trying to make a 15 year payment- so we never refied into a 15.

[Caoineag]

We are still debating this in my house. We will have to come up on an answer soon since we are buying sometime in the next year. Our main issue is that we want to get as cheap a house as possible so that we have less sunk into our house. We love to travel and having a huge mortgage is not conducive to that. We also want to have money free to fix the home up. No matter how expensive or cheap the home, there are always repairs and upgrades to consider.

Right now, leaning towards a 30 year so that we can use the difference for repairs and still have a very cheap payment and then consider extra payments after we have maxed out retirement accounts and started a taxable account.

[M-squared]

We are lucky to have decent salaries in an area where living is cheap. We found a beautiful house for a very reasonable price and decided to go with a 15 year note. Yes, the payments are pretty high, but I am looking forward to owning the house free and clear before my kids are out of high school. The way I see it , if the house is paid off, then if we sell then that much more can go to the down payment of the next one.

[MonkeyMama]

We had 15-years on our first home. (When we were way less financially savvy). But we also had 2 incomes.

We refied to 30-years when we had 2 homes briefly, and kept it when we went down to one income and had our first child.

Anyway, we are getting back to the point where we could go back to 15-years and I have to say it is ENTICING.

BUT we have grown accustomed to the financial flexibility of a 30-year. The beauty of it is you can still make prepayments and pay it off sooner, but then you are not on the hook for the difference if you lose your job or go through a financial hardship.

Anyway, we were looking at the 15-years since interest rates had lowered for a bit and because interest rates are lower on shorter loans. We decided keeping our 30-year is best. We rather put more into our retirement for now, while we are still young and it is all tax-deferred. We didn't like the idea of adding $300/month to our fixed payments. Just too much of a stress for now. Kind of stressful.

But there are a lot of factors to consider here. What is the difference in the payment? How much equity do you have? How long do you plan to stay in your home? How is the cost of living? What are interest rates?

I would personally go for the home I want over cutting the price $25k for a 15-year-loan.

As far as what most people do, who cares. We want to pay off our home in our 40s and we will. I don't care that most people can't stick to a prepayment schedule. Prepayments allow far more financial flexibility. You can always refi to a 15-year down the road once you gain more traction, if rates become more favorable. I think it is something we will probably do in a few years. This would make sense as we pay off more principle, and if rates were still low, and we could accelerate payoff with the same payments. The only reason we are still considering it. Also, because we expect increased income. Overall though the 30-years makes far more sense for now.

In the meantime we decided we should have been funding our retirement in our 20s, not paying down our low-interest mortgage. So why I mentioned we weren't as financially savvy before. My general rule is not to pay more than the 30-year note until all of our tax-deferred investments are maxed out.

[jIM_Ohio]

Originally Posted by maat55

After you pay a house off in 15 years, you can invest your house payment for another 15 years. After 15 years on a 30 year note, your just beginning to pay down the house. If I want more house later, I can just pay cash without the interest.

Ahh- but the fault of this logic is that if I had the lower payment earlier from 30, the difference can be invested in years 1-15, probably earning higher than the rate on the 30 yr or 15 yr fixed could even hope for (like an 8% return).

Assume this situation
Mortgage amount of $166,700

30 yr fixed at 6%, payment of $1000 ($999.45)
15 yr fixed at 5.5%, payment of $1362.

$362*12=$4344

If a person put $4344 in their Roth IRA each year earning 8%, that would be $113k after 15 years. The mortgage would still have $118k owed, but if they NEVER put another dime in the IRA, by year 30 the 113k would compound to $373k. If they added the $4344 into Roth each year 1-30, they would have $531k, plus a house worth $166700.

If a person did not invest until the 15 year was paid off (because that $4344 was put into house), the $1362/month invested would be $16344/year. $479k would be the result.

It would beat investing for 15 years and stopping, but be $50k short of 30 yr fixed.

I could see arguments either way. The risks taken are less in the first situation

$4344*30=$130,320k invested compared to $245,160 invested.

30 yr fixed is a return of 531/130=4X.
15 yr fixed is a return of 479/245=2X

I see the 4X and know that is direction I would go- because if returns at any time exceeded 8% during one of those first 15 years, the 30 year fixed comes out WAY ahead.

[MonkeyMama]

P.S. We bought a nice home and the return on investment is far more than if we had bought a much smaller/lesser home. Plus we never plan to upgrade. There is a LOT to be said for not having to move up down the road.

[Snave]

We are 30 year fixed and I would not go to a 15 year as well, because of the higher MONTHLY payments. However, we do plan on paying it off early. I am in sales and get bonuses, so we can put those towards the house and not get tied in to a higher monthly rate. I also (other than the past two months) have done better investing the additional money.

[jIM_Ohio]

Originally Posted by project15

I would think the 2nd house in that dual 15-yr situation because chances are that I would upgrade at that 15 year mark since I would have a huge down payment and probably make more.

If it's just one 15 year fixed vs. one 30 year fixed, the 15 year would have the most value at the end of the 30 years because I'm paying less overall on it but it's still worth a similar amount as the 30 year fixed.

Bad phrasing.

15 yr fixed and 30 yr fixed houses have the same VALUE because you are comparing the same house.

30 yr fixed had a higher interest payment and higher cost.

If you are analyzing costs, 15 yr fixed wins
If you are analyzing net worth, 30 yr fixed/ invest the difference wins without much competition.
If you are analyzing rates of return, the 30 yr fixed wins without much competition.

[disneysteve]

Originally Posted by MonkeyMama

How long do you plan to stay in your home?

This is an important point. Statistically, very few homeowners keep a 30-year mortgage for 30 years. Either they move and pay off the mortgage at that point or they prepay and cut years off of the loan.

We started with a 30-year loan. A few years later, we refinanced to another 30 with a lower rate. Then a couple years after that, we refied again to a 25-year loan with an even lower rate. At this point, I've looked into doing another refi but the rates haven't been low enough to be worth the hassle. If I do refi, it will be to a 15 because we owe a relatively small amount and have the money to comfortably make the payments. However, what we will more likely do is start making extra payments to principal once our HEL is paid off which I anticipate doing by the end of 2009. So our current 25-year loan will probably be gone in no more than 20 years.