15- vs 30-year mortgages

[catherine]

So the houses I've owned have carried a 30-year fixed mortgage. That's what most people did, and probably still do.

When Dave Ramsey was touting the benefit of 15-year mortgages, I must have been paying attention, because when we got the mortgage on the VT house, I went for a 15-year mortgage.

I have seen the light.

For fun, I just compared the difference in amortization between my VT house--15-year mortgage at 3.75% interest--and my NJ house--30-year mortgage at 5.5% interest.

The NJ house amortization calendar showed that it takes 18 years to get to the point where you're paying more down on the principal than the interest. 18 years!!!

OTOH, I've been paying more toward principal than interest on the VT house already! And I have already reduced the principal by $40k since 2018--only 5 years.

I realize that the difference in the interest rates accounts for some of the difference in principal pay-down, but really!! I am so glad I took Dave Ramsey's advice, and I wish I had done it on other houses.

I have already encouraged my SIL/DD to get a 15 year mortgage for their house, which they did.

This falls under the need for financial literacy courses somewhere--in high school maybe? Or would those numbers not matter to a lot of people? I think most people want the lowest monthly payment possible, and don't consider the high cost of stretching out mortgages 30 years. But the financially sane thing definitely is to get a loan with the shortest terms possible. You wise folks are thinking "no duh", but those two line charts side by side really amazed me.

Any thoughts?

[sweetana3]

For a smart young person, they might get the 30 year and then pay on it as if it was a 15 year. I think we did that. Every time we got extra money, we would consider the best use and often that was paying towards principal. Gives flexibility and I would only suggest this to financially educated people. ( but all costs need to be considered.)

[Alan]

For a smart young person, they might get the 30 year and then pay on it as if it was a 15 year.
Yep, We built our current home 27 years ago and financed with a 30 year mortgage which was paid off in 14 years after applying extra principal payments each month. Of course, a year later we took out a 15 year mortgage to finance a project and pay off our daughter's student loans. That one was paid off in 9 years by applying extra principal to each payment.

I think for younger borrowers it may be more practical to do a 30 year mortgage and apply extra principal to each payment when possible. It gives them more flexibility.

[jp1]

When I was in high school the mother of one of my best friends told the story of when she bought her house. She had divorced my friend's father about 5 or 6 years earlier and decided she needed to buy a house to raise her daughters in. She was in her mid 40's at that point and the loan officer at the bank (who had pointblank said that he didn't think divorced women should be buying homes but should be finding a new husband, which was apparently an acceptable thing to say back in the 70's) said "while you qualify for a 30 year mortgage it's unlikely that you will continue working for 30 years so I can't give you the loan." So she asked "do I qualify for a 15 year mortgage?" He grudgingly ran the numbers and it turned out that she did. So she got the mortgage, paid it every month, and finished paying it off at about the same time her second daughter (my friend) had finished college. She looked at the balance of her 401k and the amount she could get if she started collecting social security and realized that she could afford to retire since she no longer had a mortgage to budget for. And then silently thanked the loan officer for his sexism because it had unintentionally pushed her into probably the best financial decision of her life.

[ToomuchStuff]

My last house, I had a 20 year note, which was something like 18 years, after being involved in a large/expensive lawsuit and once having around six months off, due to medical. I guess a 20 is now more of a thing.

[catherine]

When I was in high school the mother of one of my best friends told the story of when she bought her house. She had divorced my friend's father about 5 or 6 years earlier and decided she needed to buy a house to raise her daughters in. She was in her mid 40's at that point and the loan officer at the bank (who had pointblank said that he didn't think divorced women should be buying homes but should be finding a new husband, which was apparently an acceptable thing to say back in the 70's) said "while you qualify for a 30 year mortgage it's unlikely that you will continue working for 30 years so I can't give you the loan." So she asked "do I qualify for a 15 year mortgage?" He grudgingly ran the numbers and it turned out that she did. So she got the mortgage, paid it every month, and finished paying it off at about the same time her second daughter (my friend) had finished college. She looked at the balance of her 401k and the amount she could get if she started collecting social security and realized that she could afford to retire since she no longer had a mortgage to budget for. And then silently thanked the loan officer for his sexism because it had unintentionally pushed her into probably the best financial decision of her life.

What a great story. And yes, in the 70s, men could and did openly discriminate the way the banker did.

[frugal-one]

For a smart young person, they might get the 30 year and then pay on it as if it was a 15 year. I think we did that. Every time we got extra money, we would consider the best use and often that was paying towards principal. Gives flexibility and I would only suggest this to financially educated people. ( but all costs need to be considered.)

Same here. Figured if one of us lost our job we could still make the payment.

[happystuff]

Same here. Figured if one of us lost our job we could still make the payment.

This was exactly our thinking as well. And, as it turned out, jobs were lost several times.

[Teacher Terry]

We always took 30 year mortgages and then paid extra. On my condo I purposely took a small mortgage for 30 years because at my age I wanted the payment as small as possible and even with a 15 year mortgage may not live to pay it off.

[iris lilies]

We never had a mortgage, but we did live on one salary and banked the other with that idea if one of us lost a job…

[frugal-one]

Wow..IL…never had a mortgage! I thought we did well by saving the needed 20% down payment by scrimping and saving for 2 years and paying it off in less than 15 years.

[iris lilies]

Wow..IL…never had a mortgage! I thought we did well by saving the needed 20% down payment by scrimping and saving for 2 years and paying it off in less than 15 years.

Well as I tell everyone, you too could live without a mortgage if you were willing to live in the dump we lived in for decades. Oh it wasn’t really a “dump” but it was a gut rehab that took 20 years to complete. Most people are not willing to live that way.

We bought the house for $28,000 cash, and it had been gutted—just 4 walls and floors, not even any interior staircases. DH spent one year full time getting it minimally habitable and we moved in with electricity in only only two rooms, dry wall in some places, etc. Then he went back to full time working for someone else and worked on our house on weekends.

[frugal-one]

$28,000 was more than we paid for the first house. We had absolutely nothing when we got married. The house was very small and we got a VA loan to put up a garage. It was adequate for the 3 of us.

[beckyliz]

WE bought a duplex in May 2021 at a nice low rate. I couldn't get a 10 year mortgage, so I got the 15 and had them calculate the payments with extra principal so it will be paid off in 10. Nice to see the principal reduce every month.

[iris lilies]

WE bought a duplex in May 2021 at a nice low rate. I couldn't get a 10 year mortgage, so I got the 15 and had them calculate the payments with extra principal so it will be paid off in 10. Nice to see the principal reduce every month.
That is a slick trick! I didn’t know you could manipulate payments that way. Well, you are in banking so have some knowledge about ways of the world.