Ok - 15 year or 30 year mortgage?

[y4m]

Here's the deal...  We are buying a townhouse.  It's most likely not going to be our forever home, but it's a good investment because of its location, and we're pretty confident it will never go down in value, at least not over a longer timeframe.  We'll probably stay there for 5 years or so, and then we could either sell it or rent it out.  We're putting down enough to get our loan to be conforming - it ends up being between 20% and 30% down.

Now we have to decide whether we want a 15 year or 30 year loan.  We have been offered the 15 year loan at 2.75% or the 30 year at 3.75% (but they think it might come down some, to maybe 3.65).  The 15-year loan's PITI is about $1200 more than the 30-year (and would be about 33% of our take home, post 401K/tax income).  The 30 year payment is more like 25% of our income, and would leave us an extra $1200 to invest in other places.  Either payment feels affordable.

The 15 year seems like the obvious choice, except a big motivation for buying is the mortgage interest deduction, since we are in a high bracket. 

How do I do this math?  

[ssmjlm]

I'm going to assume your investments will make more than the interest you will be paying on the mortgage.

I would go with the 30 year just for comfort. Especially in your market where the chances of being underwater are minimal.

[rubytue]

I don't think it's a no brainer at all.

30 year has a much higher percentage of your payment as interest, so bigger deduction.

If you are going to invest the other $1200/month, then you will probably do better in the long run. Even if you only do as well as the housing appreciation, you will have the advantage of having that money liquid. If that $1200/month goes to your house, sure, you will have more equity in the house but it will be tied up in the house. If you need it, you have to sell or get a HELOC. Personally, I'd rather have enough liquid assets to pay off my primary residence if needed than a paid off house.

If you are only going to be there 10 years, then you should only be comparing the first 10 years of payments. The whole argument of saving you $x in interest over the life of your loan doesn't make since if you aren't going to keep the loan for its life.

Here are a couple of links arguing for a big, long mortgage. Not everything in them is great advice, and might be a bit dated, but he is one of the few financial folks out there that makes this argument.

www.ricedelman.com/cs/education/article?articleId=1964&titleParam=Don't%20Be%20Seduced%20by%2015-Year%20Mortgage%20Rates

www.ricedelman.com/cs/education/article?articleId=232

[pamela]

Do the math for the interest saved over the time you plan to keep the loan. However, paying more interest to the bank to keep from paying 25% of that amount to the government doesn't make sense either.

Also, are you sure you're going to actually invest that $1200 difference or is it going to get spent elsewhere slowly over time?

[rubytue]

Also, probably not an issue since you are up near the edge of conforming, but with rates so low, some mortgages don't have enough interest per year to exceed the standard deduction. If your rate is under 3% and only 60% of your monthly payment is interest, then it's not very much interest per year.

Also, with the 15 year, the interest percentage is going to drop very quickly. Within a few years, it's even less likely you'll have much of an interest deduction. Just something to think about.

On the other hand, as my father would say, don't ever pay something just to save something.

[SJ]

I think I would do the 30 year, but set up automatic investments for the extra $1200 (on top of whatever saving/investment would be in your budget with the 15year) each month.

We did a 15 year on our investment condo, but it is a really small mortgage and different personal circumstances.

[aspentosh]

I think I'd go with the 30 year if you're positive you'll invest that $1200 and not just spend it on stuff.

[ijack]

I'd do a 30 and invest the rest for right now or use it to pay extra on the loan.

[Deleted]

I'm always team 30 year when it comes to a mortgage. I dont see the point in paying it off early, especially in this market. under 4% is still free money. And in your income bracket, take all the tax breaks you can get.

Plus it will be nice to have the extra $1200/month, especially if you decide to have kids.

[gt7301b]

We refinanced into a 15 year mortgage, but the payment is still less than 30% of our monthly take home. I wasn't willing to go above 30% when we took out the mortgage.

What are the chances that you will move in 5 years and rent the townhome out? If you think they are pretty high this would be another check mark for me in the 30 year column.

[Deleted]

Team 30 year mortgage. These rates are ridiculously low and I consider anything under 6% free money.

[Deleted]

I would do 30 year. I refinanced my former condo to a 15 year mortgage thinking I was going to be there for quite a while. Turns out I met H and we quickly outgrew the place. I couldn't rent it out without taking a $500 loss or so each month. With a 30 year mortgage we could have easily kept the condo and rented it out for a profit. Take the 30 year and make the same payment you would as if you had the 15.

[Deleted]

I think it depends on your financial picture and circumstances. We went with 30-yr with the new house because of the kid/s. If we were DINKS, we would have chosen 15-yr. The 30-yr just gives us more flexibility in case one of us loses a job.

[Roc A Bee]

What's the rental market like in your area? Would you be able to rent it for enough to cover the extra $1200/month if you had the 15 year mortgage.

I think I would still lean towards 30 year loan. You could invest that $1200 or put part or all of it back into your mortgages on months you feel like it to pay it down faster.

[SJ]

Jan 31, 2013 9:34:27 GMT -5 @charky said:

Jan 31, 2013 9:01:18 GMT -5 pamela said:

Do the math for the interest saved over the time you plan to keep the loan. However, paying more interest to the bank to keep from paying 25% of that amount to the government doesn't make sense either.

Also, are you sure you're going to actually invest that $1200 difference or is it going to get spent elsewhere slowly over time?

Fist bump, pamela. Justifying paying more interest with the mortgage interest deduction bugs me. As a rough example, in the 25% tax bracket, you're paying $4 to save $1 off your tax liability. No one would ever pay $4 for a $1 off coupon.

I prefer to minimize interest, so that usually means a 15 year only if it's reasonable for your budget. 33% is close, but if you're doing well with retirement and have no or very little other debt, I'd consider it.

I think we understand that you are still paying more in interest even with the tax liability.

However, the point is that the interest you are paying (which will of course be more with a 30 year) is at such a low interest rate that you will be able to build more wealth if you invest that money instead.

[Deleted]

I'd do the 30 for the flexibility. You can always pay more if you want (and in doing so have more mortgage interest to deduct in a particular year), but you'll have the loan at a historically low rate if you want to scale back payments too (i.e., when it becomes a rental property and you have another mortgage on your forever home).

[Deleted]

I'm in the 30 year camp, specifically b/c of what Tosa said.

[sillygoosegirl]

We chose the 30 year in a similar situation, although it was a difficult decision. In the end, it came down to the high monthly payment. Yes, we can afford it now, but job situations can change.

Since it's not your forever house, I'd be even more inclined to go for the 30-year. That will help you with having the flexibility to rent it out rather than selling when you are ready to move. For one thing, your money won't be tied up in equity, it will be available to save as more liquid savings/investments. For another, it'll put less pressure on your budget when you are looking to get another mortgage.

If you do the math, the difference isn't that great with such low interest rates, compared with the risk and flexibility considerations, IMO. I was always told growing up that even if I got a 15 year mortgage, I'd pay more in interest than on the house, but interest rates being so low, it's not actually true. Both interest rates you mentioned are very close to historical inflation rates, which basically means you aren't actually paying anything to borrow that money.

Of course, I still hate owing money to anyone, even though we could leverage it, we're most likely gonna pay it off in 15 years anyway. So it's a bummer not to get the lower rate... But most likely isn't a sure thing, and the flexibility is so cheap.

[imojoebunny]

Depending on your age, I would be in the 30 year camp too. When you do rent it out, if you have a high income, you cannot deduct the depreciation expense against the income e property produces, but the interest would go against that income. We have our properties set up to be paid off when the kids go to college, which for us means 15 year loans, so we will have that income to assist in paying, but what we may do instead, is sell them at that time to avoid having to pay taxes on the income. It just depends on the tax law at that time and DH's work.