- April 30, 2024
- Posted by: legaleseblogger
- Category: Related News
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## The Problem with 30-Year Mortgages
It is widely recognized in the financial world that signing up for a 30-year mortgage can have serious implications for your long-term financial health. Many people are unaware of the true cost associated with these types of loans, and the impact they can have on savings, retirement funds, and overall financial security.
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## Consider Your Options
While a 30-year mortgage may seem like a convenient option, it often comes at a steep price. It may require settling for a smaller home in a less desirable neighborhood or even relocating to a different city or state. However, the financial burden of a 30-year mortgage, particularly in the current interest rate environment, can far outweigh these sacrifices.
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## The Importance of Financial Prudence
Prominent financial experts like Dave Ramsey have long warned against the pitfalls of 30-year mortgages. While their advice may have been met with skepticism in the past, the reality is that opting for a shorter loan term can ultimately lead to greater financial stability and security.
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****** just grabbed a
“So much better” is a bit disingenuous.
Having the flexibility of a 30 for most people is more beneficial than the benefits of a 15.
15 years is a long time. What happens if you experience a lay off (like the hundreds of thousands of people going through one since January of this year?)?
Being able to make lower payments in a time of need is a blessing. Being able to pay a 30 like a 15 is also a blessing.
Not having the choice in a time of need is a curse.
Get a 30 year and just pay it off in 15 years? That way if you lose your income source you aren’t shafted by a high payment. I’d take the longer terms any day for peace of mind
I have both. One on a condo that I rent and pays for itself and the other on a townhome.
I like the flexibility of a 30 year. If anything happens to my family’s financial situation we have a mortgage affordable on one salary. So we just toss extra money towards it and will pay it off in 15 years anyways.
Disagree 100%.
I got a 30 year mortgage in 2015. Had I waited until I could afford the 15 year payments, I would still not have a house. 30 years gave me the flexibility I needed to get into a home. My house has nearly tripled in value since I got it. Bought for 103k, now estimates for ~280k.
Also, the difference in rate for me was small. My rate is 3.25%, 15 year at the time was 2.85%. Meanwhile, I am making way more money than I used to and I’m investing the difference. If I applied the difference to my mortgage instead, I would be losing out on hundreds of thousands of dollars in retirement. Currently putting ~$2,400 per month into retirement vehicles, which is generating an average of 12% returns, and compounding at a higher rate than I could ever get by paying off the house early.
Edit: Also, I might stroke a check to pay off the house in my 50’s if I feel like it in preparation for retirement. I might decide to take an early retirement, we’ll see. I could pay off my house over the next 5 years if I wanted to, but the math is the math. I’m better off financially not doing so.
I have a 30 year 2.75% mortgage… still less interest than a 15 year 5.8% mortgage. Granted, 2.75% is non-existent now, but I don’t think your logic applies to every situation. Sometimes, cash flow is a big deal. Some folks can’t even handle a 15 year mortgage due to lack of income.
Not necessarily. A 30 years mortgage allows you to invest more in mutual funds for 30 years, which can far exceed what you would get paying on your 3% mortgage rate.
>I know the likes of Dave Ramsey have been pushing it for a long time and got ridiculed for it – but I think they might be right on this one
As a general rule, don’t take advise from Dave Ramsey. Note that you are allowed to pay as much extra principle on your mortgage as you like. You can pay a 30-year mortgage off in 15 years if you like, or at any othe rate. I paid my 30-year mortgage off in under 2 years.
What are the pros?
It almost might mean not buying a house at all. The cost difference is extreme
I wish I had a 100 year loan at my current 2.5%
Get a 30 and pay it off like a 15.
Let’s assume a $450K house with 20% down and $3K/year property tax and $1500/year insurance on a 30 year at 7%. So a loan of $360K
You’re going to pay roughly $500K in interest with a monthly payment of $2770
Now let’s look at the same house, 15 year at 6.25%. You’re going to pay roughly $196K in interest with a monthly payment of $3237.
Now if you take that 30 year and pay it off like a 15 so an additional $467 (difference between two mortgage payments) a month you pay roughly $291K in interest but with the flexibility of if life happens (kids, job loss, etc). I’d prefer the flexibility because you’re not locked in to the higher payment. You’ll be paid off within 19 years save a shit ton of interest without giving up the flexibility
That’s for the new homeowners. If you got in during Covid or Shortly after with such low rates. I got in at 2.62%. Could we pay extra our mortgage? Sure can. Will we? Nope. Upped our 401k contributions to 20%, maxed out our Roth IRAs each, and putting additional to a taxable brokerage because I’m almost certain that i can beat 2.62% in the market
I’m risk adverse. So with a longer mortgage I feel if some financial catastrophe happens, I can scale back and pay the minimum.
Right now we’re paying on a 20 year pay off schedule.
It’s a constant push and pull of “live in the moment” and “think about retirement” for me. 20 years of mortgage payments is a happy medium for us.
I mean, it’s great if you can afford it, but leveraged debt is something that individuals and businesses alike will do if it makes strategic sense. Simply saying “15 is better than 30” is myopic at best, as it doesn’t account for a full strategy of an individual’s life goals.
Sure, some people may not fully understand the ramifications of lowering their monthly payment by increasing the time borrowed,but that does not make the 30-year loan a bad idea by default. It very much depends on an individual scenario to know whether or not it makes sense for a person, financially.
Nobody ever talks about inflation when debating 15vs30 year mortgages. In 2022 I took a 30 year mortgage at 4.5%. Seemed high for me at the time when everyone I knew recently had 2-3% range rates, but looks cheap now.
I never once considered a 15 year mortgage.
If my mortgage p&i year 1 was $1200/mo, at year 15 it’s still $1200/mo.
Except at year 15, it’s actually $822 when accounting for inflation (used data for the past 15 years)
At year 20 inflation adjusted its $721
At year 30, it’s $570.
In my opinion the time value of money matters.
I projected my 30 year mortgage to be cheaper than if I had done a 15 year mortgage based on my 3% rate, plus the added liquidity. You clearly indicate in todays rate environment in the text so I do agree with you, but your title is much more broad.
It may make financial sense but I prefer living in a city and a house that I want to be in even if it costs a few hundred more a month. Lots to be said for quality of life.
You are suffering from recency bias.
There was virtually no rational case to take a 15 year mortgage when 30 year rates were sub 4.
It certainly is possible to not earn 4% over a 15 year period in the market, but it is extremely unlikely.
It’s reasonable to have a 15 year mortgage instead of a 30 but there is not a math based case.
Today that answer is different but that has only been the case for the last 18 months or so.
Great points, everything you said makes a lot of sense in essence. But I’d say to same for those who advocate for 30 year. It’s all circumstantial.
Yes, in a 7% interest environment it doesn’t make sense. But for a household who’s diligent enough to take the 30 year AND actually make the same extra payments, it also makes sense to take the 30 year loan. And yes, I do believe in a world of consumers and debt and poor finance choices, there’s actually people who are amazing and diligent with their money despite the flexibility. Many fail, and only a few do it right, but they still do it.
A lot of people couldn’t afford homes at 15%. Not everyone had 20% ready. Were they the ideal home buyers on paper? No, but they were stable enough and could afford a mortgage at 30 years. Had they waited, they’d be shit out of luck and can kiss both 15/30 year mortgages good bye. Won’t debate on real estate timing because off topic and no one can predict a crash/future. But certainly, things played out well for some of these segment of folks. Equity shot up, income grew, and/or some have a chance to now overpay their mortgage min.
I hate to debate with hypotheticals, but in the end that’s what al financial advice is. Hypotheticals vs hypotheticals. In the end each household has to examine their situation and make the most optimized choice while considering short, mid, and long term. It aint always about how you start, but how you finish. Paying interest is stupid af I’ll agree with you. But I won’t accept that (or one factor) as my end all be all guiding star for decision making
The one thing I’ve learned about money and making more money and optimized choices, is never say “this is the only way” or “it has to be this way”. The answer is always “it depends”
If you manage to get a low enough interest rate, its better to get the 30 year and invest extra cash in the market.
Even at current mortgage rates, 30 Yr Mortgage makes sense for most people. The cash/proceeds once would put towards extra on principal can grow far more in that additional 15 years span
Sounds like you mean it isn’t good to be house-poor. I see your point. Counterpoint: I love my house, and will not regret buying it, even though it was a bit of a budget stretch. And it isn’t such a bad way to build wealth in an upswing market: if your home value goes up, you get those leveraged returns, which can be nutty, if risky.
I met in the middle, which has worked out well.
I did a conventional 25 yr in 2015, bought out our PMI upfront at a reduced cost because we were stretching it and couldn’t quite make it to 20% down. Then refinanced in 2018 without extending the loan term, put a lump sum down at closing towards principal made from investments and landed on a 2.99% fixed, coming down from 4.25%. Now I only have 17 years left, have $275k of positive equity in it and have kept my mortgage low, leaving more room for investments which have netted way more than any interest savings would have. Intending on selling this and buying another house in 1-3 years.
15 yr would’ve stretched us too thin as we were still climbing our career ladders and we’re making significantly less money at the time of purchase than we are now. Month to month it didn’t leave enough breathing room early on in homeownership. It simply wasn’t possible/in our budget to afford a 15-year
Not always true.
Some people don’t have the means to pay it all at once or cover that huge of a monthly payment.
You can also make the case of just paying cash for the house all at once, and not get a mortgage at all.
Less risk with the 30 year loan. I went with 30 because it I figured that I could pay it off earlier or invest the “extra” money.
So I do both, I pay extra to principal every month and also put some money into retirement accounts.
Plenty of people get 30 years loans and pay them off in 15.
Not even remotely true. I have a 30 year at less than half the rate of a current 15 year. My rate is low enough that it’s more advantageous to simply invest any excess. I would only switch to prioritizing the mortgage payoff above ~5%
You can always pay more on a 30, but you can’t pay less on a 15. I don’t want to lose my home if we were to lose half our income.
You can make additional principal payments if you have extra cash, but it’s not as easy to stop making the (approximately 25% higher) monthly payments if you run into cash flow issues, and there are many things outside of your control in the 15 years that can cause that, such as job loss, health issues, etc.
Get a smaller house/mortgage then, you say? Not practical for many (most?) buyers once you crunch the numbers. It is likely to be a choice between “buy now on a 30-year mortgage” and “not buy at all,” and not so much a choice between a 30-year mortgage versus a 15-year mortgage.
Entirely dependent on interest rates imo
30 year mortgages were phenomenal when rates were super low since that’s debt you’d want to hold for the long term
Now that rates are much higher, paying a mortgage off early makes a lot more sense so a 15 year mortgage makes sense if you can swing it
30y mortgage is detrimental to savings? With current rates – probably. At 3% rates? It’s one of the greatest wealth builder you can have.
I didn’t see too much of a difference in monthly for a 15 vs a 30 so I went 15. It was an extra $150 per month and the interest rate on the 15 year was a lot lower. Made total sense to me. Imo, if you need to take out a 30 year mortgage, you are buying too expensive of a house for your income.
“In the current rate environment” is key man. When rates were 3% it made much more sense for a 30 over a 15.
15 years vs. 20 years vs. 30 years is a red herring.
It all comes down to margin remaining in your budget every month after all expenses are paid. I can buy a huge house at a 3% loan and still feel miserable if 50% of my take-home pay goes to a house.
The benefit of a 15-year fixed comes when you pair it with an upper % of take-home pay limit.
Buying a smaller house than you really want so that you can be debt free faster is definitely a decision that can bring freedom. Just finished paying off my house a couple years ago. Now I can cash flow so many endeavors and also save faster for short term goals with HYSA rates being so good (without an opportunity cost of not putting it towards house debt) is nice.
What you don’t want to do is focus exclusively on paying off a house with no retirement savings… but, as they say…
Por que no los dos?
nah, I’m good. lose 200k in liquidity to pay off a 3.5% loan or let it earn 10% in the market for the next 30yrs. hmmmm.
Everyone else has touched on the major aspects, namely flexibility and increased liquidity. But also before the past couple years when rates were low, it mattered even less. I have a 30 year at 3.5% and the 15 was around 3. My money can do better in the market or even a HYSA currently, in either case. I have more liquidity with the 30 year and will outearn the interest penalty provided I can keep saving like I am. If I can’t keep saving like I am, well, then I’m glad I don’t have the much higher payment on the 15y.
In todays interest rate environment I’d still do the 30 year no matter what. Ideally you buy a house you could afford on a 15 year, but the flexibility of the 30 year is worth it. With todays rates, I might prioritize paying down the house instead of investing my free cash flow – that’s the only difference
The final payment on my 30 year, 2.25% mortgage is some fraction of my normal payment, like a few hundred bucks.
I will send even that final payment absolutely no sooner than the due date.
But some of us don’t have the income to support a 15 year over 30 year. While it might suck it’s still better than renting even if it cost more over time. Especially when you are already looking at the cheapest you reasonably can
My current other investments laugh at my 30 year 2.7% mortgage.
Everyone would LIKE a 15 but it’s like hundreds more a month lol hell I’d like a 10. Most people cannot afford a 15. And no it’s not just “spend a little less and get a 15” it’s Hundreds more a month different. Hundreds.
OP relax. We all know 15 is better than 30. You’re not educating anyone. But when a mortgage is $3000 with escrow and taxes a month, paying an extra $1k isn’t exactly simple
I have a 30, I pay extra every month and basically it’s a 20 year. Once I pay off other debt I’ll pay more.
You come off douchey in your post. So let me say it again, you’re saying nothing we don’t already know. Lol
Or…. You get a 30 year mortgage and use the lower monthly payment to pay it off in 10 years. This way if you have a bad month you’re not forced into a 3x higher payment but most months you can pay significantly more than the monthly payment to pay it off faster.
“Just pay your loans off quicker, what are you poor?” wow great advice
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With a sub 3% mortgage, why do I want to pay the bank faster? Maybe make it 100yrs….so they won’t get their money back while i invest the difference.