Finance part II - 30 vs 15 year mortgage

My wife and I chose the 15 year option 20+ years ago.  It saved us a ton of money on the total cost of the loan and after 15 years it is a huge piece of mind.

Some will argue that you could be investing the difference and come out ahead dollarwise.

The peace of mind was/is invaluable to us.

Considering the average mortgage payment is over $1,000/month, I would opt for the 15-year loan vs. the 30.

1. I pay less interest on the 15-year
2. at the end of 15 years, I can start investing the x/month mortgage payment
3. from what I have found, the difference in monthly payments is maybe $200/month, so I'd rather take the 15 year and be done with it.  It would take more then an extra $200/month in principle to pay down the 30 year loan in 15 years.

The realtor and banker would suggest you buy a bigger home...

What is the loan rate, and what would you do with the difference in payments?  If you really would invest the difference, then the 30-year might make sense.  If you spend the difference on high-living, then the 15-year loan makes sense.  Do you KNOW you won't take out a second mortgage or home-equity loan?  It'd be pretty foolish to take a 15-year loan and then second mortage to meet some cash-flow needs for a year or two. 

You can get a 30-year ammortization schedule and increase the payment to cover the next ammortized principal.  You pay it off in 15 years with gradually increasing payments.  This kind of splits the difference between 15/30 and leaves you lots of flexibility (especially if interest rates rise). 

The realtor and banker would suggest you buy a bigger home...

What is the loan rate, and what would you do with the difference in payments?  If you really would invest the difference, then the 30-year might make sense.  If you spend the difference on high-living, then the 15-year loan makes sense.  Do you KNOW you won't take out a second mortgage or home-equity loan?  It'd be pretty foolish to take a 15-year loan and then second mortage to meet some cash-flow needs for a year or two. 

You can get a 30-year ammortization schedule and increase the payment to cover the next ammortized principal.  You pay it off in 15 years with gradually increasing payments.  This kind of splits the difference between 15/30 and leaves you lots of flexibility (especially if interest rates rise). 

If you can afford the payments, a 15 year is the way to go.   It's the time-value of money.  You pay interest on the balance outwithstanding so for example:

I was gonna give an example but when I went to look up current interest rates I stumbled across this site which sums it up well.

 http://michaelbluejay.com/house/compoundinterest.html

~Mike

If you can get a decent rate of return, you can come ahead by investing the difference for the full 30 years.  Say you have a $200,000 loan at 6%.   30 year payments would be 1200 and 15 year would be about 1700.   So you take out the 30 year loan and invest the $500 a month and get 8% compounded for 30 years.  You would have your house paid off and 715,000 in the bank.   If you paid off the 15 year loan and then started saving $1700 a month for the remaining 15 years, you would have a paid off house and 580,000 in the bank.    If the interest rate goes down to 6% it is a wash ($480k in both scenarios).   If you get 10.5% it gets twice as advantageous to get the 30 year loan.  Now say it is in a 401k and you get this money tax free, plus the extra interest break on your mortgage.  So the 15 year loan is a little safer, but the 30 year has better potential.  Like some of you mentioned, though, there is a lot of potential to NOT invest the difference.  It would be really easy to find ways to spend that $500 extra a month. 

Where are you going to get a guaranteed rate of return of 8% when mortgage rates are 6%?

Nowhere is one going to get a guaranteed 8% return, but c'mon, you know as well as anyone else that if you invest in the stock market, mutual funds, etc., for 30 years, it is likely that you will get an 8% return.

That's exactly what we did with an acreage we bought, and it's working out so well we're doing it with our new house.  I'm sure it's not the savviest financial option, but it sure makes me feel comfortable.