Why I’m Not a Fan of 15-year Mortgages

There are those whose goal it is to pay off their mortgage…as quickly as possible.  Some people’s approach to this is to get a 30-year mortgage and pay extra every month while others just get a 15-year mortgage and pay it off that way.  Then there are those who get a 15-year mortgage AND make extra principal payments to accelerate the pay-off.  While there are merits to paying off your mortgage, I believe there are much better strategies for financial success than focussing on paying off your mortgage.  Here are the advantages that come with choosing the 30 year mortgage and ideas to help you understand these strategies and help you decide what will best help you reach your financial goals.  RELATED – check out this article about what the return on investment you get on the equity in your home.

Consideration #1: 30-year vs. 15-year and investing the difference – creating wealth

In this scenario, let’s look at a $250,000 mortgage on the same house – property taxes and homeowner’s insurance are the same, so we will only consider the principal and interest payment of the mortgages.  The payment on the 30-year mortgage is $1,304.52 at 4.75%.  Interest rates for 15-year mortgages are typically about .25% lower than a 30-year mortgage, all else being equal so I’ll use a rate of 4.5% on the 15-year mortgage in my examples.  The payment on the 15-year option is $1,912.48, a difference of $607.96.  If we go with the 30-year mortgage and invest the difference every month (we’ll assume an 8% rate of return which should be pretty easy to obtain over a long period like 30 years – 12% is very doable when investing in good mutual funds), at the end of 30 years, the scenario with the 30-year mortgage has your home paid off and an investment account value of $906,078.93 (just for fun, at 12%, the investment account would be worth $2,124,798.39).  The scenario with the 15-year mortgage where you would pay off your home in 15 years and then invest that payment for the next 15 years in the same investment yielding 8% would have an investment account value of $661,791.18 – a difference of $244,287.75 – this is the benefit of choosing the 30-year mortgage options and investing the difference in payment between the 15 and 30 year mortgage.

There are some who might still just want their house paid off in 15 years so they would choose the 15-year option regardless of these numbers.  Here’s the other problem with that scenario:  if you choose the 30-year mortgage, your principal balance after 15 years is $167,660.25.  The investment account would be worth $210,377.40.  Though I wouldn’t recommend it, you could pay off your mortgage and still have $42,717.15 remaining in your investment account.  From this point, in either scenario, you invest $1,912.48 for the next 15 years (you can do for longer if you want but I’m using this time from because it matches up with the 30-year mortgage time frame) and the investment account balance on the 30-year options is $803,053.44 whereas the value on the 15-year option is as above at $661,791.18.  Financially speaking, the best option is the 30-year mortgage where the mortgage is paid off according to schedule and the difference in payments between the 30-year and 15-year mortgage is invested every month for that 30 year period.

Consideration #2:  Cash flow and tax benefits

As the saying goes, cash is king.  Regardless of what your income is, your cash flow is better on a 30-year mortgage than on a 15-year mortgage to the tune of $607.96 in this scenario.  If an emergency came up a few years down the road (medical, major house repair, or job loss), you are in a much better financial position to handle the situation if you chose the 30-year option and invested the difference.

With the new tax code that allows for a $24,000 standard deduction (as of the time of this post), fewer people are itemizing on their tax returns but for those who are, a 30-year mortgage will provide better tax advantages than their 15-year counterpart – both in the amount of interest per year and as to how long they will have that deduction.  When making financial decisions, you shouldn’t make a decision based solely on a tax benefit but they should be a consideration in your decision if all other benefits are equal – they are often a good added bonus.

Consideration #3: More investment options

If you choose the 30-year mortgage, you will have a significant amount in your investment account much sooner than if you choose the 15-year mortgage as per the example above.  With a good amount of money in your investment account, you now have investment options such as real estate which offer benefits like leverage, tax deferred growth with 1031 exchanges, and great tax benefits such as depreciation; for more information on real estate investing, check out my 6-part video series:  http://thewunderliteam.com/top-6-things-to-know-when-investing-in-real-estate/.  Doing it this way,  you can have your money working in hard assets like real estate as well as liquid assets like stocks and mutual funds.

In the end, the choice you make as to your mortgage term, down payment amount and other considerations is a personal one and only you know what’s best for you.  As far as I’m concerned, I prefer the piece of mind knowing that I’m investing regularly and that I have money for an emergency and that when I decide to retire, I will have investments that will allow me to maintain the quality of life that I am used to without being a burden on my children.

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