Did you know thirty is greater than fifteen? Oh you did? Well, then why do so many people proclaim a 15 year mortgage is better than a 30 year one. I’ll tell you why, because they are wussy faces. Okay, maybe not wussy faces, but they are at minimum narrow-minded.
Girl Ninja and I are planning on buying a house some time between now and never (haha, how’s that for a time frame). Although we don’t know exactly when this will happen, it’s never too early to start planning ahead. Today I thought we’d take a look at how a 30 year mortgage and a 15 year mortgage would impact the Ninja household.
Let’s lay out some numbers real quick so we’re all on the same page…
- Let’s assume the house we buy is priced at $300,000 and we put 20% down ($60K) effectively making our mortgage $240,000.
- According to Wells Fargo, today’s 30 yr mortgage rates are 3.875%.
- Fifteen year rates are listed at 3.250%
- Private Mortgage Insurance is irrelevant since we would put 20% down in both circumstances.
- Taxes and Insurance rates are equivalent no matter the loan type since the purchase price of the house remains the same
Okay, now that you know some of the background info, let’s crunch some numbers. Speaking of crunching numbers, did anyone ever play the game “Number Munchers” in computer class back in elementary school? I freakin’ loved that game. It was right up there with “The Oregon Trail.
If we took the 15 year mortgage plan through Wells Fargo, we’d be looking at a monthly payment of $1,686. Over the life of the loan, we’d have paid $63,552 in interest.
If we took the 30 year loan, our monthly payment would drop to $1,128. That said, we’d end up paying $166,284 in interest over that time frame. YIKES! That’s over $100,000 more than the 15 year loan. Looks like the 15 year loan is the clear cut winner in this hypothetical situation.
If you’re like me, however, you believe liquidity is king. There is something comforting about knowing you have a healthy positive cash flow each month. With a 15 year mortgage I am committing an extra $558 every month to my mortgage. Good, because I’m paying my loan down faster. Bad, because I’m not able to use that cash for other things like investing, savings, or entertainment.
A shorter loan forces you to invest more capital in your house. And as we all have seen, home prices can drop sharply in a short period of time. Sure would suck having to invest all that extra money in a depreciating asset every month. Besides, just because you took out a 30 year mortgage, doesn’t mean you can’t pay it back faster. Remember, I had 20 years to pay back my student loans, but instead I punched them in the face in a little over two. A little discipline goes a loooooong way.
I could throw a whole bunch of other arguments out there as to why a 30 year mortgage isn’t as bad as some of you 15-ers make it out to be (things like the benefit of inflation, or the ability to invest the $558 in an account that will earn me a higher yield than 3.25%) but I wont. If you like 15 year mortgages then you should get a fifteen year mortgage. Just don’t make me feel like I’m being irresponsible for going the 30 year route (if we do).
If you have a mortgage what length is your loan for? If you haven’t bought a house yet, are you going 15 or 30 year loan? Any other points to consider?
