It is a rare person that likes mortgage debt and is not looking for a way to pay it off earlier – we feel that a shorter payback time could benefit us financially and maybe more importantly – Emotionally!  Why do people take 15 year vs 30 year mortgage? Typically, they want:

• Shorter amortization to pay off the mortgage quicker
• Faster repayment
• A lower interest rate
• To achieve long term interest savings if that is the objective.
• The Tradeoff is a higher monthly payment – 35% or 40% higher

Let’s look at a 15-year amortization. In this example you borrow $640,000 with a 3.75% interest rate. The interest paid over 15 years is $197,000 and the required payment $4,654. The house value is $800,000 and the black line just represents the debt being paid down over time.

• Pay off other debt with it
• Blow it

Now let’s look at a 30-year plan. They are going to pay $334,000 in interest payments and the Interest rate is higher – 4.125% versus 3.750%. However, the payment is $3,102 so you have cash flow savings. The payment difference is $1,552 which is the cash flow that you would not be required to put in the mortgage every month.

There are only three things you can do with money. You can:

• Pay off debt with it
• Blow it on Stuff
• Save and Invest it

Every person’s situation is unique and there is not one right answer. However, in this example, we are going explore saving and investing the cash flow savings. If you earn 5% over long periods of time, you will have enough money in about 15 years to pay off the mortgage. The two mortgage examples would be pretty much similar in terms of cash flow, assuming someone committed to either strategy.  Be aware, there are other risks involved.

Most people do not borrow for 15 or 30 years. They will have four or five homes over their lifetime, they have mortgages for four, five, six years, they will refinance, life happen all the time and things change! A lifetime of borrowing may start at age 30 and might go to 65, or 70. Using 35 years in this example, the cash savings strategy at $1,552 is worth $1,650,000 million over a 35-year period. You have an additional net worth of $721,000.

But to be fair, at the end of 15 years, you could have started investing your $4,654 15-year mortgage payment.

Over 35 years, let’s compare the 15 yr. mortgage and then investing our $4,654 to the 30 year and investing the cash flow difference after both loans are paid off.  In both examples we used the same cash flow of $4654 over 35 years. But there was a difference in the priority of payment and where that cash flow went. How does it play out?

As you see below, at the end of the 15 yr. strategy you have $1,600,000 – the $4,654 invested for 15 years. The 30-year option worked out to $1,838,000. In addition, you had the use and liquidity of that money, and you may have earned more over time or had other opportunities over the 35-year period.

There is a lot to think about. When we are Borrowing Smart – it is always about safety, liquidity, and a rate of return. Consider:

• Discipline risk – Will you stick to it? If you choose to not pay your mortgage more rapidly, then ideally you are investing the money someplace else, which requires discipline. Can you stick to the plan? Can you not touch it? Can you not blow it?
• Benefits of liquidity. Life is all about cash flow and having liquidity. When something goes wrong, it may be great if you have accelerated paying down your mortgage, but if you need money – you cannot get to that money if it is inside the house. We advocate liquidity, as that is what protects most people.
• Investing risk – to earn a higher rate of return you must take more risk, typically that is in the stock and equites marketplace. Can you stick to that plan [even when] markets go up and down?
• What you are funding. Most people must fund education, college, retirement, and life stuff – how do you prioritize these needs?
• How long you are going to keep your home. Taking a 15-year mortgage and only keeping it for five years does not make a lot of sense.

To learn more, check out our additional Borrow Smart Lessons!

Short Version

Is a 15-year Mortgage Better than a 30 Year?

• It’s about Cash flow – your Cash flow!
• Do you have Discipline
• Compounding interest is very powerful

For all mortgage lending and HECM questions, reach us by phone, email, or schedule an in-person consultation HERE.