Should I Get a 15 or 30 Year Mortgage?

In the new economy buying a home isn’t really about just buying a home – it’s about the use of money. In today’s economic climate and what we’ve learned from the recent past, homebuyers should be careful not to be sold a home. It’s about the money – your money.

With mortgage rates at or near their all-time low, many young buyers I meet with ask the question, should I get a 15 or 30 year mortgage? I recommend a 30-year mortgage. I don’t see the benefit of paying off a 4% loan quickly when, historically, you can make more money with that money (the extra money it takes to pay on a 15 year basis) in the stock market. (The difference between the two is $22,000 – favoring investing the difference but you have to invest the difference.)

When the day comes that you own your home that’s great, but to have the majority of your money tied up in a home doesn’t make sense to me. If I want to take a vacation, I can’t pay for it by taking a door off my bedroom. A bedroom door is not currency. It’s why I retain the mindset that I am really “renting” the condo I pay a mortgage on.

Home buyers, especially young home buyers, are better off saving the difference between the 15 and 30 year payment. For example, a $175,000 mortgage at 4% at 30 years carries a monthly payment of $835. At 15 years the cost is $1,294. The difference of $459 invested in the stock market will return (historically) 10%.

One way to keep the option to own your home sooner is to get a 30 year mortgage and set up a pre-payment schedule. This allows you to pay your loan off more quickly should you choose to do so. It allows for bad economic times or other unforeseen expenses. The 15 year mortgage locks you into the higher payment so you are without options. I like options.

But how do you get to a point where you are even confronted with such a decision? As a young client recently said, “Michael, we’ve never known anything but a bad housing market and stock market.”

The starting point is to understand who works for whom whether buying a home or investing in the stock market. Just because someone is friendly and nice does not mean they have your fiduciary (financial) interest at heart. Tell me why you want to be sold a home by someone who doesn’t’ really represent your interests? Because it’s a big name company and they can be trusted? Google “Enron”.

Friends and family will suggest you need 20% down to buy a home so that you avoid paying Private Mortgage Insurance (PMI). I disagree. If you find the right home at the right price then lock in a low mortgage rate and low purchase price now. The rate and price are factual. Speculation is that rates and prices will remain low while you are trying to save a 20% down payment to avoid PMI. The speculative approach may cost you more money than the PMI cost if rates and home prices increase.

I don’t sell stuff. I’m not trying to send someone to the moon or cure a disease. This is basic housing stuff and basic finance 101 and 102. For the price of coffee you might learn something (as might I from you) about housing and basic finance so feel free to schedule an appointment to talk over coffee should you want to learn more. Thanks for taking the time to read.