Why we chose a 30-year mortgage

Last week, I announced that Kris and I have refinanced our mortgage at 4.96% for 30 years. In the comments, Ian expressed disappointment that we'd opted for the longer term when we could have afforded to take out a 15 year mortgage at 4.625%. “Starting your 30 years over is no way to get rich slowly,” he wrote.

He has a point.

Kris and I took out the 30-year mortgage because we wanted a safety net. We will continue to pay $2,000 each month toward our mortgage, so we could have afforded the shorter term, but we opted to take a longer mortgage so that we had a cushion if something happened.

But was this a smart move? How much will it cost us to do this? Let's find out.

Running the Numbers

You all know that I love to play with spreadsheets. I pieced one together to run the numbers on our mortgage. Just for curiosity's sake, I first looked at what might have happened if we had not refinanced at all and planned to repay the old loan on a normal schedule (you can play with actual mortgage rates get current numbers):

Existing mortgage pre-refinance

Principal remaining: $206,345.33
Interest rate: 6.25%
Total payments remaining: 303 (25 years, 3 months)
Regular payment amount: $1386.60
Total repaid: $420,139.80
Total interest paid: $213,794.47
Interest/Principal: 103.61%

Now, here are the totals if we were to pay the refinanced, 30-year mortgage without any sort of acceleration. Note that the payment amount does not include taxes and insurance (which adds another $280.21 to our monthly obligation).

30-year without acceleration

Principal borrowed: $212,900
Interest rate: 4.96%
Total payments: 360 (30 years)
Regular payment amount: $1137.69
Total repaid: $409,568.40
Total interest paid: $196,668.40
Interest/Principal: 92.38%

By refinancing, we're saving $10,571.40, even if we don't pay extra, and even if we stretch the loan out to 30 years. Next, I looked at a 15-year mortgage without any sort of acceleration.

15-year without acceleration

Principal borrowed: $212,900
Interest rate: 4.625%
Total payments: 180 (15 years)
Regular payment amount: $1642.30
Total repaid: $295,614.00
Total interest paid: $82,714.00
Interest/Principal: 38.85%

Clearly, a 15-year mortgage is a better option — if you can afford to make the payments, which in this case would cost an extra $504.61 every month. (And if inflation isn't running rampant. I have not accounted for inflation in any of these scenarios.)

But Kris and I pay more than the minimum. We pay a flat $2,000. If we subtract $280.21 for taxes and insurance, that means we'll be paying $1719.79 toward principal and interest each month. How does this affect our costs? Let's look at the 30-year loan with accelerated payments:

30-year with acceleration

Principal borrowed: $212,900
Interest rate: 4.96%
Total payments: 174 (14 years, 6 months)
Regular payment amount: $1719.79 ($1327.97 final month)
Total repaid: $298,851.64
Total interest paid: $85,951.64
Interest/Principal: 40.37%

This is the plan we intend to follow. For us, there is a huge difference in the total we pay (and how long it takes us to pay it) between an accelerated and a non-accelerated 30-year mortgage. We save over $110,000 and 15 years by making extra payments.

But we will still pay more interest than if we had taken the 15-year mortgage. What about accelerating the 15-year mortgage? Let's look:

15-year with acceleration

Principal borrowed: $212,900
Interest rate: 4.625%
Total payments: 169 (14 years, 1 month)
Regular payment amount: $1719.79 ($960.31 final month)
Total repaid: $289,885.03
Total interest paid: $76,985.03
Interest/Principal: 36.16%

Financially, this is the best option of all. But it only shaves 11 months and about $6,000 from the standard 15-year option. Ian may be right: it might have made more sense for us to take a 15-year loan.

Doing What Works For Us

Let's assume that Kris and I are going to be able to make our $2,000 payments every month for the next 15 (or so years). If we had opted for the lower-rate 15-year loan instead of accelerating the 30-year loan, we would have the debt paid off five months earlier. What's more, we would save $8,966.61 in interest payments, or roughly $640 per year ($53 per month).

Ian's point — and it's a good one — is that although Kris and I saved $250 per month by refinancing, we could have saved another $50 per month (with no changes to our current plans!) by choosing a 15-year mortgage instead of a 30-year mortgage.

Did we make the wrong decision? Time will tell. If nothing happens along the way, then this will have been a poor choice. But if we experience some sort of financial setback, our caution just might save our bacon. With the lower payments of the 30-year option, we could live indefinitely on either one of our salaries alone. As with all investments, lower risk brings lower reward — and that's the choice we made this time.

What choice would you have made and why? I suspect that many GRS readers opt for 30-year mortgages when they could afford the higher payments and the shorter term. I know that we're certainly not the only ones among our friends who have done this!

Note: I did not save the spreadsheet that I used to run these numbers. If you're wanting to do similar math, check out the mortgage calculators at Dinktown.

More about...Home & Garden, Budgeting

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Writer's Coin
Writer's Coin
11 years ago

Right off the bat, simply by looking at how much you pay, I would’ve said the 15-year mortgage makes more sense.

But now that I’ve seen these spreadsheet numbers, it’s hard to argue with what you’ve chosen: now you have the statistical benefits of the 15-year mortgage with the “cushion” that comes with a 30-year mortg.

I say you did well. It’s like switching banks for 0.05% more interest when the bank is way across town in a shady neighborhood. I’ll take the lower interest and safety every time.

JerichoHill
JerichoHill
11 years ago

For comparison’s sake, this resident economist of GRS and AWESOME FORUMS ADMIN (Cheap Plug), also refinanced at the same time JD. We actually found out the other was refinancing over a series of emails. Folks, I think that is a sign to refinance! Back on topic, unlike JD, my wife and I choose to refinance into a 15 year product. We had 13 years left on a 15 year HEL and 24 years left on a 30 year fixed. We looked at a 15,20,and 30 year product. Based on our unique situation, we could save approximately 200 a month with… Read more »

CF
CF
11 years ago

JD, I’ve been going through the same scenario in my head as well. We’re at about the exact same stage as you (5 years into a 30 yr mortgage), and I will probably do the same and take the 30 year refinance as a “hedge” against any bumps down the road. We have a great rate already (5.25), so I’ve hesitated since rates aren’t that much different. The Fed’s actions yesterday might drop the rates further, but most lenders have so many applications that they have little incentive to drop them any further. Thanks for the post.

the weakonomist
the weakonomist
11 years ago

I’d gladly pay $3,000 to have some “insurance” in case the flow of money slows or stops. Being aggressive could lead down a hole you can’t get out of. Best not to chase to best scenario, because it forces you make assumptions you might not be able to live up to. Conservatism for the win my friend!

Heather
Heather
11 years ago

hmmm… In the current economy, is saving $50 a month worth possibly being able to pay a smaller mortgage amount if needed? I would honestly say NO!!! Sometimes peace of mind is priceless. That said, I am the proud owner of a 15 year mortgage. My husband and I will have our home paid off before I am 40 and I am a stay at home mom. We refinanced when we were both working and thankfully have been able to afford the 15 year mortgage. Sometimes I think it would have been better to get a 30 year. Then I… Read more »

Katherine
Katherine
11 years ago

While I am far from buying a home, I made the same choice with buying a car last year. My husband and I opted for a 4 year loan because we knew we could comfortably make the payments, even though we were both students. Now that he has graduated and been looking for a job for three months, I am very glad that we have the lower payments. As soon as he gets a job, though, we plan to pay extra and pay it off FAST. In summary, I love the security of lower payments and the good feelings I… Read more »

Brad
Brad
11 years ago

I think you did the right thing. You basically have your own insurance policy on your lifestyle. Sure it costs a bit extra wiggle room allows for when life happens.

I think the key is that if a person has self discipline to make the extra payments they should go with a longer mortgage and overpay each month.
If a person does not, than a shorter mortgage might be better.

Scott
Scott
11 years ago

We’re just finishing up a refi and went through the same debate. We made the same conclusion that the 30 year (while still paying more) was the better decision even though we could have ‘afforded’ the 15 year. Our original goal in doing the refi was to lower our fixed expenses (while saving interest costs over the life of the loan) in case one of us loses our job going forward and we didn’t like the idea of having the required higher payment.

Keith
Keith
11 years ago

My wife and I just completed a refinancing in early January that allowed us to combine 2 15-yr HIL loans and our 30-yr mortgage into one mortgage loan. We had about 10 years left to pay on the 15-yr loans and 25 years to go on the 30-yr. We lowered the rates on the loans from 5.375 to 5.125 and went again with a 30-yr loan. It saved us about $200 a month in our payment, though after I bank that savings this year for some cushion I am planning on paying that savings as extra payments starting next year.… Read more »

ABCs of Investing
ABCs of Investing
11 years ago

I use the same logic as you and have a lower monthly payment. We do a lot of accelerated extra payments on top of that.

One thing to keep in mind when considering refi is that if you are going to pay it off early, that will reduce any benefits from refinancing. Most mortgage calculators out there assume you don’t make any extra payments.

Extra payments save on interest which means that lowering that interest rate is less beneficial if you are paying the mortgage off early. Just something to keep in mind when doing your calculations.

Sceptor
Sceptor
11 years ago

JD,
Why don’t you switch your payments to bi-weekly??

If you apply this and accelerate your 30 year mortgage that will really make a difference. I don’t like the idea of monthly payments when bi-weekly is usually a small % more. Bi-Weekly makes a huge impact on overall interest paid and shortens mortgage length as byproduct.

Waves
Waves
11 years ago

I noticed you compared the 15 yr w/ acceleration to the 15 yr wo/ acceleration. I think you should be comparing it to what you actually chose. It would save you nearly 10k if you had chose to do the 15 year plan w/acceleration.

In the comparison you also said it would “only” save 6k (10k if you compare to what you chose). It is interesting how as you have moved out of debt that a 6k savings is not as big a deal to you anymore.

Michele
Michele
11 years ago

We chose a 15-year mortgage 8 years ago. We refinanced about 1 1/2 years later for another 15-year mortgage with a lower rate. We now have 8 1/2 years left to pay off our mortgage. To date, we’ve never had a problem paying the higher dollar amount even going down to one income. We have always kept an emergency fund and have lots of money socked away in retirement. If a catastophic emergency happened, we’d still be fine, so we opted for the lower interest rate.

AD
AD
11 years ago

We’re planning to do the same thing you’re doing–30 year mortgage, paying extra every month.

I want the safety net. I like knowing that we can pay the bills on one salary, both for piece of mind, and because I’m 27 and kids are probably in the 5-year plan. I want the options to return to work part time or maybe not return at all and freelance. Either way, the closer we are to living off of one salary, the more choices we have–whether it’s being a SAHM or starting a business.

Chett
Chett
11 years ago

J.D., We did the exact same thing last summer. We opted for a longer term and are putting extra money towards our mortgage each month. In the past, when we were in debt, we would have chosen the longer term for a lower payment, made some shallow promise to ourselves we would pay more when we could and then filled whatever wiggle room we had left with monthly payments for more crap that we didn’t need. Now we have clear goals and paying down our mortgage is one of them. I think leaving yourself some room “just in case” was… Read more »

Do You Dave Ramsey?
Do You Dave Ramsey?
11 years ago

Nicely done JD. The key point I’d illustrate is the diligence you put into the process. You clearly ran the numbers but also factored in “off sheet” risks and possibilities as well.

Too many people look for the lowest payment so they can obligate those newly freed funds elsewhere.

Rather, you took advantage of the lower interest rates to do 2 things – improve your payment power AND maximises or at least preserves your buffer.

I think that’s a winning combo

Deborah
Deborah
11 years ago

“If nothing happens along the way, then this will have been a poor choice.” I don’t think so – I think having the breathing room and peace of mind will be worth the financial decision in the long run. Maybe it won’t be as financially rewarding – but you’re obviously in a place that’s just as much about emotional/mental rewards as it is about financial. Safety and Security are worth it. We were on the verge of refinancing (we’re also 5 yrs into a 30 yr mortgage) when our home value fell down a gorge and got eaten by hyenas.… Read more »

Tom Murin
Tom Murin
11 years ago

We refinanced from a 30 to a 15 a few years ago. While we love building equity faster – we now regret the decision based on our cash flow situation. In hindsight would have felt better staying with the 30 and making additional payments (which we were already doing).

Shaz
Shaz
11 years ago

Bravo. You can’t make decisions by the numbers alone!

J.
J.
11 years ago

Are you kidding me? Absolutely you made the right choice–this current financial crisis is an excellent case in point. But any sort of, god forbid, medical emergency, house emergency, family emergency, or job emergency can tip anybody over the edge if there is no buffer. It’s one of the main points I love to read about on your blog, as it reinforced my deep seated life philosophy. Congrats on the savings!

Neal Frankle
Neal Frankle
11 years ago

The choice you made gives you tremendous flexibility and lots of “sleep at night” value.

I think it was a smart move.

A mortgage is the biggest debt most of us ever have. As a result, we have to consider everything – not just the numbers.

Adam @ Checkbook Diaries
Adam @ Checkbook Diaries
11 years ago

Hi J.D. We are going to be refinancing soon and plan to do the same thing. Although we should be able to afford reducing the term to 15 years, we like the idea of knowing that if need be we can simply pay the “minimum” on the mortgage each month and have some extra money for emergencies. In our case, we are expecting our first child and want to be sure that we have a little extra wiggle room each month in case of unanticipated expenses. Our goal is to put the extra money saved in P&I into our consumer… Read more »

DP
DP
11 years ago

could you please post the spreadsheet that led you to these numbers?

I also agree w/ your plan.. But the fact that you are paying 10K for the “insurance” option does seem a little steep..

Barb1954
Barb1954
11 years ago

I would not want to restart my mortgage at 30 years after several years of payments. All that extra interest is just money out the window. My husband and I bought our house 19.5 years ago and have refinanced it three times. When we purchased in 1989, the interest rate was 9.75%. We refinanced to another 30-year loan a couple years later when rates dropped 2% points. Because we’d put 10% down and our house had appreciated in value, we now had at least 20% equity and were able to drop the PMI insurance. Several years later, when rates dropped… Read more »

sandy
sandy
11 years ago

We bought our place 10 years ago (this mmonth!.)We looked at the 30 and 15 yr options at the time, and went with the 30 year, with the idea that we could always accelerate payments, and having a lower monthly payment if we needed to. We have put extra toward the principal most months. When hubby got a bonus or refund or some other chunk fell in our laps, a lot of it went straight to mortgage. Now, we are looking at likely being done with a mortgage by end of 2010. We’ll be 48. So, 12 years of mortgage.… Read more »

nickel
nickel
11 years ago

We did a 15 year @ 4.875% when we refinanced in Feb 2008 and we’re pre-paying it. That being said, I was drooling over the possibility of 30 yr fixed rates @ 4% (this was batted around a few months ago). Talk about an inflation hedge! If I were able to get a rate that low for that long, I would pay it off as slowly as humanly possible. All signs are pointing toward increased inflation down the road, which would rapidly erode the ‘real’ cost of our mortgage. All of this being said, your strategy makes sense from the… Read more »

leigh
leigh
11 years ago

we did that with a car loan several years ago. and sure enough, halfway into it, we incurred nearly $20k in medical bills and then my husband lost his job.

adjusting to one income and scant unemployment benefits was rough enough, at least we didn’t have to worry about making our regular high car payment. that cushion was worth it for us.

J.D.
J.D.
11 years ago

@DP (#23)
I wish I could share my spreadsheet, but I can’t. It was an ad hoc affair created for this post, and I ditched it after I was done. I regret this because it would have been fun to share and it occurred to me that if I have any math errors, I’m not going to be able to determine how they occurred. (I don’t think I have any errors, but you never know.)

Next time I do something like this, I’ll save the spreadsheet.

John Ingle
John Ingle
11 years ago

Hey J.D.! I’m a new reader and I love everything I’ve seen so far! Keep up the good work. I’m glad you posted this because I’d been wondering about the numbers for a while and simply hadn’t run them yet. However, I do have a question for you if you’re up to it. How might the numbers (and your decision) change if you invested the difference between the refinanced 30 year accelerate and non-accelerated mortgage payments? I know that you can’t guarantee a particular return on investment, but if you average a decent performance over the term of the mortgage… Read more »

Budgie
Budgie
11 years ago

Great point, JD. We did the same thing with our mortgage when we took it out last year. We could have afforded the 15-year term, but we opted for the 30-year term for peace of mind. We’ve been paying a significant amount extra towards principal every month, but we didn’t want to take the risk that something could happen and we couldn’t pay our mortgage. What if one of us lost our jobs? We couldn’t pay the 15-year term mortgage with one income, and that’s not a risk we were willing to take. It seems to work the same way… Read more »

Nancy
Nancy
11 years ago

We’re in the middle of refinancing from a 30 year mortgage (6 years in) to a 15 year. If all goes well and we close in the next couple of weeks, we’ll have dropped 2 whole percentage points and dropped our monthly payment by around $400. Over the length of the mortgage, we will be saving over $100K in interest. The factors that weighed into choosing the 15 year over the 30 year were the following. 1. The interest rate was lower on the 15 year, which increased the amount of savings. 2. The monthly payment was lower than our… Read more »

Troy
Troy
11 years ago

JD Pay no attention to your detractors. I OWN a mortgage company, and you chose correctly. Ammoritization means zilch. It only determines the amount to principal on each payment. If you pay extra, you create your own ammoritization. The fact you opted for a 30 vs 15 loan only means your MINIMUM payment is less. that allows for flexibility. A 30 gives you choices. You can pay, or not. you can turn it into a 15, or a 109, or a 20 or a 30 simply based on your payment schedule. a shorter term affors no such flexibility. the difference… Read more »

mwarden
mwarden
11 years ago

@JD, you are doing the right thing. The small savings is not worth committing to the 15 year repayment period. I would pay the extra $3k to have the freedom to use that money more wisely, should a more wise decision come across.

RT
RT
11 years ago

We refied in Feb of last year. We rolled two mortgages (30yr regular and 15yr HELOC) year mortgage into a standard 15 year loan. Let me tell you, it was scary and exciting to move into a 15 year mortgage. I had the same concerns you did about having a cushion in case something happened. It took about 3 payments before I really felt comfortable with the new bill but then I got excited with the prospect that we’ll own our house free and clear before we’re 45. It works best for us at this point because we’re DINKs (Dual… Read more »

aa
aa
11 years ago

It’s better to be safe than sorry.

Laura
Laura
11 years ago

If you want to play around with different refi scenarios, this site has some great mortgage spreadsheets:

http://www.mtgprofessor.com/spreadsheets.htm

We have a 15 year mortgage at 5.75% that we pay extra on. We’ve considered refinancing to a 30 for the same reasons you mentioned, but we’re so close to having it paid off (December 2010!) we decided it wouldn’t be worth the headache.

ldk
ldk
11 years ago

We opted to not use a mortgage product at all 12 years ago when we built our home. We financed it with 25% down and the rest on a secured line of credit at prime less a quarter. Minimum payment of interest only. Our safety net (which we never used) was that we would have only had to make the minimum payment (about $600/month)had our income decreased for any reason. We made regular monthly payments of $1200/month ($600 of which went immediately to reduce the principal) with the intention of paying it off in 15 years. Some bonuses came our… Read more »

mjfrombuffalo
mjfrombuffalo
11 years ago

I find it odd you didn’t mention 20-year mortgages. While not as talked-about as 15- and 30-year mortgages, they’re available and make a very happy medium when you’re balancing interest and payments.

Trevor Hammond
Trevor Hammond
11 years ago

JD – love your analysis, and your blog as always. I’ve been helping families make this same decision for over 10 years. The way I explain it to clients is…”how do you manage your risk?”. Choosing a loan product, and term, is really about managing risk. This is exactly what you did. While a 15-year fixed-rate mortgage can save you thousands over the life of the loan…too often people get caught up in the numbers and forget to “real life” factor. These days I get calls weekly from great clients and friends who have lost jobs or taken pay cuts.… Read more »

RP
RP
11 years ago

We got a 30-year 5.5% mortgage when we bought our house 6 years ago, and have been prepaying it from the beginning. We were thinking about refinancing, but then our old mortgage broker recommended against it. He said that the prepayments lowered our effective interest rate; so we hauled out our trusty spreadsheet where all of our payments are listed and had it solve for our interest rate. Bingo! 3.79%, even if we make no more prepayments. So, unless mortgage rates go way down, we’ll shelve this idea for now and concentrate on rebuilding our savings from the plundering they… Read more »

mary
mary
11 years ago

What you’re doing basically is allowing yourself some insurance. Although it looks like you could save more money with the 15 yr mortgage, following this line of thought you could also save money by not paying for health insurance, life insurance, etc., AS LONG AS YOU NEVER NEED. Hindsight’s 20/20.

mary
mary
11 years ago

What you’re doing basically is allowing yourself some insurance. Although it looks like you could save more money with the 15 yr mortgage, following this line of thought you could also save money by not paying for health insurance, life insurance, etc., AS LONG AS YOU NEVER NEED IT. Hindsight’s 20/20.

Kristen
Kristen
11 years ago

We have a business loan, and 1.5 years ago, opted to write up our purchase contract over 8 years with a minimum $5K per month payment, rather than about 4 years at $10K, just to be safe. This was the absolute right thing for us to do. For the first year, we were able to sock away that ‘extra’ $5K per month, but in September, business largely dried up. We’ll be able to survive because we were conservative, and we were able to keep some of that money in the bank as a cushion. We’ll be refinancing our house here… Read more »

Weston
Weston
11 years ago

Well since the Spreadsheet was trashed does anyone know of any online calculators that do essentially the same sort of comparisons. I know that there a ton of mortgage calculators on the net but I don’t know of any that do this particular calculation.

Since I (and clearly many many others) are considering the same factors as J.D. I was hoping someone could point me in the right direction.

Ian
Ian
11 years ago

Great Post JD, You make a good argument with valid points. You’re paying extra anyway and you are playing it safe in uncertain financial times. I like to make three other comments: 1. It concerns me how many write (including you, JD) that by extending the length of their mortgage you “Save” money every month. You should remove that white lie from your vocabulary. You are not saving money per month, your paying extra to pay that money later. It’s like walking up to a car salesman and telling home you want a $200 monthly note (car buying mistake #1).… Read more »

brooklynchick
brooklynchick
11 years ago

If the past few months have taught me anything, its that there is NO SUCH THING as a “secure” job. Having your fixed costs at a level that can be maintained on ONE salary is the best plan you could have, IMHO. I think you did exactly the right thing, esp. if your mortgage has no penalties for early payments.

Linear Girl
Linear Girl
11 years ago

I’d like to challenge you to run and consider one more set of numbers. How much more would you need to accelerate your payments on your new loan to “break even” with the 15-year loan? In other words, how much extra would you need to pay each month at 4.96% in order to make the total interest paid over the life of the loan equal to the $76,985.03 you would pay on the accelerated 15-year plan? I doubt (though I don’t know, hence your running of the numbers, which suddently sounds very Hemingway-esque) it would be a significant increase and… Read more »

SV
SV
11 years ago

This may have already been mentioned, but have you considered tax deductions for the interest on your mortgage? The 15-year loan would have saved you $8,966.61 in interest, but if this interest is tax deductible, the amount saved with the 15-year loan will effectively be less than this, won’t it?

Brian
Brian
11 years ago

Just because something feels good doesn’t necessarily make it the correct thing to do. Paying down a 30 year mortgage may feel safe, but nothing is safer than living within your means while aggressively paying off a fifteen year mortgage. Paying less money for the same asset just makes sense. Its worth the sacrifice to be beholden to no one.

Karen
Karen
11 years ago

@Ian: I can’t speak for the rest of the commenters, but we took a 30-year term on a $50k mortgage and are on track to have the loan paid off in November after only 15 months. The only discipline involved was setting up an automatic payment through our bank.

If the worst happens, we’ll call the bank and reduce our payment to the minimum until we we’re back on our feet.

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