Mr. Moneyaire and I have different philosophies when it comes to our mortgage. Mr. Moneyaire would prefer not to have a mortgage. I on the other hand, when interest rates were low, I never wanted to pay our mortgage off. Back in 2018 our mortgage interest rate was in the low 4% range. We decided to take advantage of the historically low interest rates at the time. We had the option of getting an interest rate in the low 3% range if we refinanced into a 30 year fixed or a fixed interest rate in the upper 2% range if we went with a 15 year mortgage.
My vote was for the 30 year fixed mortgage with an interest rate at about 3.25%. Mr. Moneyaire wanted the 15 year fixed mortgage with an interest rate at 2.875%.
This is what the monthly difference in mortgage payments would be:
|Monthly Mortgage||Monthly Payments|
|15 year fixed @ 2.875%||$1,301|
|30 year fixed @ 3.25%||$827|
This is what the total interest payments would be for each loan.
|Mortgage Type||Total Interest Paid|
|15 year fixed @ 2.875%||$44,130|
|30 year fixed @ 3.25%||$107,682|
We crunched the numbers. With a 15 year mortgage we’d be paying an extra $474 a month and we’d save $63,552 in interest payments over the life of the loan. But… What if we did the 30 year and invested the difference?
Investing the difference
After 30 years of investing $474 a month at an 8% rate of return (the stock market has averaged a 10% rate of return over the last several years) with the assumption of an annual compound, we’d end up with $497,000 in gains. If you add in our contributions, we’d be up $667,652. Ten times what we’d save in interest by paying the mortgage off early.
So, obvious. Right?
My argument for the longer mortgage at a higher interest rate was that we could take the “extra” money we would have been putting into paying off the house every month and invest it instead. Given that the US stock market has averaged about a 10% return over the last several decades, I thought this was a no brainer. Even though we’d pay more in interest on the house over the life of the loan, the monthly payment was less. This gave us the opportunity to invest our money instead. We’d potentially earn a lot more in growth by investing in the stock market.
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Mr. Moneyaire did not think the decision was obvious.
Mr. Moneyaire, however, was not moved by my analysis. He didn’t want a mortgage for the next 30 years, even if the payments were lower every month. Mr. Moneyaire wanted to be mortgage free by the time he was in his early fifties, if not sooner. Peace of mind over potential stock market gains was more tangible.
Plus, Mr. Moneyaire argued that after we finished paying off the mortgage we could realign our mortgage payments towards investments. If we put the $1,301 towards investments after paying off the mortgage, not only would we save $63,552 in interest, but after 15 years, we’ll earn $234,180 in profits if we assume an average of an 8% return. That’s $505,603 if you add up the interest saving, profits and monthly contributions over the 15 years after the mortgage is paid off. We would have less wealth in this scenario. However, we would have a paid off home in half the time. With the extra 15 years, there’s a lot of opportunity for something to go wrong by keeping our mortgage going.
A big burden
Investing was really difficult for the average person
And the winner is:
Mr. Moneyaire. Yup, I lost. We went with the 15 year mortgage that was a bigger payment a month than our old mortgage. I wasn’t initially happy with this decision. Now though, I see Mr. Moneyaire’s point.
30 years of assumptions
Mortgage freedom… for us.
Once we pay off our mortgage we’ll be 100% debt free. We’re projecting that we’ll pay off our mortgage when Mr. Moneyaire is in his early 50s. Not having any debts and healthy retirement and after-tax accounts providing us passive income means we’ll have more options, more freedom. We might be giving up potential stock market gains but we’ll have peace of mind by being debt free.
15 year or 30 year mortgage?
There are pros and cons to getting the 15 or 30 year mortgage. When it comes to mortgages, what you chose should be tailored towards your personal needs, goals and behaviors. Consider both carefully and be honest about what would be best for your financial future.
Here are what I think the pros and cons are for these two different mortgage types.
15 Year Mortgage
- Build equity faster
- Lower interest rate
- Pay off the mortgage sooner
- Stuck with higher payments
30 Year Mortgage
- Lower monthly payment; makes home ownership accessible
- More flexibility; pay more towards principal or divert
- The lower payments may entice you to get a more expensive home
I think one of the biggest risks between the 15 year and 30 year mortgage is that the smaller 30 year payment may entice you to get a more expensive home. Afterall, if you could afford a bigger monthly payment at $2,500 on a 15 year term, couldn’t you afford $2,000 monthly on a 30 year term on a “nicer” home? Careful.
Whatever you decide I hope your decisions let you sleep well at home.