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.

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

Mortgages are huge burdens. The idea that we could lose our home because we didn’t make a mortgage payment weighed heavy on the both of us. Its been a big obligation for most people. For my parents, they bought their home in the 1980’s. Interest rates back then were outrageous, even by today’s rates. Their interest rate at the time was 13%. They worked diligently to pay off their mortgage as fast as possible. They even paid prepayment penalties. Back then, this was a common thing. You could be penalized for paying your mortgage off faster than the full term. Its less common now and has been scaled back. It still exists though, so make sure you read your mortgage documents carefully.

Investing was really difficult for the average person

Regardless, back in the 1980s investing was difficult and you mostly had to go through expensive, and at times, deceptive brokers and financial advisors. Discount brokerages and intuitive trading platforms didn’t exist yet in the 1980s. The one thing my parents understood and could do was paying off their mortgage. They knew this would eliminate a huge debt burden. My parent’s retirement has been comfortable because they don’t have a mortgage to worry about. My parents have a very modest income in retirement. If they had a mortgage they would have very little extra for trips, going out to eat and bowling. Grandpa Moneyaire has taken up the sport in his mid 70s. Never would have guessed it. Getting rid of their mortgage was the smartest financial move they could make. It’s given them flexibility in retirement. So, Mr. Moneyaire’s mortgage free aspirations are more than valid.

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

A bunch of assumptions need to go into that $497,000 gain over 30 years. The biggest assumption is that we would consistently put the extra $474 a month towards investments. That’s a huge assumption, even for us. In life there is very little that happens consistently for over 30 years. We’d have to assume that we’d never give into life style creep and use the extra $474 a month towards extra spending. It’d be easy for us to skip investing, or reduce how much we’re investing in favor of a nicer car, an extra or nicer vacation, an extra meal out or a fancy purse. Afterall, we’d be able to afford those things, so why not treat ourselves?

Forced Savings

By having a heftier mortgage payment a month, we don’t have the option to use that $474 a month towards something else. We have to keep our expenses in check to make that mortgage payment. Also, we have more equity in our home. We’ll own it, debt free, sooner. This makes wanting to move to a larger home less appealing as we’d have to start a new mortgage. Not having a mortgage will allow us more flexibility when we’re a bit older to use our time as we want.

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.

Biggest Risk

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.

Cheers,

Mrs. Moneyaire