Today is the first in a new series here at Rockstar Finance called Money Match-Up.
This series will introduce financial topics and allow two money bloggers to argue opposite sides of the issue.
From there you can decide which option you think is better or even join the fray yourself in the comments.
Today’s issue pits the 15-year mortgage against the 30-year mortgage. Which is better?
We’ll begin the debate with The Financial Journeyman arguing for the 15-year mortgage.
Here are his thoughts:
A Fifteen-Year Mortgage
In my opinion, there is no such thing as good debt. Some forms of debt, however, are better than others. For example, people should avoid all unsecured debt including credit cards or payday loans. While auto loans are secured based on the value of the vehicle, they too should be avoided if your goal is to save as much as possible and to one day be financially independent.
Homeownership is a major aspect of the American Dream. Many people dream of owning a nice house with a white picket fence. Parents envision raising their children in a safe suburban neighborhood, with good schools, and plenty of other children for their kids to grow up with.
Most people cannot afford to buy a house based on their savings alone. For these folks, they will have to borrow money to purchase a house. Even if they are part of a dual-income couple, most people do have enough liquid assets to simply write a check to pay for a house.
For most people to make their dream of home ownership a reality, they will need to borrow money in the form of a mortgage. What makes a mortgage better than unsecure debt is that unsecure debt offers zero benefits. The benefit of having a mortgage is that it can provide tax benefits like income tax deductions that can reduce your tax liability.
There are many factors to consider when taking out a mortgage. Should you take out a fixed or variable rate mortgage? How much of a down payment can you afford? The focus of this post, however, is based on the term length of a mortgage.
Mortgages have two general term lengths. The two most common term lengths are 30 and 15-year mortgages. Most people take out a 30-year mortgage because of lower monthly payments, flexibility with payments, and low interest rates that can be locked in for a long time.
There are also benefits that should be considered for taking a 15-year mortgage:
Close to Retirement
For those who are close to age 50, a 15-year mortgage is a good option for people who do not want to carry a mortgage with them into their retirement years. Once a person retires, they will be relying on a fixed income to pay their bills. For many people, their last decade of employment is the highest earning period of their career. If a person is age 50 and plans on retiring at age 65, a 15-year mortgage would enable them to pay off their home loan before entering retirement. That would allow them to have more money to enjoy during retirement.
Less Interest Paid
Since a 15-year mortgage is half the length of a 30-year mortgage, the total interest paid would be much less. For simplicity sake, let’s compare a $100,000 mortgage with a 4% interest rate for both a 15-year mortgage and a 30-year mortgage. The monthly payment on the 15-year mortgage would be $740 per month. The 30-year mortgage would be $478. While the monthly payment is less, a person who opts for the 15-year mortgage will end up saving over $38,000 in interest to the lender.
A 15-year mortgage can be beneficial for people who are working towards reaching financial independence. The money that a borrower saves on interest can be added to their retirement savings accounts. Based on the $38,000 in interest savings in the above example, a person would be able to free up enough money to fund their Roth IRA for almost 7 years. The savings would even be greater on larger loans.
Since you are reading this post, you most likely do not like debt. You either do not have debt or are working on paying it off. By taking a 15-year mortgage, the borrower would be in debt for half the number of years compared to those who take out a 30-year mortgage. The shorter-term mortgage also allows the home owner to build equity faster by paying down the principal balance much quicker.
Less Expensive House
The monthly payments on a 15-year mortgage will be more expensive than a 30-year mortgage for the same amount of money borrowed. For most people, that would entice people to buy a less expensive house. The benefits of buying a less expensive house would reduce other homeowner expenses. Most of the time, a less expensive house will have lower taxes, lower costs to maintain the house, and lower costs to heat or to cool the house.
Lower Interest Rates
The interest rate on a 15-year mortgage is generally lower than on a 30-year mortgage. Interest rates are controlled by the Federal Reserve and fluctuate due to economic conditions. We currently are in a period where interest rates are raising. According to Lendingtree.com, the average difference in interest rates between a 15 and 30-year fixed rate mortgage is almost 0.5%.
There are benefits and drawbacks for both 15 and 30-year mortgages. It is truly an individual decision. There are many factors that need to be reviewed before you sign on the dotted line and take out a mortgage. Be sure to perform your due diligence because this is most likely the largest financial decision that you will ever make. If you are buying a less expensive house, can afford higher payments, are close to retirement age, or want to save on interest payments, a 15-year mortgage is an option that you should consider.
Next we have Michael Dinich from Your Money Geek who starts off getting right to the point…
Why I Hate 15-Year Mortgages
Doesn’t paying off your mortgage in 15 years sound great? 15 years will fly by and then you will magically own the home of your dreams, right? This idea may sound wonderful, however; faster isn’t always better. Before you venture into homeownership, you may want to consider all of the pros and cons of your financial endeavors prior to progressing.
When applying for a mortgage, you can decide between a 15-year mortgage and a 30-year mortgage. Both offer numerous benefits and downsides. But when it comes to the intrigue of the 15-year mortgage, you should proceed with caution.
So, what is a 15-year mortgage?
First, it’s important to understand what a 15-year mortgage may entail. When you receive a 15-year mortgage you pay your mortgage off within 15 years if you have made all payments on time. There is often a fixed interest rate that you carry for all 15 years. Payments tend to be significantly higher than a 30-year mortgage, so you must budget accordingly for this expense.
There are a few benefits to getting a 15-year mortgage such as:
- You will build equity faster since your payments are condensed.
- You will pay less in interest compared to a 30-year mortgage.
And this is a faster path to becoming a full homeowner.
In theory, it may sound like a great idea to move forward with a 15-year mortgage. But there are a few downsides that could potentially extremely outweigh the benefits.
What are the downsides to a 15-year mortgage?
Like with any financial decision, selecting a 15-year mortgage comes with some extreme downsides. Some of these downsides include:
- Taking on higher payments. 15-year mortgages can be 50% higher than 30-year mortgages. You must also factor in your property taxes, fees, and insurance into this payment. Before you know it, your housing cost could eat up your entire monthly budget if you aren’t careful.
- Receiving less bang for your buck. Since you will have such a high monthly payment, you may not qualify for as much as you would with a 30-year mortgage. If you are looking to stretch your funds, this may not be an appropriate use of your monthly income.
- Reducing your tax advantages. If you purchase a home from now until 2026 you can deduct interest on a home up to $750,000. With a 15-year mortgage, your interest will be less, allowing for fewer deductions.
But the two biggest downfalls may be associated opportunity cost and the “what ifs” of life.
Opportunity cost is the possible gain of selecting an alternative investment. If you decide on a 15-year mortgage you are tying up a significant amount of cash flow. Let’s say you are not contributing enough to your 401(k) to receive the company match. You are leaving free money on the table. Imagine missing out on 3%-7% of your salary on the table every year.
Or maybe you aren’t maxing out your retirement accounts. This could have an extreme impact on your retirement and tax planning strategies for the future. If you can’t afford to pay your 15-year mortgage and max out your retirement accounts, you may want to stick with a 30-year mortgage.
Another large downfall is the “what ifs” of life. What if your taxes go up? What if your hours get cut? What if you need extra cash? What if you lose your job and can no longer afford the payments? What if there is another opportunity to earn a better return on your investment? Life is full of “what ifs”. You never know when a tragedy will strike.
Banks will not be forgiving and let you start making 30-year payments instead of 15-year payments. If you fall on hardship, you may still be liable for the monthly payment. This could lead to financial devastation if you haven’t planned accordingly.
Additionally, a home purchase is not a risk-free investment. Purchasing a home does not guarantee you will make a profit when you go to sell. If you are forced to leave your home in a down market or rent it out, you may not be able to turn a profit with a 15-year mortgage. If the 15-year mortgage was a mistake, you out of options. Home values don’t always go up, if you need to refinance your mortgage down the road, you could be out of options.
What can you do to pay off your mortgage faster without getting a 15-year mortgage?
Even if you determine a 15-year mortgage isn’t the right solution for you, you can still work towards paying your mortgage off in a timely manner. If your mortgage doesn’t have a penalty for paying it off early, you can put additional income toward your monthly payment.
Let’s say you start a side hustle or receive a bonus from your company, you can put the additional funds toward your payment. This way you aren’t responsible for the higher payment.
If you stay consistent and dedicated to paying your 30-year mortgage off earlier, you could save yourself money and build equity faster.
Do what is right for you
There are some financial situations where a 15-year mortgage makes sense. But overall it could cause you more stress and anxiety than it is worth. There are plenty of other ways to increase you income, create a side hustle, or invest in other form of passive income to pay down your mortgage is a more timely manner. You don’t need to be strapped to a 15-year mortgage to do so.
Weigh out the pros and cons, and make the best decision for you and your family.
So, those are the two sides of the equation. Which do you think is better for you?
He’s an early 50’s retiree who achieved financial independence, shares what’s worked for him, and details how others can implement those successes in their lives. He is also the author of a free ebook titled Three Steps to Financial Independence and spends a lot of his time interviewing millionaires.