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15 Year Mortgage Test – Can You Afford It?

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If you are halfway good at math then you understand that, assuming all else equal, a 15 year mortgage will always beat a 30 year mortgage. This is a fact that many financial planners and talking heads latch onto when they tell you that a 15 year mortgage is better than a 30 year loan. And when you run the numbers, it’s easy to see why they say that. 15 year mortgages have lower interest rates than their 30 year counterparts, and they drag the interest payments out over fewer years. The interest savings on a 15 year mortgage can easily be close to $100,000 compared to a 30 year loan. On paper, it sounds great.

15 year mortgage affordability testBut I’m going to tell you that despite what the raw numbers tell you, and despite what the financial gurus say, a 30 year mortgage is better for most people. And here is why…

It’s All About Cash Flow

Cash flow is probably the most underrated aspect of personal finance. But just because the media doesn’t mention it frequently doesn’t mean it’s something you can ignore. Let this example play out, then take the test at the end of the article to determine if a 15 year mortgage is something you should shoot for, or if you should go for the 30 year mortgage and increased cash flow and financial flexibility.

Running the Numbers:

Here are some recent national averages I found on fixed rate mortgages: 15yr @ 3.14%; 30yr @ 3.85%. Using a mortgage calculator at BankRate, I ran the numbers. Assuming all associated closing costs are identical and with the following mortgage assumptions:

  • $250,000 house value
  • $50,000 down payment (20% down to avoid PMI)
  • $200,000 mortgage (finance 80%)
  • all related costs are equal (property taxes, insurance, etc.)

Monthly principle and interest payments will be:

  • 15-year: $1,394.67
  • 30-year: $937.62

Payment difference: $457.05/mo.

Total Interest Paid:

Let’s assume you take the mortgage to term and follow the amortization schedule completely. At the end of your loan, you will have paid the following amounts of interest on your home:

  • 15 year mortgage: $51,040.53
  • 30 year mortgage: $137,541.93

A 15 year mortgage would save you $86,501.40 over the life of the loan. That isn’t chump change, and is likely to convince many people to go with the 15 year mortgage “if they can afford it.” But we’re not done playing with numbers yet.

Let’s assume you choose the 30 year mortgage, but make the same monthly payment you would have with a 15 year mortgage. Using the same loan assumptions as above, you would pay $68,356.31 in interest on a 30 year mortgage when making the same size payment as the 15 year mortgage (the spread on the interest rates between the 15 and 30 year loans accounts for the difference).

Verdict: Prepaying a 30 year mortgage at this schedule would take an additional 13 months of payments, and $17,315.78 in interest payments vs. the 15 year mortgage. Suddenly the gap isn’t so large. Granted, $17k is a lot of money, but so is the value of flexibility.

Back to the Importance of Cash Flow…

When you run the numbers, the 15 year mortgage still comes out ahead of prepaying a 30 year mortgage. The difference amounts to about $90 per month (total interest savings of 15 year mortgage, divided by the 193 months it would take to pay off the 30 year mortgage with additional payments). Yes, $90 per month is a lot of money, but here is the difference:

you are required to pay the full amount of the 15 year mortgage each month, you can scale back on the 30 year mortgage without penalty at any time, so long as you meet the monthly minimum.

This flexibility equates to financial insurance in the event something happens to your financial situation – such as a job loss, decrease in income, unexpected expenses, emergencies, etc.

What you can do with the additional cash flow

My final argument against the 15 year mortgage centers on opportunity cost, or what other things you can do with your money other than sink it into a mortgage. With $450 extra cash flow per month* you can:

*additional cash flow will vary by each loan

The 15 Year Mortgage Test

I’m not here to tell you not to get a 15 year mortgage. If you can afford it, and it won’t stretch your budget or put you in a bind if something happens to your cash flow, then by all means go for it. But I will tell you there is more to comparing 15 and 30 year mortgages then just reading the bottom line. I would use the following as a litmus test to determine if you should go for the 15 year mortgage, or the 30 year and prepay:

  • Are you maxing out your 401k, IRA and other retirement accounts?
  • Do you have any additional consumer debt (credit cards, car loans, student loans, etc.)?
  • Is your job or income stream stable?
  • Do you have a 6 month emergency fund?
  • Do you have an excess of cash flow each month when accounting for all other fixed payments (loans, bills, utilities, insurance, investments, etc.)?
  • Are you fully prepared for any large expenses which may come your way soon (children in college, paying for a wedding, etc.)?

If you answer “no” to one or more of these questions, then strongly consider getting a 30 year mortgage and prepaying what you can afford. Use your extra cash flow to take care of these other areas first, and build security into your financial situation.

Photo credit: The-Lane-Team


Published or updated February 21, 2012.
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{ 5 comments… read them below or add one }

1 krantcents

When I refinanced 8-9 years ago, I went with a 15 year mortgage. My balance was small enough that the payment only changed by a couple hundred dollars. I went with a 15 mortgage because I wanted it paid off by the time I retire and the lower interest rate. I was able to do it because I had no other debt, my children are grown and I downsized 14 years ago. I even increased the principal payment to guarantee payoff on time.

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2 Ryan

It looks like you passed the 15 year mortgage test! Having no additional debt, no looming large expenses, and having your financial house in order makes it much easier to go to the 15-year mortgage vs. the 30-year.

But you also bring up another good point – refinancing can be a different story, especially if you have a smaller principle than when you started. In this example, I compared the 15 and 30 year mortgages for an initial home loan with the same starting balance. But when you have already made a lot of headway on your principle, you can often refinance to a shorter term without raising your payment too much. Another benefit is that you don’t extend your pay off date as far into the future. (for example, I just refinanced my home, which extended the payoff date another year). I will prepay my mortgage as much as we can afford, but since I still have a 30-year mortgage, I have the flexibility to scale down my payments if necessary. And that is immensely important to me as I am self-employed and have two young children.

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3 krantcents

I recently looked into refinancing again, because of the low interest rates. I thought about using a 5 yr ARM because I would have my mortgage paid off before it could change. The interest rate was 3.01%, but the closing costs used up some of the savings and it did not make that much sense for a small balance and short period.

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4 Mike

While I can commend you for bringing up the aspect of cash flow, most of the questions you asked to determine whether you should opt for a 15 vs. 30 year mortgage should be asked to determine whether or not you should even be buying a house.

Most specifically, why would you even be considering buying a house if: 1) You did not have all other consumer loans paid off, ESPECIALLY any unsecure debt like a credit card; 2) You did not have a steady income stream; 3) You did not have a 6 month emergency fund (including your new potential mortgage payment); 4) You did not have extra money at the end of each month (you should never be buying something on loan if you’re already living paycheck to paycheck).

Concerning maxing out your retirement, I wouldn’t opt for a 30 year simply so you can save for retirement instead of paying your mortgage early, you should be able to afford both a 15 year and still save for retirement (goes back to buying a house that puts you on paycheck to paycheck. Saving for retirement should be something you’re already doing, i.e. budgeted already, and is therefore already included in determining how much of a mortgage you can afford). And any large expenses coming “soon” is somewhat open to interpretation. A wedding is something that you should have a definite time and decent budget on, and should be saved for or budgeted to be saved for into a sinking fund on top of your mortgage payment.

A lot of people say that they’ll take is longer mortgage with smaller payment and just pay it off early, but far more times than not, that promise fails to become practice. The 15 year mortgage and budget forces discipline. If you foresee troubling times coming, pizza delivery and waiting tables are good paying part-time evening 2nd jobs, my wife and I both know this from experience and are practicing it now to pay down our debts before we even bother looking at a house.

There is only 1 good time in your life to buy a house, and that’s when your budget tells you that you can afford it. Not the bank saying rates are so low, not the talking heads saying home prices have bottomed. Listening to those idiots are the exact reason why we’re in the situation we’re in to begin with.

Elsewhere on the site is a link to Dave Ramsey’s Baby Steps. I would suggest people, sorry, I mean EVERYONE DEFINITELY NEEDS TO look into Dave Ramsey at http://www.daveramsey.com.

A final note on mortgages: The “interest paid deduction” myth. I say it’s a “myth” because of 3 things.

1) It’s only a deduction if you’re itemizing instead of using the standard deduction. While many mortgages are initially enough to put someone over the threshold into itemizing, as you pay down your mortgage, your interest paid lowers and eventually, unless you have a number of other itemized deductions, you will no longer be itemizing and deducting your interest. This is an individual specific situation for everyone and should be figured out for sure through tax planning. Any bankster who says you just simply deduct the interest paid should be laid into because they cannot say at all with any certainty that the interest you pay will be deductible without knowing your exact tax situation.

2) If you’re in the 25% tax bracket, please tell me, how does it make ANY sense at all to keep a mortgage around to pay that bank FOUR TIMES (4X) what you would be paying the government. In numbers, if you itemize and paid $4,000 in interest to the bank, it saves you $1,000 (4,000 x .25) in taxes. If you REALLY want to be that stupid, pay off your mortgage, and I’ll gladly pay your $1,000 in taxes to the government if you pay me half the interest ($2,000) you would have otherwise paid the bank. Think about that, would you pay me $2,000 so I can pay the government (or any other entity) $1,000? Talk about a stupid money move.

3) Keeping a tax deduction around versus having extra cash flow? Talk about another no brainer? This whole article was about cash flow. Using the same example of paying $4,000 in mortgage interest, you’re keeping around a mortgage payment of however much (you have $937 for a 30 year payment in your example) to save $1,000 in taxes? Is that $1,000 tax savings going to help you every month pay your $937 in the event of an emergency, job loss, or anything else that affects your income?

The only good thing mentioned in this article is putting 20% down to eliminate PMI, which should be illegal since it’s the biggest rip-off in the mortgage world.

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5 Ryan

Mike, let’s take a step back for a second and look at the bigger picture… your assumption works great in a perfect world, but no one I know lives in that bubble. It’s easy to say how things should be done on paper, but another thing to do those things in life, especially when it is difficult to predict our financial situation 5 years out, much less 15 or 30 years out.

The test I outlined, for example, works just as well for a refinance as it does an initial purchase (a refinance is a mortgage after all), and this article was written as a response to my own thought process after refinancing my home on a 30 year mortgage. I can afford the payments of a 15, but due to my income (I am self-employed) and other financial goals, I chose to refinance on a 30 year loan.

Another case when this test works very well for refinancing is after one’s financial situation has changed. For example, a two income family is now a one income family, perhaps someone was downsized and had to take a job with a lower salary, had large medical expenses, had a large emergency which wiped out a portion of their life savings, etc. Maybe they didn’t invest for retirement when they were young, but want to put their retirement savings and other investments on overdrive to make up for lost time.

Would you then tell that person they should only refinance if they can afford a 15 year mortgage? How responsible would that be?

It’s easy to say how other people should live their lives when you take a text book approach. But, as I’m sure you know, life has a tendency of breaking off the script.

“There is only 1 good time in your life to buy a house, and that’s when your budget tells you that you can afford it.”

I agree 100%. And as life changes, so do budgets. That’s why building in some flexibility on one’s fixed expenses allows people to have some breathing room when life throws them a curve ball.

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