We are planning to retire early. Right now we are on track to retire comfortably at 47. We are looking to buy a house within the next 5 years. My question is, is it better to go on a 30-year mortgage and dump the extra into investments or go with a 15-year and have the mortgage paid off before we retire? If we go with a 15-year and we buy in 5 years, we would have the house paid off before our current planned retirement date.
However I just can’t get over the potential opportunity cost of not investing that extra money, which could mean one or both of us retiring even earlier. Right now our retirement needs are estimated at $40,000/year if we don’t have a mortgage to worry about and about $50,000/year for another 10-15 years if we still have the mortgage to pay off.
What do you think?
If someone, lets call her A, offers to lend you money at 3%. And another person, let’s call her B, wants to borrow money from you at interests rate 10%. What would you do? Would you say No to both of them and walk away?
I’d borrow from A, lend to B, and pocket the difference.
Another angle very few people talk about is, the monthly outlay for 15 year mortgage is much higher than 30 year. If due to health reason or job loss you can’t quite make that higher payment? You’d lose the house. So even if I were to pay the house off in 15 years, I would take out a 30-year mortgage and aggressively pay it down like it was a 15-year. I like the flexibility and extra margin of safety.
That 10% return is the annualized return of S&P 500 over the last 30 years. You as an individual should have a higher return than banks. Banks are much more regulated than individuals. They can’t put your deposit into the stock market for one.
1.5M house in Cupertino. Redfin says it’s “Hot”. So I guess it’s considered cheap in Cupertino. Using Redfin’s default calculator:
30 Year fixed P&I: $5,447
15 Year fixed P&I: $8,140
Difference is almost 3k a month. If both husbands and wife working and suddenly the husband got laid off, that 3K a month could be a real issue. I know people with Ph.D.'s who can’t find work after a year of looking. 3K a month for a whole year is 36K. Not a trivial amount of money.
Just to lazy to do a detailed computation. Just want to say that there is no free lunch. If one way is better than the other, the market, though not very efficient, would arbitrage still the advantage is gone. If you think it is, your analysis can’t be right.
No, one way is not always better than another way. It depends on the individual. Some have less appetite for risks than others. For me I will not choose 15 year fixed. Actually I will not even do fixed. But that’s a very personal choice.
Some just don’t like debt. I respect that choice. It’s a personal choice. But I won’t make that choice at my current stage of life. Maybe when I am 60 I will have everything paid off and not worry about anything. But I am not there yet.
One of us is not understanding the other. For the same monthly mortgage, the one with the 30 years is damn. 15 years can be refinanced to 30 if one of the couple loses the job.
Your example is not apple to apple comparison because the monthly mortgage is different and you have not said what happen to the money not used. From your disposition, I have to assume it is used to buy another rental. And I also assume we are talking about rental all the while.
This is assuming the reddit person can get at least 10% return on his/her investment, but it might be much lower than that depending on the investment decision, or even negative return.
IMHO, if I want to pay the house off in 15yrs, I’ll go for a 15yr term for lower interest rate (usually 1% lower). And if for whatever reason, financial plans change then I’ll refinance to 30yr.
Since 15yr term helps you build equity fairly quickly compared to 30yr term, even a couple of years initially on 15yr term will help you get to a LTV ratio that favors refinancing with small market value fluctuations, esp in BA.
Well yes, but job loss is such a drastic scenario that you’ll find paying 30yr mortgage tough as well. In that case, I would rent and move out to whatever location has job, or worst case, lower rent than what I collect in BA
Between 15 year fixed and 30 year fixed, there is likely gap of big gap in PITI. If you rent BA homes, with 15 year PITI, it will not match even 50% of the PITI. During downturn/recession, people were jobless (across USA) for 6 to 12 months. This was the main reason, during 2008-2011, around 50% homes (listed for sale) were in short sale/foreclosure.
The best way is to get 30 year fixed, and pay extra cash whenever you have. This is financial safety point of view.
However, we mortgage amount is low, say less than 15% DTI, it is up to the individual comfort to go for 15 years.
15 year fixed is for sure benefit financially, but we are committing 15 year higher cash flow. It depends on individual comfort and financial position. I tried 15 years fixed, then came back to 30 year fixed.
Job loss is the major issue resulting foreclosures, especially downturns.
