The 15-Year vs. 30-Year Mortgage Debate: Why 30 Is Better

 

According to Freddi Mac’s most recent surveyed, there is currently a spread of 0.79 percent between the 15- and 30-year fixed rate mortgage benchmarks, which just so happens to be the largest spread since Freddie started tracking the 15-year mortgage 20 years ago; for comparison purposes, the average spread over that same time period has been only 0.47 percent.

I think most people naturally assume that, when it comes to choosing between a 15- or 30-year fixed rate mortgage, the 15-year loan is usually the better option anyway.  Throw in this historic spread, and I’m sure a lot of folks out there are now beginning to think they’d be absolutely crazy to take out a 30-year loan.

On the surface, it makes sense. All things being equal, a 15-year mortgage allows you to pay off your mortgage twice as fast while saving a significant chunk of money on interest.

That being said, I still think the 30-year mortgage is a more logical choice for most people because it has so many more advantages over its shorter-termed cousin.

Here are several big reasons why I think a 30-year fixed rate mortgage is the more pragmatic choice:

1. Lower payments. Of course, the biggest advantage of the 30-year mortgage is that it comes with lower payments that can be used to invest or save as you see fit.  In fact, it doesn’t take a rocket scientist to know that 30-year mortgages are much…

2. More budget friendly. Those lower payments not only take the strain off tight budgets but, if need be, they also allow you to stretch your dollar enough to purchase a more expensive home.

3. Increased flexibility. Two years ago, with my employer in a bit of trouble and potential layoffs looming, I refinanced from a 15-year to a 30-year mortgage in order to lower my monthly payments by over 40 percent. Today, with the layoffs still going on, you can bet I sleep a lot better knowing that my mortgage payment is only $600 per month instead of $1000.

4. More control. With a 30-year mortgage you are almost always free to make additional principal payments necessary to pay off your loan in 15 years without penalty. However, you are never obligated to do so, and can always change your mind as life’s circumstances dictate. With the 15-year loan, you are hopelessly committed to giving that extra money to your lender each month — whether you can really afford to at the time or not. This leads to another big advantage of 30-year loans…

5. Reduced financial vulnerability. By committing to give your lender that additional principal each month you could be needlessly tying up too much of your money into your house. While it’s true that the shorter loan builds home equity faster, you still need a lender’s permission to tap into it with a home equity loan. If I lost my job tomorrow, it is highly unlikely my bank would agree to give me such a loan, making that equity useless to me in time of need.

6. More opportunity for financial balance. Yes, building home equity and getting that house paid off is a noble goal.  However, for young people just starting out, there are often other very important financial obligations that need to be addressed too. The higher payments that come with a 15-year mortgage makes little sense if it leaves you unable to build an emergency savings account, or contribute anything to your 401(k) plan, IRA, and perhaps your kids’ college funds.

7. Bigger tax deductions. I can hear all those keyboards banging out the nasty emails to me right now.  Len, you dummy, agreeing to pay more interest in exchange for a bigger tax deduction is like spending a dollar to save a dime. I get it. This should never be the only reason for taking a 30-year mortgage over a 15-year mortgage. However, all things being equal, the larger tax deduction for the 30-year loan does temper the interest savings of a 15-year loan — if only a little bit.

8. Effective inflation hedge. Inflation erodes the value of the dollar over time. As a result, payments made during the last 15 years of a 30-year loan are significantly lower in real terms than the day you first get the loan. That’s why banks hate sustained periods of high inflation: folks with longer-term fixed-rate loans end up repaying those loans with dollars that are worth far less than the value of the dollars they originally borrowed.

No matter how you look at it, the faster inflation rises, the less sense it makes to pay off the mortgage early. With that in mind, a 30-year loan is definitely your best opportunity to stick it to the bank. For many people, I suspect that’s probably reason enough to choose one.