The 15-Year Mortgage Is Gaining in Popularity

I just read A 15-Year Mortgage Isn’t for Everyone over on Yahoo Finance. The author basically says what I have said in the past.

According to the article, more people are choosing the 15-year mortgage than during the past. Why?

The financial situation of the people capable of refinancing today is a factor in the shift, Walters said. These people typically are homeowners with the best credit and the most equity—and, therefore, most suited for a shorter-term loan.

But there might be some psychology at work. “We’re seeing a different view on debt than maybe we’ve seen in the past,” he said. Today, homeowners are saying, “I really want to pay this off. I’m going to bite the bullet and take the payment and work toward paying this down.”

I will admit that I like this new shift in thinking. I think it’s good for people to have a fear of debt. But, I think that fear of debt should be directed at credit cards and other unsecured debt. I call that “bad debt.”

Anyway, the article mentioned something that I thought was interesting:

“There was a drive a couple of years ago to take out the biggest mortgage that you could and use all of the money you would have otherwise had in the house and put it into stocks and bonds — to think of your house and mortgage as part of your entire investment portfolio,” said Amy Crews Cutts, deputy chief economist for Freddie Mac.

That’s not what I remember people doing a few years ago. I remember people taking out their equity to pay off other debts or to take vacations or to buy a car. I don’t remember people using their equity to buy stocks. I’m sure some people did this, but I don’t think the bulk of them did.

Anyway, the article mentions that 15-year mortgages aren’t for everyone. I agree. I think a person needs to do the math and look at their budget. If flexibility is important, then a 30-year is the way to go. Extra payments can always be made to help pay off the loan faster (if that’s your thing). Also, consider what other ways the extra payments towards the principal can be used. Should a person be paying down their mortgage faster if they aren’t maxing out their retirement plan? All things to think about.


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10 thoughts on “The 15-Year Mortgage Is Gaining in Popularity”

  1. I remember a discussion with my FA over 15 or 30 year mortgages. He wanted me to go with the 30 and invest the difference (through him of course). I ended up going with the 15-year fixed (this was 6 years ago).

    I personally do not like blurring the lines between a purchase (a house) and investing in the stock markets. Houses are shelter, and you should strive for the cheapest shelter you and your spouse can live with. Cheapest in purchase price, and cheapest with the financing (pay it off as quick as possible). It is not a piggy bank to raid.

    “Should a person be paying down their mortgage faster if they aren’t maxing out their retirement plan?” — turn that around: should a person be investing in the stock market if they can’t afford a 15-year mortgage?

    In my case, I have the 15-year mortgage (that I prepay) and stock investments (10% going into 401-k).

  2. Given the recession, some people who are doing well financially are scared. And they might be turning to a better refinance option.

    Dave Ramsey might have influenced that a little, too.

  3. i do have a fear of debt and keep thinking about changing to a 15-year mortgage. But my wife says it’s really not worth it since we’re not staying in the house 30 years (we’re only in the 2nd year of a refinanced 30-year). is she making a good case?

  4. #3 Steve) Actually, I kinda of wish I had a 30-year mortgage now (*SHOCK*). It would be better for me, today, to refinance my remaining 9-years left, into a new 30-year mortgage, but continue to pay it on the 9-year schedule that I have left (by massively prepaying the 30-year mortgage). I have the discipline to pull this off, most people don’t.

    This would reduce my mandatory monthly payments by around 2/3rds — while leaving me the buffer of not making the payments should some emergency arise. I’ve recently looked into this, and doing the refinance would cost over $5k in closing costs, which I feel is way to much — so I’m not gonna do the refinance.

    Since you have a 30 already, just make the extra payments to pay it off like a 15-year mortgage — you don’t need to refinance from a 30 to a 15. Google search for “amortization calculator” to help you determine how much you should prepay, and also make your you don’t have one of those evil loans that have pre-payment penalties.

    The trick with these loans is that the amount of interest you eventually end up paying to the bank is directly related to whether you prepay or not. The cost of your house is: PurchasePrice + Interest.

    A $200k house, financed for 30-years (at 5%) will cost you over $386k. The same house paid on a 15-year schedule will cost you $284k (over $100k less). To pay the 30, but on a 15-year schedule, can be pulled off by just paying an extra payment every other month.

  5. Steve, it depends on the rate decrease, the interest you’d pay from now until the finish line, and if you can swing the probable monthly pmt increase a 15-year would bring. If your jobs are uncertain, or you might have to move in the near term, (or your closing costs would be too high), then I would recommend paying extra on your existing mortgage and getting the interest savings that way. Just a couple hundred bucks here and there can make a difference.

    We’re in #2 year of a 15-year refi. And to JLP’s certain amazement, we are refi-ing again. Our rate is decreasing to 3.875% from 4.75% and closing costs are around $1800. I’d been rounding up on our current payment, so I will continue to make that same pmt, and by doing so we will shave 10 months off from where we would have finished the mortgage under our current timeframe. When you’re nearing the end of a work career and the kids are thru college, that’s 10 months of socking away some coin instead of paying the mortgage. Yeah, I know we could have been saving this differential for the whole 15 years. But as a wise man said after the crash a few years ago: “soft assets and hard debt.” I’m opting for clearing the debt.

    For the time involved gathering the papers for the refi, my interest savings “paid” me a pretty good rate!

    And for us, the new required payment is $350 lower than what our pmt is now. So as much as I intend to stick to the gameplan of paying what we pay now, if something tragic happens, I will have a little wiggle room. So for our way of thinking, we had nothing to lose.

  6. Stacey) Nobody is refinancing for that cheap in Texas. Title-insurance, by itself, is close to your $1,800. The rates are set in law, and of course, the rate decreases the more expensive your house is.

  7. Stacey) yep, that is the bright side, but we have 4-5% property taxes and 8.25% sales taxes so they get the money one way or another. BTW, congrats on getting that 3.875% for only $1800! If I had the same chance, I’d do that too.

  8. We are going to be in the market for a new mortgage in 2012, and we are strongly in favor of a 15-year. After losing an estimated 28% and counting on our current place (according to zillow estimates, we are currently ‘underwater’ by $1600 after a little over 5 years) we’d much rather be in a position where we are rapidly paying down principle – and since it’s a new mortgage the closing costs are going to be the same whether we get a 15-year or a 30-year, so we’d rather take the lower interest rate. We are saving up cash for the 20% down payment and hoping our neighborhood recovers enough by 2012 to cover our closing costs for selling it (we’d need the value to increase roughly 3%).

    Given that our down payment is going to dictate our purchase price rather than our monthly payment, we will be able to comfortably afford a 15-year with plenty of room left over.

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