By Chris Davin, Guest Writer
In this article, I recommend that a 30-year fixed-rate mortgage is best for most people. I realize this may be controversial among the finance blog/FIRE community, but I think I have a solid case to make. I have come up with four criteria that a home-buyer should consider when choosing between a 15 vs 30-year mortgage, and readers of this blog will disproportionally meet them, but some won’t. In any case, this post is targeted at the typical high-income professional working a normal-length career, not a FIRE hobbyist saving 60% of her gross income and wanting to retire by 45.
The key advantage of a 30-year mortgage is the lower monthly payments. For example, consider the purchase of a $1M house with 20% down and an $800,000 mortgage. For a 30 year mortgage with a 4.0% interest rate, the monthly principal and interest (P&I) payment would be $3,819. The main reason to consider a 15-year note over a 30 year is that the interest rate is typically lower. At today’s rates, the difference is about 0.25%. For a 15 year mortgage at 3.75%, where the monthly P&I would be $5,817; it means a difference of $1,998. For most people, the advantage of a lower payment outweighs the lower interest rate.
4 Criteria for Deciding Between a 15- or 30-Year Mortgage
#1 The Payment
For those buying an inexpensive house relative to their income, the higher payments for the 15-year note are less of a burden, so the lower interest rate might be worth it. Here in Southern California, where home prices and taxes are both high, and physician incomes are low, this is a rare situation. Between the coastal states, it’s much more common.
Keep Debt-to-Income Ratio Less Than 30%
Banks considering you for a mortgage typically look at your “debt-to-income ratio” (DTI), which is the ratio of your monthly payment on the mortgage (including principal, interest, property tax, and insurance), plus any monthly payments on other debt you may have (car loans, credit cards, etc.), divided by your gross monthly income. Most banks will not write you a mortgage with a DTI of more than 43%, but just because a bank will lend you that much money doesn’t mean it’s a good idea for you.
Even in a high cost-of-living area, I would recommend keeping your DTI less than about 30%. More than that, and you lose too much financial flexibility by having to make those huge fixed monthly payments. But if you can get a 15-year note on your house purchase with a DTI of less than 30%, it might be worth considering.
#2 Contributing to Tax-Advantaged Accounts
Can You Make the Payment AND Max Out Retirement Accounts?
The tax savings of contributing to tax-advantaged accounts is too good to pass up for a 0.25% savings on a mortgage rate. If, however, you can comfortably make the payments on the 15-year note AND make the maximum contributions to all your available tax-advantaged accounts, then the 15-year note might be worth considering.
The contribution limits on tax-advantaged accounts might be higher than you think. If you and your spouse are at least 50 years old and your spouse works too, you could have easy access to $108,000 of annual contributions to tax-advantaged accounts: $56,000 plus $6,000 catch-up to your individual 401k, $19,000 plus $6,000 catch-up to your spouse’s 401k, $6,000 plus $1,000 catch-up Backdoor Roth IRA contributions for each of you, and $7,000 for the family Health Savings Account. Even if your age doesn’t allow you to make catch-up contributions now, you still need to account for them if you or your spouse will turn 50 during the term of the loan.
You might have access to more or less than this amount. Make sure you are able to comfortably contribute the annual maximum to all your available retirement accounts, as well as your other savings goals (eg. education), with some positive cash flow left over, before choosing a 15-year mortgage.
#3 Investing vs. Paying Off Debt
A fundamental issue at the heart of the 15 vs. 30-year mortgage question is whether the money saved with the smaller payments can earn a better return elsewhere. Mathematically, the “return” of paying down debt is equal to the after-tax interest rate. This can be compared to the after-tax rate of the return from various investments.
Risk Tolerance
Historically, stocks have returned about 10% per year and bonds have returned about 5%, although current yields on investment-grade bonds are closer to 4%. For a younger investor with decades to grow a nest egg and some tolerance for taking risk, a portfolio tilted toward stocks (say, 80% stocks and 20% bonds) is usually recommended by financial planners. It wouldn’t make sense for such an investor to earn an 8% return (after-tax if the investments are inside a tax-advantaged account) and simultaneously pay down a 3.75% mortgage (about 2.5% after-tax, if interest is tax-deductible) on an accelerated schedule. After 15 years, the $1,998 per month payment difference invested to earn 8% will exceed the remaining balance on the 30-year mortgage with lots of money left over.
Even under the worst conditions, if mortgage interest is not tax-deductible, investing in a taxable account, and with California tax rates, you would only need to earn a 5.7% annual return on a side investment to outperform the interest rate difference between the 15 and 30-year notes. Over a time period more than a decade, this return should be achievable with reasonable investments. If you’ve already decided you can handle the volatility and risk of more aggressive investments, you might as well take advantage of the higher returns with the smaller payments on the 30-year note.
On the other hand, with a conservative portfolio returning closer to 5% with still some risk, it makes a lot more sense to take the guaranteed “return” of around 2.5-4% by paying off the mortgage faster with a 15-year note, especially if mortgage interest is not tax-deductible.
#4 Income
Finally, anyone considering a 15-year mortgage should have a very stable income. If family income drops or is eliminated for some time, the lower payments on the 30-year note will make it easier to bridge that gap without defaulting. Fortunately, the majority of those reading this post (physicians) likely have unusually stable jobs already. If you have a spouse who works in another field and contributes to your household income, you need to consider their job stability as well.
Who Is a 15-Year Mortgage Right For?
In summary, if you are buying an inexpensive house relative your income, can easily fully contribute to your tax-advantaged accounts, prefer conservative investments, and have an especially stable job, a 15-year mortgage is probably the right choice. Everyone else should get a 30-year mortgage, at least until the current interest rate environment changes.
You should lean toward a 15-year mortgage only if all of the following apply to you:
- Payments on the 15-year note will not be a burdensome percentage of your income.
- You are able to maximally contribute to all of your available tax-advantaged accounts (401(k), IRAs for self and spouse, HSA, etc.) while making payments on the 15-year note.
- You tend to invest in conservative lower-return assets (like bonds) much more than riskier higher-return assets (like stocks).
- Your income is very stable.
Other Factors Affecting Your Decision
Inflation
Another advantage of the 30-year mortgage, although harder to quantify, is that it provides more protection against inflation. In the case of high inflation, those fixed monthly payments will become easier and easier to make.
Liquidity
Along with this protection comes a higher level of liquidity by having (presumably) larger liquid savings. If your situation changes, it’s easy to decide to pay off the mortgage faster, or completely. But, if you need to go the other direction later and liquidate some of your home equity, it will almost certainly be at a higher interest rate than a mortgage you can get today.
I know many readers of this blog are debt-averse, and I understand why, but there are some real advantages to carrying debt on as good terms (long term, low interest, tax-deductible, no call risk) as a 30-year mortgage.
Pay Off Strategies
Some Bogleheads and bloggers recommend taking a 30-year mortgage but paying off on a 15-year schedule. Of course, this strategy loses the benefit of the lower interest rate, but it does pay off the loan just as fast while giving the flexibility to drop to a smaller payment if your cash flow situation requires it. Personally, I don’t like this strategy.
On the example loan I gave above, it costs $100 extra per month to pay the higher interest of the 30-year mortgage on a 15-year payoff schedule, and this difference might or might not be tax-deductible. If I had the means and were committed to paying off the mortgage in 15 years, I would want the benefit of the lower interest rate. Put another way, would I buy an insurance policy from the mortgage company with a $100/month premium that let me decrease my payments by about one third any time I wanted? Probably not. But if you decide it’s worth the money to you, go ahead.
Forced Savings
One argument in favor of the 15-year mortgage I don’t accept is that the higher payments represent “forced savings” by building home equity, and this is better than spending the difference in payments on frivolous things. This point is where the behavioral and mathematical aspects of personal finance intersect.
It’s definitely true that a 15-year mortgage is a better option than a 30-year mortgage if the monthly difference is wasted by meaningless spending. However, if you or your spouse have a behavioral finance issue, you really need to fix that issue before buying a very expensive house and the decades of large payments that come along with it. Once the behavioral issues are fixed, then you will be in a position to make the mathematically best choice. In any case, most savings and investment accounts can be set up with automatic contributions anyway, so the temptation to spend money in the checking account can be just as easily removed this way as with a 15-year mortgage.
What do you think? Did you choose a 15 or 30-year mortgage when you bought a home? Do you agree with the recommendations of the author that most should choose a 30-year mortgage? Why or why not? Comment below!
[Editor's Note: Chris Davin is an aerospace engineer at NASA Jet Propulsion Lab (The opinions and viewpoints expressed in this article are the author's and not NASA JPL) and the spouse of an EM physician. While looking for a house to buy in Southern California, he began to carefully consider the issue of choosing a 15 vs 30-year mortgage. After a lot of research, he decided to write a guest post and share his findings with our community. We have no financial relationship.]
What we personally did was a hybrid between these two approaches. We took out a 30 year mortgage (Technically a 15-1 ARM) and plan to pay it off in 15 years or so. That way, we weren’t forced into higher payments early on, but as our cash flow increased as we paid off other debts, that we could start rolling some additional money into our mortgage payment to have it paid off early.
I normally tell people to focus on “the big picture” of their personal finances to see if something makes sense (as opposed to focusing on monthly cash flows and lower payments, which leads a lot of people to finance things they shouldn’t buy). That said, I understand the argument being made.
Though, I do think you can “have your cake and eat it to” (albeit with a slightly higher interest rate) by paying off a 30 year mortgage early.
Interesting post to think about.
TPP
I don’t think a 15/1 ARM typically gives you much lower of a rate than a 30 year. What did you get, 1/8th of a point?
0.25% in this case. They gave us an additional 0.25% for opening up a high-yield account with their bank (Which we are probably going to close now and move somewhere else).
I agree with most of this, however, I think the author is confused on the idea of doing a 30-year mortgage and paying it off in 15. He’s describing pre-paying a mortgage – that’s not even close to ideal (which is why he probably doesn’t advocate for it). The actual way to do this works much better and you aren’t “losing” the benefit of lower interest rate.
Is there an advantage to making more frequent payments also; that is, if you pay 1/2 your monthly mortgage amount every 2 weeks, rather than just a single monthly payment?
Sure. The biggest advantage of doing that is that you’ll make 26 half payments instead of 12 full payments. Basically one extra payment a year. But you also save a little on interest.
Personally, I think that if you can’t afford the 15-year payment, you can’t afford the house.
When we bought our home, the difference was something like $600 per month (it was also a whole 1% difference between the interest rates).
The “interest-rate arbitrage” argument is a slippery slope, and one that is dramatically overestimated IMO if you actually do the math. On a typical physician income, the potential benefit is actually quite small as a fraction of the total net worth.
This is a little extreme and bubble-thinking. Purchase of a home with 30 year rate makes sense for a lot of people, depending on your personal and financial situation. Sounds like you’re speaking for your own personal financial situation and housing market, but this varies widely, even among physicians. 15 year might make most sense for you, but definitely not everyone – in fact for some it could really be a mistake.
If you think the interest rate arb is overestimated you havent done the math. If anything its underestimated. Inflation, transaction costs, and time in the market make pouring money into a house faster than necessary a losing bet almost all the time.
I have done the math 🙂
Assuming the details described in the post, a 33.3% marginal tax rate, fully deductible mortgage interest, and a 3.5% discount rate (slightly more than inflation), the Net Present Value difference between the 30-year mortgage and the 15-year are as follows, vs. the after-tax rate of return of a side investment account:
Return NPV@15yr NPV@30yr
2% -$21,264 -$29,837
3% $1,514 $7,972
4% $26,826 $59,095
5% $54,863 $127,527
6% $85,951 $218,434
7% $120,460 $338,495
8% $158,804 $496,346
9% $201,452 $703,162
10% $248,933 $973,405
Note that these values are for an $800,000 loan, and should scale linearly (up or down) with loan size. But in this case, with an 8% after-tax return on other investments, the arbitrage is worth about $500,000 in today’s after-tax dollars over the 30 year period. Whether this is worth being in debt for an extra 15 years is up to you.
At a certain sufficiently small loan (say, 1 x annual income), to me it would be worth the extra 15 years of being debt-free. But at California house prices, the arbitrage becomes a significant factor.
Spoken like someone who doesn’t live in a HCOL area 🙂 I think many who don’t live in the coastal states don’t appreciate how expensive housing actually is here. In the town where my wife and I live, we rent a condo that sells for about $850,000. It’s about 950 sqft, and the space isn’t allocated well. The bedrooms are tiny, there’s no garage, and limited storage. There’s a traffic jam most nights in the tiny one-sink “master” bath as my wife and I try to get ready for bed at the same time. It’s manageable for now but is too small if our family ever grows. The cheapest single-family houses start at about $1.5M, and at that price they won’t have been remodeled since the 1980’s. A simple 3-bedroom house, in good shape and with a garage, is in the $2-2.5M range.
I think the assumption behind “if you can’t afford it with a 15-year, you’re buying too much house” is that any additional house beyond, say, 2 x annual income is wasted money. That might be true in some parts of the country, but I don’t think it’s true in our area. Aside from a possible house purchase, we’re debt-free and doing very well with savings and investments. I think buying a house in the 3-4 x income range would be money well spent and would provide good value to our daily lives over other potential uses of money. Even at 4 x income, a mortgage payment would be a DTI of about 24% with a 30-yr note (33% with a 15-yr note). I hear what people say about maintenance costs on top of PITI, but in this market maintenance costs are lower on a percentage basis, and also due to the climate. While 1-2% per year may be typical elsewhere, 0.5% or perhaps less is more reasonable here.
Of course, it’s up to each person to decide what the best use of money is for them. Many doctors (and others) buy too much house and underestimate the huge benefits of socking away money and/or paying down debt. But in a HCOL area I think it’s reasonable for some to decide that a more expensive house (up to maybe 4-5x annual income maximum) might be a good use of money.
Thanks to all those who serve the patients in those HCOL areas so the rest of us don’t have to live there. That sounds truly awful. Maybe the choice of where to live is even more vital than 15 year versus 30 year?
Without a doubt.
If you cannot swing the 15 year payments you should buy less house not extend the mortgage. Why not argue making it a 40 year mortgage?
My biggest reason to push a 15 year is to get people to buy a house they can truly afford.
The purchase price of the house is just the beginning. Taxes, maintenance, furniture, and the Joneses will keep you poor if you buy too much house.
I think there are places in Europe with 50-100 year multi-generational mortgages.
I said 40 because a bank was pushing that to us once. They did not seem to believe me when I told them I would rather a 15 year.
50-100 years. That’s nuts!
I don’t think the question should be “able to afford” vs “not able to afford” in regards to the duration/payment of the mortgage. Instead, the question should be “do I have a better use for my money?” Which is inherently a personal question, hence personal finance. I paid off a mortgage quickly and wish to goodness I had invested the difference instead. That’s the whole point of the author’s comments regarding stock/bond market returns, which is imminently reasonable.
While I also would have come out ahead investing instead of paying off my mortgage a couple of years ago, I don’t regret it because the improved cash flow helped free me up to make decisions in my life that led to me having a better life and actually making more money. By lowering our fixed expenses, we can often take risks we wouldn’t otherwise take.
I’d consider a 40 year mortgage, sure, as long as there is no prepayment penalty and the interest rate premium were small. Just because you take out a 30 (or 40) year mortgage doesn’t mean you have to be in debt for that long. You can always enjoy the lower payments for a while, then accelerate the payments or pay the loan off completely later. Over time, you should be accumulating liquid savings, and inflation should make that fixed payment smaller in real dollars every year. At a certain point it might become worth it psychologically to pay the loan off, but that doesn’t mean it was the wrong decision to get the longer term – you got the benefit of the smaller payment early-on, and (we hope) put that cash to good use.
Worst post I’ve ever read on WCI. You should change the title to 4 ways to justify stupid.
Really? The worst one? Worse than the colored diamond one? Worse than the scrubs one? Suddenly I’m not feeling so badly about those other ones knowing you have read all 1500 of them and this one is the worst. Thanks for the feedback, but try to be a little more constructive next time. Reminds me of the man in the arena quote:
You can submit a better guest post here: https://www.whitecoatinvestor.com/contact/guest-post-policy/
Awesome response WCI. I’m going to hope that maybe David was just having a bad day…or coming off of a 36 hour trauma call shift in his intern year.
I strongly disagree that this was the worst post. Alternatively, I strongly agree with much of what the poster has written. I had the flexibility to do a 15 year mortgage but also chose to go the 30 year route. The main reason was to have flexibility with my money. If the market went to crap, I could dump more money into the market instead of pay down my house quicker. Since the market has been scorching, I have instead been dumping extra money into paying off my mortgage the past couple of years. Although this is technically a form of “timing”, it is all a form of wealth building. Either way, my 30 year mortgage will be paid off in under 10 and I never felt pressured to making a higher mortgage payment…even when I might have had a bad month at the office.
The biggest risk with taking a 30 year mortgage instead of a 15 year mortgage is that a person increases their spending and lifestyle. Most of the WCI readers won’t do this. The “average Joe” who just wants a bigger house and doesn’t care about personal finance is the one who should be doing the 15 year mortgage instead of the 30.
I mulled over these number many times in the past and came to the same conclusion that the poster did. It was better for me to do a 30 year and just pay it down on my timetable.
Naturally, I had to go and search for the colored diamond post. It’s a real, ahem, gem. https://www.whitecoatinvestor.com/investing-in-colored-diamonds/
Oh thank you for that link! The comments on that post had me laughing out loud at my desk. Clearly we need more colored diamond posts! More Cowbell!
I just rode a mountain bike trail this weekend called More Cowbell. It even had a cowbell hanging on a post on it.
Thanks for the reminder. There are about 5 posts on this blog I’ve thought about just deleting. That’s one of them.
Wow, that post was 6 years ago. The colored diamond post was the very first WCI post I ever read. Somehow I found a reason to keep reading the rest of the site!
You’re the second person to tell me that post brought them to the site. That was why I didn’t delete it the last time it came up.
One key problem with the authors analysis is the quoted alternative investment threshold of 5.7%. While this number is accurate the appropriate benchmark for getting 5.7% is not stocks or a mix of stocks and bonds. It is just bonds and bonds only.
The statement that people should max tax advantaged before shorter term mortgages is correct for most people who are either Roth eligible or who are in a very high bracket.
The typical interest rate difference is still .5% which isn’t huge so if someone is close on affordability or thinks they might need the cushion the difference could be easily worth it.
Given the wide spread between 5.7% and current high quality bond rates (govt or high grade A) if people can afford the 15 year and max tax advantaged they should usually do 15 year mortgage and pay down after establishing emergency fund adequate liquidity etc.
Who do you think is not Roth eligible? If you’re working, you’re Roth eligible. Even many who aren’t working can do Roth conversions.
I did not word it well. All I meant was people in top income bracket usually choose Reg 401K instead of Roth 401K and in general Roth Conversions or contributions make more sense for people in lower tax brackets. Not really ‘eligible’, so poorly worded on my part.
This probably does not apply today, but i found when interest rates dropped very low on house finance, and muni bond rates were elevated in California, it actually made sense to put money into CA muni bonds rather than pay off the house. Muni rates were up for the same reason mortgage rates were very low – the housing market had crashed, California appeared to be in trouble financially. The fed was trying to get housing going again by dropping mortgage rates, California was not taking in enough tax revenue to stay solvent, so the risk was higher along with the coupon rate with CA munis. This is not the situation if financing today, which demonstrates the transient nature of financial opportunities. If my memory is correct, a 15 year fixed mortgage was at 2.5% in 2013. California state G.O. muni bonds at the same time were paying higher. So buy the munis, which spit off tax free income that pays off the mortgage, which at the time the interest was deductible. YMMV!
For many of the above reasons stated — I actually have a 20-yr mortgage (put down 30%) at 4% interest rate (in ’17), no PMI needed. I figured it was somewhere in the ‘middle’ of a 15 and 30yr… of course, 22.5 would be in the middle but that was not an option 🙂
Interesting that he was so down on getting a 30 year and just paying it as if it were a 15. That’s what we are doing, and the interest “penalty” for having a 30 year loan was not all that significant over the term of 15 years. Plus the extra payment amounts are going straight toward the principal early on, which greatly reduces overall interest paid. I thought the argument against doing this was because most people aren’t disciplined enough to actually stick with it.
On another note, I wonder if most people think it would be a bad idea to refinance to a 15 (or shorter) term loan within the first couple years of taking out a 30 year mortgage. I know the closing costs might negate any interest benefit, but I’d like to hear people’s thoughts.
You just have to run the numbers to see if it is worth refinancing into a 15 to lower the interest rate. Sometimes it is, sometimes it isn’t, even if you wish to pay it off earlier.
I (somewhat surprisingly) refinanced twice over a very short timeframe. The first was a no-brainer dropping the rate from 6.625% to 3.95% for 30 year fixed rate. The next time was only 16 months later when someone mentioned in passing “Hey, I just refinanced again. Have you looked into lately?” “Nah, it would have to drop a full point to make that worthwhile.”
But I did check anyway. Surprise, surprise. Rates really had dropped that much again.
We ended up with a 15 year fixed @ 2.75% with zero closing costs.
Between the rate change and finding less expensive insurance, PITI payments only went up $500 / month while cutting $250K in total interest. That was the initial motivation, but I’ve since discovered the combined equity growth from principal reduction and appreciation is $50K annually. That’s just about what I can put away into the 401K every year. Pretty amazing from a simple refinance deal.
Good read. I’m probably one of the rare aggressive types who just hated debt. We have a 10yr mortgage @2.8%. But to your point, it’s much less expensive house compared to CA, the payments are easily affordable and we can max out all tax advantage accounts every year.
We have a 30 year instead of 15-20 largely because the Army pays doctors “bonuses” that used to be annual and thus the bank wasn’t willing to consider around 1/3 of my income as real. “Bonuses can change” – sure, at the speed of Congress. Tack on that at the time we still had student loans from my wife and if she hadn’t gotten an offer letter from her job here we probably wouldn’t have gotten the loan.
Fast forward 3 years, the loans are gone, the annual bonuses are now monthly “retention pay,” a few other changes (we both got a raise and I moonlight a bit) and our monthly payment now looks tiny (DTI of about 7%). I’ve been struggling with the idea of maybe refinancing to 15 years vs just paying enough ahead to make it effectively a 15 year process vs making a side fund kind of like the PLSF security fund idea. Invest the extra payment aggressively and in 15 have enough to pay off the balance.
All comes down to individual factors too. How much longer are you going to be in this house (this is not a forever home for us, but it’s hard to say if it will be 1, 3, or 8-12 more years when Uncle Sam pays the bills). What interest rate difference can you actually get, how much can your personal investment choices actually earn, etc.
No right or wrong answer among those choices, but I’d be hesitant to do a refinance with significant closing costs if I were in the military.
I post this with some concern of it coming across as a “humble-brag”, but I would like to offer a different point of view than those posted above.
I bought our house with a 10 year mortgage at 2.875% in 2012. My intention was to pay as little interest as possible over the life of the loan. Next month, we’ll pay off that mortgage with our 80th payment (6 years, 8 months in). I’ve done the math and I obviously could have done better, financially, by directing our extra cash to additional investments instead of paying down the note. However, I place a high value on the feeling of owning our house free and clear. Also, while the stock market and my other investments have done very well over the past 6 or 7 years, that’s never been assured. The only thing I felt 100% confident of was that paying down the house would save me 2.875% per year. I also think it’s going to feel really great.
Bottom line is that paying off the house early is an emotional decision for me. The emotional aspect of the decision was omitted from the article, but it is a powerful factor for some.
We’re in the same boat! The plan is to have our 30 year mortgage paid off in 7ish years by making large additional principal payments every month. Still making sure to max out everything tax advantaged. Our interest rate is a little higher (4.5%) since we just took it out a few months ago, but the fact that we can already see the light at the end of the tunnel is very enticing to us.
We paid ours off in about the same period of time, similar rate (2.75%). Was some of it emotional? Dunno, maybe. But it just seemed silly to keep it around any more. It wasn’t large enough compared to our net worth that it would have really moved the needle to keep investing instead of paying it off.
And do you guys with the paid-off houses have a HELOC ( maybe with zero balance) as a risk management tool?
No. That risk is so small I don’t judge it to be worth the costs or the hassle of the HELOC. Others may feel differently.
Agree with you Matt. I am planning to pay off my mortgage in 10 years. Got it at 2.69%. It is a 25 year mortgage that I got 18 months ago and have already shaved off 7 years by making extra payments. There is a part of me that cannot live with knowing I owe anybody money.
I understand the math but I need to know what’s mine is truly mine
Perhaps I’m in the minority, but as a California resident with the same expensive market and financial toxic wasteland tax considerations, I thought the author came to some very reasonable conclusions.
Also must admit I was charmed by the wedding toast tux photo, which I similarly deployed frequently back in the day 😉 It identifies another frugal soul I can definitely relate to.
Fondly,
CD
Thanks! I thought I needed a little more mileage out of my Men’s Warehouse tux.
I did the 15 year mortgage and my kids were in high school when all of a sudden I had no mortgage payment what an amazing finding !!
I would add another criterion to the 15 or 30 decision: age or proximity to retirement. I think it prudent to have the house paid off by your retirement target date. In one’s last 10 years or so of working, one will likely be trending more conservative with the portfolio. It makes no sense to be adding bonds paying 3% while carrying a mortgage at 4% into retirement. If you are buying a house in your 50’s (or refinancing), the 15-year likely makes more sense. Move that to your 40’s if you are aiming for early retirement.
I agree that carrying debt into retirement is a bad idea. But some disagree…
https://www.whitecoatinvestor.com/the-value-of-debt-in-retirement-a-review/
Certainly if age and proximity to retirement affect your asset allocation, then that could affect your choice. A point I think many don’t fully appreciate is that just because you take out a 30 year loan doesn’t mean you have to keep it for 30 years, or even make the same size payments for the life of the loan. Someone age 50 with an aggressive AA can take out a 30 year mortgage and pay the minimum payments for 10 years. Then, at age 60, they can double up their payments if they decide to make their AA less aggressive. When they retire at age 65, they can increase the payments even more, or pay the loan off completely with assets that could come from taxable or retirement accounts.
This is something of a “best of both worlds” scenario, in my view. When you’re younger, have more of a need for the cash flow, and have a more aggressive AA, you get the benefit of the lower payments, but as your investment return and risk tolerance change, you can adjust. As long as the after-tax return of your investments is higher than the after-tax interest rate on the mortgage, you’ll come out ahead. And with the yield curve being so flat right now, the interest rate penalty for doing this really low.
I’m not sure carrying a mortgage into retirement is such a terrible idea. When you have a mortgage when you’re younger, most likely you’re relying on future earnings to pay it off, so you’re taking on the risk of anything that could disrupt or redirect those future earnings. But if someone retires at 65 with, say, a $400,000 outstanding mortgage balance at low interest, and $2.5M in liquid assets, I would argue the risk of default is actually much lower. Any retirement accounts can be tapped without penalty, and the loan can be payed off in a matter of days if they so desire. If someone chooses to keep it because they expect some arbitrage between investment returns and mortgage interest, I don’t think that’s a crazy decision, especially if interest rates have risen from where they are now. I definitely agree there are psychological benefits to being debt free – I’ve paid off some of my low-interest loans for this very reason, and am currently debt-free – but I don’t think it has to be the only way to go.
My wife and I took out a 30 year mortgage on our home we bought after I finished residency, but pay extra towards it every month, putting us on a 14-15 year timeline for payoff. We max our tax-advantaged accounts as well as putting some in a taxable account. I put 100% of these into stocks (index funds) because I treat the extra mortgage payment effectively as the 15-20% “bond” portion of our portfolio due to its guaranteed ~4% “return” (interest not paid on extra principal paid off), and we’ll have a paid off house.
I guess a disadvantage to doing things this way is I can’t really rebalance unless I put even more toward the mortgage to make up for higher returns on stocks, but I guess this doesn’t bother me too much at this early stage in my career. Curious if anyone else has a similar philosophy or thoughts on why this might be a bad idea?
It also doesn’t help with the psychological/behavioral aspect in a bear market, especially if housing values are falling at the same time (although technically the house should be considered separately from the mortgage.)
Thanks for the guest post, congrats on making content worthy of it. I do not follow your logic on asset allocation of 15 vs 30 yr. In my mind AA should be even more aggressive with a 15 year. I have heard people consider remaining principle a negative bond, so a 30 year mortgage would need even more bonds to counterbalance this.
In my opinion your length of mortgage should have little to do with how aggressive your AA should be. Other factors (that you did a good job mentioning) should matter more like investment horizon, risk tolerance, job security, amount of human capital remaining should influence your AA way before length of mortgage.
That wasn’t quite what I was trying to say. My suggestion is to first determine your asset allocation based on the factors you list (time horizon, risk tolerance, etc.) Then, take this asset allocation, and the associated expected return, into account when deciding on a mortgage term. With an 80/20 AA and an expected return of something like 8%, it makes a lot less sense to pay down a 2-4% mortgage twice as fast than if you have a 25/75 AA with something like a 5% expected return. The causal order should be AA -> mortgage term, not the other way around. And remember there are other factors too.
Something I have found to be BS is that making extra payments does not push back the next minimum payment due. I have been able to do this with student loans so why not with a mortgage? There would still be interest running on the remaining balance so I don’t see much of a downside for the administrator and this would offer a ton more flexibility for the borrower who is able to get ahead on payments in good times. Does anyone know the history of why companies don’t do this for mortgages but do it for student loans and other types of loans?
I’d rather not get ahead on interest payments honestly. I want those extra payments going to principal, not future interest. But what you’re looking for probably does exist as some combination of an interest only mortgage. Not many people looking for that product or willing to pay the higher fees/interest rates using it would entail. The flexibility isn’t worth that much apparently.
Thanks for the post! It’s good to hear a different perspective than the “if you can’t afford a 15-year mortgage, you can’t afford it” crowd.
We have a 30-year mortgage, but are currently paying extra, and would be scheduled to pay it off after 20 years if the current pattern holds.
We didn’t pay extra from the start. The enormity of purchasing our first single-family home in a HCOL area made us not even consider a 15-year mortgage. Our mortgage was less than 1.5x our income, so we certainly could have afforded a 15-year. But the thought of locking up an extra ~$1500/mo into a mortgage payment was daunting (30-year payment $2600/mo vs. 15-year payment $4100/mo), especially while expecting our first child.
Since then, we’ve been paying extra on the mortgage each month, continue to max out our 401k’s, Roth IRAs, solo-401k, HSA, 529s and contribute to a taxable account. With 2 kids now, I’ve gone down to part time, and DH has cut back on his moonlighting shifts.
I don’t think we would have been able to take the salary cuts while still investing as much as we do with a 15-year mortgage.
I used to be a hardcore believer in the 15 year fixed (mostly for behavioral purposes) but remain balanced on my view of the 15 vs 30 yr argument. It certainly is tough for a pediatrician in CA to afford a modest home and max out tax-advantaged accounts using a 15 year fixed.
One small issue I will take with the post is the idea that you should fix your behavior before buying a house. I think behaving with money is a process of better decisions over time, not just with one big purchase. Few of us are born with the innate ability to make the right money decisions from the start.
Okay, but blowing the housing decision early on can make such a dramatic effect that you can’t just waive your hand at it like it doesn’t matter. It does. I talked to a nurse today trying to decide whether to downsize or not. She wants to retire early but is paying 28% of net in housing costs. That’s an expensive, difficult change that most can’t/won’t do.
Perhaps I should clarify. I wasn’t implying you should wave your hands on the housing issue. It is important. What I was referring to was how people use the idea of increasing cash flow by opting for a 30 year mortgage (instead of a 15 year) to say they will invest, and instead they use the extra cash for discretionary spending. It is possible to make a good housing decision and still misbehave in other arenas with money.
Hard to disagree with that.
“For most people, the advantage of a lower payment outweighs the lower interest rate”
He lost me right at the beginning – made it difficult to read the rest. I guess I am not most people. I prefer the lower interest rate the 15 year offers even if the trade off is higher payments and paying the damn house off earlier. If you buy a house that you can afford then how much the monthly payments are should not be an issue IMO
I am debt averse. Maybe that’s why I don’t understand why anyone would want to still be paying off the same item for 30 years
// am debt averse. Maybe that’s why I don’t understand why anyone would want to still be paying off the same item for 30 years//. You can (sometimes) write off the interest on the payments. You (might) be able to get a higher interest rate on a bond you buy. So in some cases it makes sense to not pay off debt if the interest rate on the debt is lower and tax advantaged versus the profit from a bond you buy instead of paying off the debt. For example – 15 year fixed rate mortgage at 2.5%, interest deductible from taxes. Residual is 500 K. You find 500 K under a mattress. You are about to pay off the residual when you notice you can buy a AAA muni bond for 500K in your state or residence that pays 5% tax free.
Both courses of action are equally safe, but you are wealthier buying the bond. You also might derive a lot of satisfaction from gaming the system. I do anyway.
Just because you take out a 30-year mortgage doesn’t mean you have to be in debt for 30 years. If you only want to be in debt for 15 years, you can pay the loan off on an accelerated schedule, or (in my opinion a better option) pay it off after 15 years with a lump-sum. The only real upside of the 15-year loan is the lower interest rate, and with the yield curve being close to flat, this difference is small. That said, a 15-year can make sense for some people, and if you think you’re one of them, go ahead.
That approach doesn’t get around paying PMI for 10+ years along with 0.5% higher rate for the entire term. PMI alone added 12 – 14% to the monthly payment when I was loan shopping last time around.
I’m not a fan of paying PMI. The best way to avoid it is to put 20% down, which in my area is quite a lot of money (several $100,000’s). But nonetheless I would recommend it for most people. That’s certainly my plan if/when we buy a house. I also think saving 20% down is a good “exercise” before taking on a big loan.
Interest rates vary by location and loan size. When I wrote the article a month ago, the spread was 0.25% (4% vs 3.75%) in my area. Since then, rates have dropped and the spread has shrunk to 0.125%; today, for a jumbo loan rates are 3.75% and 3.625% for a 30-yr and 15-yr on BankRate. The higher the rates overall and the higher the spread, the less value in the rate arbitrage vs. investments.
It’s true the spread on jumbo non-conforming loans to people with excellent credit scores is only 0.25%. That’s only possible because the lenders are keeping the loans in-house rather than offloading them to Fannie Mae / Freddie Mac which charge an additional fee and setting the qualifying bar quite high.
That’s really a double special snowflake situation (huge loan + perfect credit).
The other 95% of mortgage loans have a half point spread (or more) for 30 year vs. 15 year. People with lower credit scores have an even larger spread. The link in the post shows typical spreads of 0.50% – 0.60%. The reason is the same one completely overlooked in the post. It’s risk. Longer terms and lower credit ratings increase the risk of default. The idea of mortgage arbitrage is pretty common, but I’ve yet to see a single author incorporate the concept or risk in any fashion. Debt retirement is a guaranteed return – investments returns above commercial finance returns are always speculative. They have to be or the market doesn’t make sense.
A 15 year note has inherently less risk than an equivalent 30 year note. The borrower is taking literally twice as long to pay it off. That’s 15 additional years for life situations to occur that completely derail the arbitrage plans. Layoffs, spouse dies, divorce, health issue – all common issues for default and forced sale or foreclosure. The additional years can also tie someone’s hands in simply starting a new venture or taking a lower paid job. They can’t afford to do that until the mortgage is fully paid off.
You’re right about the difference between rates and spread. It used to be that jumbo mortgages carried higher interest rates than conforming, but it’s reversed at the moment. Each person should look at the loans available to them and make an individual decision. Last I looked the spread for me was 0.125%, which is tiny in my opinion. But at a certain spread and overall rate I would start to favor the 15-year, if the other three criteria I mentioned were met.
I think you over-state the importance of credit score. The cutoff for prime rate for any lender I’ve talked to is either 740 or 760, and it’s just not that hard to get a credit score above these levels. Even my brother who’s been out of school for less than a year is above these numbers. Missing payments, defaulting, etc will definitely pull a credit score under 700, but again, I think these issues should addressed before buying a house, even if it takes a few years. Maybe some day I’ll pull together a “Pre House Buying Checklist”, but if I do it will definitely include getting a credit score >740 and saving 20% for a down payment. The cost for not doing these things is just too high.
I use a 2:1 ratio as a rule of thumb for accounting for risky vs. risk-free returns. If I have a loan with an after-tax rate of 4%, I will prefer to invest only if my expected after-tax return is >=8%. In CA, I would need a return of over 10% in a taxable account (10% x (1-15%-9.3%) < 8%) to get that, so I would pay off a 4% loan before after-tax investing. But what about a tax-deductible 3.75% mortgage (3.75% x (1-32%-9.3%) ~= 2.2%)? Personally, I would prefer investing if I thought I could get more than a 4.4% after-tax return, which I think is reasonable to achieve, even in a taxable account. For someone with less risk tolerance and more debt aversion, maybe their ratio should be 3:1, or to only compare a loan to bonds, and I think these are reasonable approaches too.
That’s so weird that sometimes you really don’t get penalized for a jumbo. Maybe not, I mean, what’s the difference between a $200K earner getting a $400K loan and a $400K earner getting an $800K loan. Why should one be penalized?
Your 2:1 rule of thumb is interesting. I’ll have to think about whether or not I like that. First time I’ve heard it.
It’s what I use to compare stock-heavy (or real estate-heavy too I suppose) investments with significant risks, to the guaranteed return of paying down a loan. There was a Bogleheads survey a few years ago on the breakpoint between paying off debt or investing (https://www.bogleheads.org/forum/viewtopic.php?t=161268), and the average answer was around 5%. I consider myself to have moderate risk tolerance and debt aversion, and I think 5% is about my number too. My portfolio is mostly stocks, so if you take an expected return of 10%, then you get a 2:1 ratio. As I get older and my AA gets less aggressive, I think my “breakpoint” will drift downward too, so the ratio seems to hold. Going the other way, if I could get into some high-yield investment that might pay an expected 20%, I think I’d borrow at 10% to finance it. But not 15%.
It’s different comparing a loan to pure bonds; there, I’m at closer to 1.5:1. Let’s say I take the 30 year mortgage at 4% with non-deductible interest, and in 10 years, rates have risen to where CA muni bonds are yielding 6% tax-free. Frankly, I think I’d buy those muni bonds rather than pay down a 4% mortgage. If the munis were yielding 5%, I think I’d rather pay down the mortgage.
For “risk-free” investments like FDIC-insured savings accounts, I’m basically at 1:1. If I’m getting 3% after-tax interest and my mortgage is only 2.5% after-tax, I’ll prefer the savings account. Of course, at some sufficiently small loan size, the hassle of keeping it, and the psychological aspects, outweigh the arbitrage.
Here’s what the people actually making such loans have to say:
https://www.lendingtree.com/home/mortgage/are-jumbo-loan-rates-more-affordable/
Fratantoni’s assessment of the market was similar: “Jumbo borrowers have always had stronger credit than conforming borrowers, but today we see that average jumbo borrowers have credit scores of 800 compared to about 730 for conforming borrowers.”
I agree with that. I don’t want to pay for anything over 30 years. Heck, I don’t want to pay for anything over 10. In fact, I don’t plan to ever borrow again now that I think about it.
How about get 5/1 ARM and pay it like 30 yr fixed? Rates are as low/lower than 15 yr. You have option to pay more but don’t have to. When mortgage recasts at reset, your payment will likely be lower due to lower prinbal from additional payments. Aim to have it mostly paid off by reset so rate shock will not be an issue. Also jumbo rates continue to be lower than conforming so go big even if you don’t need and pay down immediately.
ARMs are tricky and in general I’m not a big fan. Rates vary by location and loan size, but last I looked in my area, the margin over the index (1-year LIBOR) was 2.25%, meaning if interest rates stay exactly the same, the rate pops up to 5.13% after the intro period – ouch. If rates rise, the rate would be even higher. The intro rate on a 5/1 ARM is only about 0.4-0.5% less than on a 30-year fixed. So I think an ARM only makes good sense if:
(a) you’re sure you won’t be in the house longer than the intro period, or
(b) you’re committed to paying down most or all of the loan during the intro period, or
(c) you have an unusually high value for money now vs. in the future (eg. putting capital into your own business with a very high expected return) such that you’re willing to save a little money on payments for a few years, plan on refinancing to a fixed rate at the end of your intro period, and are willing to take the risk that rates rise and you’ll be forced to refinance into a higher fixed rate.
These cases are rare, especially in a HCOL area, although I’m sure there are some docs out there to which one or more of these apply. Note that if rates drop, you can still take advantage with a fixed rate by refinancing; you’ll just incur a transaction cost.
I may submit another guest post in the future about ARMs.
The main problem with ARMs is the same issue with interest only mortgages- it suckers people into buying a house they can’t really afford and it becomes a curse instead of a blessing in their lives.
But if it doesn’t cause you to buy too much house, I don’t necessarily have a problem with it.
I don’t think that’s how an ARM reset works. If you’re paying a 5/1 ARM like a 30 year fixed, you’re not going to be anywhere near mostly paid off at the reset.
I didn’t mean to imply that by solely paying the 5/1 like a 30 yr you’d be mostly paid off by the reset. What I meant was any prepayments would be factored in when the loan resets and payments are recast, offsetting the rate shock. In general, I think ARMs get a bad rap. You save a lot on interest during the fixed period (when the balance is large and it matters most). Increases are capped usually at 2% at each reset and usually 5% lifetime (though some will have an initial reset cap of 5%). So if you locked in at 3.25%, worst case it gets up to 8.25% but could be in yr 8 and after (on a much smaller prinbal hopefully). Statistically 8 yrs is the average time most people stay in a house. With a fixed rate, you are paying for rate protection “insurance” you may not necessarily need. You’d have to run your own scenario to see if it works out better for your economics and risk tolerance. I ended up getting a 7/1 that we paid off in 3.5 yrs and wished I got a 5/1 instead.
I agree that adjustable rates get a bad rap, despite them being the right move for the last 30-40 years most of the time. If one can afford to run the interest rate risk themselves, why pay an “insurance premium” to a bank to run it for you? I recommend docs planning to pay off their student loans in <5 years routinely run it, but for a 15-30 years mortgage…that's a little harder case to make. Certainly if you think you can knock your mortgage out in 5-7 years or perhaps within 5-7 years of the rest, it's an easier case to make. Same for a less expensive house (whether due to size, location, or LCOLA) that just isn't a very big part of your financial life. But for a $1.5M house in California? Lots of risk there. Might be worth paying the bank to run it for you.
The other thing to consider is one’s alternatives at the time. If these types of rates are the only ones that one can feasibly afford for a while, then the question is it is better to risk rate increases several years later vs not being able to buy at all. Renting is not a bad option, but depending on your housing market (and other factors) it might make more financial sense to buy something you technically “can’t afford” at that time under those terms, with the expectations of substantial equity growth (and hopefully more cash flow) in a few years, so the decisions on paying higher rates vs re-fi isn’t that tough a pill to swallow. For some housing markets (and HCOL areas) small bumps in the housing markets can mean 6-figures of equity within a year based on market alone, easily, so waiting to buy means you lose that (yes it stabilizes at some point, but still much more equity than one could have put in with mortgage payments).
My starter home was 0% down (with physician’s contract) and 5/1-ARM. I didn’t expect that I would stay there as long as I did, but after the 5yrs I was lucky that the rates didn’t even increase. My cashflow also didn’t increase a ton as it turned out (well, I was also saving and spending more), so it did make me nervous every year — but considering that I was only in the home 7yrs in the end, it was really the best deal I could have made. it was a small house, but due to the bubble, had I moved out within 12-18mos I would have made $200K equity alone (now I wish I’d had a reason to!), nearly the full price I paid for the house in that growing area!
Yes, if you know the housing market is going to appreciate rapidly, it can make sense to leverage up and buy a big huge house.
Interestingly, in these types of areas (higher COL, but still middle class), the smaller homes are the better investment. During the big rise, the smaller homes made similar equity to the larger ones, meaning equity increased at a higher rate. And when prices get high, the more modest homes are much easier to re-sell (both for new buyers and investors) since they are more affordable and more amenable to renting out, and so their “price per square foot” are notably higher too.
Though I did see some mansion-size homes get rented out to packs of young singles who agree to room together. Riskier for all involved, but often easier to find than a single family willing to pay $4000/month for a home in our area.
Surely many people have put the numbers into a mortgage calculator and understand the *huge* amount of interest being paid on a 30 year note. Much less a 40 year note. The tax deductible argument says paying $1 to save $0.33 on taxes (at best) is a sensible approach. I’d rather keep the entire dollar in the first place.
With the recent tax law changes, few people will be itemizing and can’t deduct mortgage interest at all. So much for the tax benefit. Rates are 1/2 point higher for the longer term along with PMI since it’s not likely 20% down is happening. That’s quite a bit of extra money each month offsetting those theoretically lower monthly payments.
My biggest argument against 30+ year mortgages isn’t the additional interest. It’s the reality that people churn houses every few years. After five years, the LTV is 91.8% vs. 73.8% LTV for 15 years. Between PMI and transaction costs, you might never gain any equity. It was a different world thirty years ago when our parents bought a house and lived there for a lifetime.
Recent tax law changes do limit mortgage deductibility unfortunately. Here in CA, the first $14k of mortgage interest per year ($24k married standard deduction minus the $10k SALT cap) is effectively non-deductible. At 4% this corresponds to a mortgage balance of $350,000. On the top end, deductible mortgage interest is capped at a balance of $750,000 for new mortgages (formerly $1M). So, mortgage interest is only deductible if the balance is between ~$350k and $750k… not a huge range. For the $800k mortgage example, interest becomes deductible after 3.3 years and is no longer deductible again after 20.8 years. It’s possible this could affect your payoff strategy, maybe paying more aggressively to $750k, then dropping down to minimum payments, then more aggressively again at $350k, or paying off completely. Then again, tax laws will likely change again in the next 20 years…
While I see what you’re saying about churning, I’m not sure I agree with the reasoning. If you sell a house after 5 years with a 30-year mortgage, you will definitely owe the bank more money at closing than with a 15-year, but you will also have made smaller payments for those 5 years. If you made a good decision on the loan term when you bought, and did something smart with difference in payments for those 5 years, then you’ll still come out ahead. The real problem with churning houses every 5 years is the transaction cost. WCI estimates about 15% round-trip cost… seems a bit high in my market, but it’s not crazy. At that frequency, you might consider just renting. If you run the numbers you might come out ahead. Or if you have to own and know you won’t be staying long, that’s a rare case where an ARM might make the most sense.
Put 20% down and you won’t have to pay any PMI.
Interesting way to phrase/look at the deductibility of a mortgage. Clearly with tax reform a big house or a house in a high COLA is less attractive.
I am most interested in the nearer to retirement argument. Many retirees @60 % go into retirement with debt. @ 40 % of this is mortgage debt. When you consider other possible financial stresses like helping your children/ grandchildren with education costs which is increasingly more common given the educational debt burden the prospect of carrying mortgage debt into retirement is not comforting . The psychological benefit of paying off the mortgage is exalting but also possibly a prerequisite to full retirement for some. Medicare cost per beneficiary is now about 135,000 per person at age 65 over the next 25 years. This does not include LTC. Your healthcare costs will rise (statistically at least). Personally I would not contemplate retirement /FI until the mortgage is paid off.
It’s better to use $100K of your nest egg to eliminate a $2000/month expense than to save up an extra $700K to provide sufficient income to pay it. It’s a cash flow thing.
I think it is wrong to dismiss the behavioral aspect so quickly. What percentage of people calculate the monthly difference between a 15 and 30 years mortgage, chooses the 30 year mortgage, and then sets up an auto-invest option for the difference for the life of the loan above and beyond what they would already have invested? That seems to be the only way to guarantee that they get the full mathematical benefits from choosing the 30 years loan. Run the numbers when they only invest sporadically and the winner quickly turns toward the 15 years mortgage holder ending up with a higher net worth after 30 years. Forced savings offer a real benefit because behavioral pitfalls are a real thing that affect everyone, even those in denial.
It’s not that I don’t think behavioral aspects of finance are important – I very much do – but rather that I don’t see a 15-year mortgage as the best solution most of the time. There are many different kinds of behavioral pitfalls and the solution should fit the problem. If the problem is a too-expensive car, hobby, or habit, then that should be dealt with in the process of preparing to buy a home (along with saving a 20% down payment). If the problem is more that accumulation in the checking account tends to get spent in lots of little bits on things that don’t offer much value, then choosing a 15-year mortgage might help. Then again, so will automatic investing, which takes literally five minutes to set up with most brokerages, and will work until someone logs in and cancels it. One might argue that most people are more likely to switch off automatic investing than not pay their mortgage. Perhaps. But the consequences for not being able to pay their mortgage are much greater – default, or more likely, taking on high-interest debt. So, I see the forced savings method as a high-risk gambit; for someone who has behavioral finance issues, taking on a large fixed monthly payment with serious consequences for default might do more harm than good. But are there people out there with the right combination of financial situation and behaviors where a 15-year mortgage might be best? Sure, I don’t doubt it.
Also keep in mind that a 15-year mortgage is, at best, a temporary solution. At the end of those 15 years, a lot of cash flow gets freed up, and if there’s not a good plan for what to do with it, along with the discipline to follow through with that plan, then they’ll have an even worse problem than they would have had at the outset. Maybe those 15 years of reliably making payments will help fix behavioral issues, or maybe not. And, you won’t know until you get there.
You’re seriously writing about the “problem” of retiring a mortgage in 15 years and having extra cashflow?!?
Well, that’s easily fixed. Finance everything at 20% and make interest only payments forever. Excess cashflow problems solved.
I may not have made my point clearly. The thinking behind the “forced savings” strategy is that our hypothetical home buyer isn’t responsible with their cash flow and tends to spend it on stuff that doesn’t give a lot of value (as opposed to savings/investment). So, they take a 15 year mortgage thinking the larger payments will help them save. What happens after 15 years, when a lot of cash flow gets freed up? Unless their behavior changes, they’ll tend to spend it on stuff that doesn’t give a lot of value (as opposed to savings/investment). It’s the same problem, albeit 15 years in the future. Maybe they will have gotten more responsible over that time. In that case, sure, the forced savings strategy will probably work. But it will only work for certain behavioral issues, and it’s far better to fix the behavior first, then take the mathematically correct approach.
That argument gets used a lot by people selling whole life insurance too. I’m not a fan of it either.
I tell all of the younger docs to take a 15 year mortgage so their house is paid off before their kids start college. Skip the college savings plans if you want. If you can’t max out your retirement, move to a lower cost of living area and/or buy less house. I agree with the behavioral finance aspects mentioned. We actually did a 10yr mortgage with our credit union. It’s 10 years of forced good behavior. The extra garage with a Ferrari and Maserati will have to wait!
Barring a FIRE style early retirement, it’s pretty easy to cash flow college with the money that was going to a mortgage.