No one can predict catastrophic conditions. You can only try your best to make responsible, wise decisions that suit your family.

We are considering moving and when we do I won’t consider a 30 year mortgage. We’re in our early 50’s and I don’t want to be paying a house payment when I’m 70+. I at least want to have options.

I do have some other backup plans, though. I am currently single and the house could easily support 1-2 roommates, which could defray some of the costs. If I get married, then I would have my wife’s income to augment mine, even if she only worked part-time. Once I get my other debts eliminated and get some savings I should be able to support a family on my income alone and continue to make the mortgage payments.

Ultimately it came down to risk/reward. The savings by going to a 15-year mortgage was worth the risk in my eyes. I will need to maintain a larger emergency fund to weather any storms that come along. I know plenty of people putting a larger percentage or their income on a 30-year mortgage than what I’m putting on a 15-year.

You are “purchasing” an option for $9,464 to have the flexibility to have a $446 lower payment if/when you need it. Of course, if you actually do take that option and pay the lower payment, then it will cost you more than $9,464. If you take that option every month, then it ends up costing you an extra $123,942.

It’s a personal purchasing decision, and I won’t fault anyone for purchasing something that they want (even though I’m against it). In your field, do you see people actually following through with the plan and make the extra principal payments?

Floridian (above) quoted a statistic that 97.3% of mortgage holders are not paying more than the minimum.

With rates as low as they are, the difference in monthly payments between the two is substantial. Some people even refinanced out of 15 year loans and into 30 years because they couldn’t manage the payments!

The rate difference between the two loan payments is too small to make a big difference.

In our example, if you decided to put the $50k into a 2% savings account, you will earn $82.57 in the first month in interest on your savings. Investing the $50k onto the mortgage saves $203.70 in interest in the first month. The mortgage earns an extra $121.14 in the first month because it has a 5% return, versus the 2% return in the savings account.

This savings continues for the second month, third month, fourth month, etc…

The absolute priorities are: Insurance & Sufficient Savings (to cover the worst crisis you can think of).

Only after those things are met, is there such a thing as ‘extra money’ for investing purposes. Accelerated debt payments is the same as investing.

401k investing (when there is a company match) is a must, even if in debt (100% return on that money) — but you might consider investing in the StableValue fund until you have a sufficient emergency fund saved up outside of the 401k.

Well… I’ve had bad things happen to me, and I still kept the roof over my head. It’s much easier to stay afloat through the lean times when your “required” bills are low.

In your example, you still have a 23% chance of something “very bad” happening in 5 years. I don’t know how you define “good” vs “bad” odds, but I don’t like them! Using your numbers, if you had to pay $1135/mo vs the increase of $446, if you took the lower payment and saved the difference, at the end of one year, you could have an “insurance policy” of 4.7 months of mortgage payments in the bank. Taken further, at the end of 5 years, you could have an “insurance policy” of 24 months in the bank! I don’t know about you, but if my choice is a 15-year mortgage, saving nothing, and having a 50/50 chance of a disaster costing me everything, well, I’d rather take the lower payments on a longer mortgage period and save the difference. (And if you’ve got the money to save AND pay your mortgage off in a shorter period, then go for it. But most people don’t have that luxury.)

You should have a real good idea of how much maintenance and repairs you will expect after getting the inspection report. Also, you want to be at the house during the inspection so you can grill the inspector and get a bunch of useful information (like how much does something cost to fix). We decided to not buy a home because of an inspection, worth every penny.

For example, let’s assume you have a $100k principal balance, with a 5% yearly APR. Your next month interest payment is $407.41 (regardless if this is a 30-year or 15-year note — everyone pays the same).

Let’s say your required payment is $900. The minimum payment amount is determined by the term length you chose. Out of your $900 minimum payment, $407.41 is going to interest, and the rest ($492.59) to principal. Let’s say you hit the lottery, and make a $50k house payment.

The next month, the outstanding principal is now $49,507.41. The bank again calculates the interest on this balance for the next payment, which comes out to: $201.70. You are still required to pay $900 (normal monthly payment), but now more of the fix-payment is going towards principal, and less towards interest simply because there is a smaller balance on the loan.

Paying extra on the mortgage, results in an immediate 5% growth of every dollar you ‘invest’ via the extra payments. This 5% growth continues for the life of the loan. If you instead put the extra money into a savings account that is only earning 2%, then you are going to come out shorter than the guy earning 5% by paying down his mortgage.

Hope this helps.

Maybe the thing to do is save the payments and make them yearly instead of monthly?

That $446 a month is nothing in the big scheme of things. If things go wrong in your life, even the ‘lower’ mortgage payment of $1135 (not counting taxes and insurance) might as well be a million a month. You can drown in 6-ft of water just like in 600-ft of water.

I’d rather have my mortgage with the lowest interest rate, and paid off even earlier — this way, if/when my financial life gets wrecked by something major (like a job loss), at least I have my paid-for house.

Assume the odds of something financially bad happening is 5% every year (job loss, death of spouse, etc). If you can pay your house off in 5 years, then during this time, there is a 77% chance you can pay your mortgage off before the bad thing happens. If it takes you 15-years, then there is a 50/50 chance you can pay it off before the bad thing happens. With a 30-year, you only have a low 20% chance of making it to the end without the bad thing happening (very bad odds).

The question is not if, but when you will be financially devastated — and what will be the repercussions of that event. Best case scenario is to have liquid savings, proper insurance, and debt-free — those are my goals above all else.

One topic that should be considered is that of Net Present Value. I don’t have the time to run the calculations right now, but I do believe comparing interest paid on a 30-year cash flow is different than comparing interest on a 15-year cash flow. In that case, you’d be making an apples-to-apples comparison, which is the value of two different cashflows in today’s dollars.

@DK:

I wouldn’t worry about building equity, but I would worry about the additional interest payments you would be making by *not* paying it down early, if you have the capability to do so.

And we have religiously stuck to OUR (not the bank’s) payment plan. We have not needed to fall back on the lower “required” monthly payment (ever). We’ve been very fortunate, and sometimes wonder if we should have just gone for the 15. Maybe our mortgage decision thwarted Murphy’s Law? ha! But knowing we still have the option of making lower payments is very comforting, especially with three kids and a stay at home parent in an economy like this!

What is surprising, though, is the number of people who choose this option and DON’T follow through – “The FDIC says that 97.3% of people don’t systematically pay extra on their mortgages.”
http://www.daveramsey.com/arti.....mortgages/
(for the record, I DON’T agree with his “ideal way to buy a house.” But I DO think you should have a sizeable down payment. 100%+ financing is crazy! We saved our down payment by buying and living in a mobile home for a year. and I guess we are weird according to Ramsey, b/c we sold that mobile home for exactly what we bought it for!)

NOW – had we waited a few more years until we were more established, we would have chosen the 15 year. But we also would have paid A LOT more for our house!