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I just bought a house and compared, for the same loan amount, the difference between a higher monthly payment (for a 15 year loan) versus a lower monthly paymen

I just bought a house and compared, for the same loan amount, the difference between a higher monthly payment (for a 15 year loan) versus a lower monthly payment (for a 30 year loan) and investing the difference between the 15 and 30 year payment at 8% annual return, and the 30 year approach came out way ahead because of the additional compounding investment return from those first 15 years. if the apr is significantly lower (4.75% vs 8%) than the expected annual investment return, it's kind of a no brainer, isn't it?

vageli 8y ago
Where are you getting consistent 8% returns year over year though?
- AdamM12 8y ago
  My best guess would be the long term returns of the S&P 500 is 7-8%. If you look at the returns relative to inception date 1993 SPY is like 9%. [1] https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY
- jerkstate 8y ago
  I meant average return over 30 years, not necessarily 8% consistent every year. https://www.bogleheads.org/blog/three-fund-portfolio-returns/ https://www.bogleheads.org/blog/three-fund-portfolio-returns... https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysisTools/portfolioAnalytics/historicalRiskReturn https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysis...
  - toomuchtodo 8y ago
    Jack Bogle, Blackrock, and other knowledgeable market participants are predicting lower future returns into the future (~4%) for a variety of reasons (structural, global and domestic growth that won’t be repeated), muting any arbitrage benefit between your mortgage rate and investment market returns. History will show (IMHO) homeowners should’ve just applied more towards their mortgage principal, and thrown solar on their roof if they could from a risk adjusted returns perspective (both “investments” I list are guaranteed, whereas the equities and non-US treasuries bond market is not).
    - jerkstate 8y ago
      Thanks, I just modified my spreadsheet predicting 4% annual return for the next 15 years (although the article I could find with Bogle's prediction is a decade of 4% returns) and then 7% thereafter. The 30Y loan still comes out ahead, but very slightly (less than $3000 advantage on about $2M expected value of the portfolio). Such is the time value of money. Agree with you about solar panels (and other efficiency upgrades) - my initial remodeling plans are improving sealing, insulation, and upgrading to a more efficient furnace. Already got the smart thermostat!
      - toomuchtodo 8y ago
        Keep in mind the 30% federal tax credit on solar starts phasing out after this year, and you may have other incentives available (state, local, utility) that reduce payback time of your solar install to 4-7 years; every kw after that is free! Hope my comments have been helpful.
monochromatic 8y ago
The expected annual investment return is not 8%.
- rootusrootus 8y ago
  Adjusted for inflation, long term is more like 7%. There have been some really ugly periods where returns were a lot less, however, sometimes lasting more than a decade. For a 30 year timeline, though, it's been a pretty good bet.
rootusrootus 8y ago
I'm with you. I have a 30-year 3.75% mortgage and I've been throwing the rest of my money into investments. With the tax benefits (up until this year, at least, not sure where we will end up after the recent legislative changes) our effective rate is definitely less than 3.75%, and a lot lower than the long term returns I've been getting in equities.
- sys_64738 8y ago
  My strategy was to pay off my mortgage quickly. After 5% down I saved anough to have a year of money to survive on if need be. After that every penny went to the principle so it was payed off after seven years. Best decision I ever made.
isoskeles 8y ago
Your strategy is preferable if those numbers are correct and if the person following the strategy is actually investing the difference they saved and they're keeping the mortgage for the full term. I doubt most people are this disciplined, but otherwise I get the idea and definitely considered it myself. I would prefer to be able to dump all of my extra income into the mortgage and be done with it in 5-7 years, which can be done with either a 15- or 30-year. I'm generally pessimistic about markets and the possibility of there being a downturn, so I'd rather not having a housing payment at all (property tax and maintenance not included), as soon as possible. As a final note though, re: the "toxicity" of the 30-year, I think that the average person's experience with a mortgage is neither of our stated strategies. The average person isn't picking a 30-year and investing the difference between what they would have gotten on a 15-year. They're picking a 30-year, making minimum payments, probably not saving much outside of this, and potentially selling/moving or being tricked into refinancing within 7 years--when most of their payments were all going toward interest and they built very little equity into their home. That's my problem with the 30-year mortgage.
jtsnow 8y ago
Depending on the rates and down payment, it's not uncommon to need >10% gains in the invested difference for the 30-year to beat the 15-year mortgage. The 15-year mortgage has proved to be much more advantageous in my case. See https://www.mtgprofessor.com/A%20-%20Term/30_years_or_15.htm https://www.mtgprofessor.com/A%20-%20Term/30_years_or_15.htm
- jerkstate 8y ago
  For sure. In another post I compared today's rates for 30Y and 15Y with 15 years of 4% returns and still came out (slightly) ahead. I'm interested in how you determined that the 15 year was more advantageous (did you calculate what your cash flow would have been with a 30Y?) and if it was a big advantage because you perhaps got lucky with market timing and finishing up your mortgage when the market is low (which really isn't something a new mortgager can rely on), or because the interest rates were at parity with the investment returns of that era, which would make it smarter to pay off quickly.
sys_64738 8y ago
People play these games but the mortgage is a millstone around your neck until it’s payed off. There is a psychological value in owning your home outright than which so reduces the worry level and stress that it improves your quality of life and probably extends it. Buying a house is one of those immense milestones in life. Paying it off completely is one of life’s major accomplishments. So a few percent ain’t worth that psychology.

vageli 8y ago

Where are you getting consistent 8% returns year over year though?

AdamM12 8y ago
My best guess would be the long term returns of the S&P 500 is 7-8%. If you look at the returns relative to inception date 1993 SPY is like 9%. [1] https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY
jerkstate 8y ago
I meant average return over 30 years, not necessarily 8% consistent every year. https://www.bogleheads.org/blog/three-fund-portfolio-returns/ https://www.bogleheads.org/blog/three-fund-portfolio-returns... https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysisTools/portfolioAnalytics/historicalRiskReturn https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysis...
- toomuchtodo 8y ago
  Jack Bogle, Blackrock, and other knowledgeable market participants are predicting lower future returns into the future (~4%) for a variety of reasons (structural, global and domestic growth that won’t be repeated), muting any arbitrage benefit between your mortgage rate and investment market returns. History will show (IMHO) homeowners should’ve just applied more towards their mortgage principal, and thrown solar on their roof if they could from a risk adjusted returns perspective (both “investments” I list are guaranteed, whereas the equities and non-US treasuries bond market is not).
  - jerkstate 8y ago
    Thanks, I just modified my spreadsheet predicting 4% annual return for the next 15 years (although the article I could find with Bogle's prediction is a decade of 4% returns) and then 7% thereafter. The 30Y loan still comes out ahead, but very slightly (less than $3000 advantage on about $2M expected value of the portfolio). Such is the time value of money. Agree with you about solar panels (and other efficiency upgrades) - my initial remodeling plans are improving sealing, insulation, and upgrading to a more efficient furnace. Already got the smart thermostat!
    - toomuchtodo 8y ago
      Keep in mind the 30% federal tax credit on solar starts phasing out after this year, and you may have other incentives available (state, local, utility) that reduce payback time of your solar install to 4-7 years; every kw after that is free! Hope my comments have been helpful.

monochromatic 8y ago

The expected annual investment return is not 8%.

rootusrootus 8y ago
Adjusted for inflation, long term is more like 7%. There have been some really ugly periods where returns were a lot less, however, sometimes lasting more than a decade. For a 30 year timeline, though, it's been a pretty good bet.

rootusrootus 8y ago

I'm with you. I have a 30-year 3.75% mortgage and I've been throwing the rest of my money into investments. With the tax benefits (up until this year, at least, not sure where we will end up after the recent legislative changes) our effective rate is definitely less than 3.75%, and a lot lower than the long term returns I've been getting in equities.

sys_64738 8y ago
My strategy was to pay off my mortgage quickly. After 5% down I saved anough to have a year of money to survive on if need be. After that every penny went to the principle so it was payed off after seven years. Best decision I ever made.

isoskeles 8y ago

Your strategy is preferable if those numbers are correct and if the person following the strategy is actually investing the difference they saved and they're keeping the mortgage for the full term. I doubt most people are this disciplined, but otherwise I get the idea and definitely considered it myself. I would prefer to be able to dump all of my extra income into the mortgage and be done with it in 5-7 years, which can be done with either a 15- or 30-year. I'm generally pessimistic about markets and the possibility of there being a downturn, so I'd rather not having a housing payment at all (property tax and maintenance not included), as soon as possible. As a final note though, re: the "toxicity" of the 30-year, I think that the average person's experience with a mortgage is neither of our stated strategies. The average person isn't picking a 30-year and investing the difference between what they would have gotten on a 15-year. They're picking a 30-year, making minimum payments, probably not saving much outside of this, and potentially selling/moving or being tricked into refinancing within 7 years--when most of their payments were all going toward interest and they built very little equity into their home. That's my problem with the 30-year mortgage.

jtsnow 8y ago

Depending on the rates and down payment, it's not uncommon to need >10% gains in the invested difference for the 30-year to beat the 15-year mortgage. The 15-year mortgage has proved to be much more advantageous in my case. See https://www.mtgprofessor.com/A%20-%20Term/30_years_or_15.htm https://www.mtgprofessor.com/A%20-%20Term/30_years_or_15.htm

jerkstate 8y ago
For sure. In another post I compared today's rates for 30Y and 15Y with 15 years of 4% returns and still came out (slightly) ahead. I'm interested in how you determined that the 15 year was more advantageous (did you calculate what your cash flow would have been with a 30Y?) and if it was a big advantage because you perhaps got lucky with market timing and finishing up your mortgage when the market is low (which really isn't something a new mortgager can rely on), or because the interest rates were at parity with the investment returns of that era, which would make it smarter to pay off quickly.

sys_64738 8y ago

People play these games but the mortgage is a millstone around your neck until it’s payed off. There is a psychological value in owning your home outright than which so reduces the worry level and stress that it improves your quality of life and probably extends it. Buying a house is one of those immense milestones in life. Paying it off completely is one of life’s major accomplishments. So a few percent ain’t worth that psychology.