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I haven't done it for a while but when I last compared 15 to 30 year rates the interest was outrageous, pure usury, for the 30 year. But that isn't my main moti

I haven't done it for a while but when I last compared 15 to 30 year rates the interest was outrageous, pure usury, for the 30 year. But that isn't my main motivation to sticking to a 15 year, it's just a mechanism to limit how much I can borrow and spend. It caps me at a reasonable amount without me having to think about it, while granting a lower interest rate. It just nicely lines up with an amount that my spouse or I can afford with even one job, or a very basic low paying job. I'm definitely doing what you're suggesting and staying away from the edge.

mediaman 5y ago
True, with a 30 year it looks like you're paying a lot of interest, and in nominal terms (i.e., the total amount during the loan), you are. But consider a thought experiment where you could borrow $1m at a low rate of interest, suppose 3%, from a generous lender who requires no collateral and requires an amortizing repayment. You take the $1m and reserve, say, $100k in "no-touch" cash (your cushion) and invest the remainder in the market, and suppose that the market returns an average of 7% over the long run. In this scenario, you obviously pay much more interest than not taking the loan. The interest you pay is nearly $500k, which sounds like a lot - almost half the loan! Yet you make a tidy profit over 30 years: after paying back the loan, you have a portfolio worth over $4 million, plus the $100k reserve you still have. While that's just a thought experiment, the math works fairly similarly for a mortgage. So long as the market returns more (over the long term - it'll be bumpy short term) than the cost of money, you will be paid handsomely for assuming lots of long-term, fixed low-interest debt and investing the proceeds. And this leads to a second surprising conclusion: you should not pay off your mortgage. Once you've built equity, releverage the house and borrow more, so long as you take the proceeds and invest it in an instrument that will pay more than the cost of money over the long run. If interest rates rise, the math might not work. This is bad advice for some people, because a pile of savings and investments can be a tempting target to use for luxury vehicles, or boats or whatever, and that can upset the math, although eventually you make enough with it that might be OK. But for people who can live as if those investments were illiquid, it's quite a rewarding path. And for some people, the psychological value of living in a house with no mortgage exceeds whatever financial gains come from continuing to pay for a mortgage. And while there's nothing wrong with that, it does come at a stiff financial cost.

mediaman 5y ago

True, with a 30 year it looks like you're paying a lot of interest, and in nominal terms (i.e., the total amount during the loan), you are. But consider a thought experiment where you could borrow $1m at a low rate of interest, suppose 3%, from a generous lender who requires no collateral and requires an amortizing repayment. You take the $1m and reserve, say, $100k in "no-touch" cash (your cushion) and invest the remainder in the market, and suppose that the market returns an average of 7% over the long run. In this scenario, you obviously pay much more interest than not taking the loan. The interest you pay is nearly $500k, which sounds like a lot - almost half the loan! Yet you make a tidy profit over 30 years: after paying back the loan, you have a portfolio worth over $4 million, plus the $100k reserve you still have. While that's just a thought experiment, the math works fairly similarly for a mortgage. So long as the market returns more (over the long term - it'll be bumpy short term) than the cost of money, you will be paid handsomely for assuming lots of long-term, fixed low-interest debt and investing the proceeds. And this leads to a second surprising conclusion: you should not pay off your mortgage. Once you've built equity, releverage the house and borrow more, so long as you take the proceeds and invest it in an instrument that will pay more than the cost of money over the long run. If interest rates rise, the math might not work. This is bad advice for some people, because a pile of savings and investments can be a tempting target to use for luxury vehicles, or boats or whatever, and that can upset the math, although eventually you make enough with it that might be OK. But for people who can live as if those investments were illiquid, it's quite a rewarding path. And for some people, the psychological value of living in a house with no mortgage exceeds whatever financial gains come from continuing to pay for a mortgage. And while there's nothing wrong with that, it does come at a stiff financial cost.