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Compound interest means that you will be paying a lot more money for the same house if you buy over 30 rather than 15 years. However, for someone disciplined,

Compound interest means that you will be paying a lot more money for the same house if you buy over 30 rather than 15 years. However, for someone disciplined, taking a 30 year mortgage and paying it off like a 15 year mortgage with significant over payments is a good strategy. It means if you need to tighten your belt you can always drop down to the normal payment for a spell without so much as having to speak to the bank. The worst option is to take the 30 year mortgage and then buy the larger house that the longer period allows you to afford.

ajb 5y ago
The answer to this dilemma is to have an offset mortgage. Your savings offset the amount borrowed, and you only pay interest on the difference. Once you've saved enough to cover it, you pay no interest.
- qorrect 5y ago
  Why wouldn't you just buy the house outright at that point ?
  - lostcolony 5y ago
    Fiscal cushion. If an emergency comes up, rather than having no money to pay for it, you instead can cover it, and just pay a little extra each month going forward until you recover. That said, I don't think they exist in the US.
- ineedasername 5y ago
  Though something to keep in mind is that offset mortgages are not an option in all locales. The US for example doesn't have them.
  - ajb 5y ago
    Huh, I just assumed that the US would have any financial instrument that was available elsewhere. I guess the same US statutory intervention into the mortgage market, that makes long fixed-rate mortgages possible, also makes it difficult to have custom mortgage instruments?
ncallaway 5y ago
This was the approach that made the most sense to me. Purchase a house where you can afford the 15-year fixed mortgage, but take out the 30-year fixed mortgage. Pay it off as if it were the 15-year fixed (ensure that your loan has no penalties for prepayment or extra payments, and that 100% of extra payments go toward the principal). If things go smoothly for you, you’ll pay a marginal amount of additional interest (because your % will be higher as a 30-year than a 15-year). However, if you run into cash flow issues, you have a good amount of reduction in mortgage payments that you can make while keeping the bank completely satisfied.
- avidiax 5y ago
  No reason to make principal-only payments with interest rates so far below the avg. stock market return. Obviously if a bond paying 3% would be interesting to you, pay the mortgage off first before buying the bond.
  - ncallaway 5y ago
    I agree that produces a better expected return, however the downside-risk from a bad outcome is worse for me than the expected upside gain. Essentially, I don't expect my overall happiness and satisfaction to be linearly correlated with my finances, and I expect that non-linearity to be such that I'd rather be more risk-averse in such a way that I have to give up some of the potential gain. If there were a world where I could _guarantee_ the avg. stock market return, then I'd of course take that offer, but sadly such guaranteed returns only exist in the form of scams and ponzi schemes.
mediaman 5y ago
A better strategy is to use the 30 year, and then invest the monthly difference in the market. Why pay down long-term funding of 3.25% cost of money and lose out from a long-term market return of 7%? You're right about the compound interest, but compound interest can work for you as well.
ineedasername 5y ago
>Compound interest Depends on how much better the same amount of money would perform if invested in an index fund. It could be more profitable to throw the difference in monthly payments into a vanguard account instead of a higher 15yr monthly payment. Personally my view is exactly your second point: Buy small enough that you can consistently put $x extra each month against the principle + one full extra payment each year. It's a good middle ground to maintain flexibility And absolutely-- buying the biggest you can fit into monthly expenses may even seem responsible: "I'm not living beyond my means!" but is a razors edge of risk for unanticipated expenses or more significant life disruptions.
grey-area 5y ago
You’re not allowing for leverage, inflation and incredibly low interest rates. In real terms cash is losing significant money every year while assets are gaining money. Debt makes sense as long as you have a margin of safety and can multiply the impact with leverage. IF you believe inflation will be significant over 30 years say, and can lock in a low rate, it is better to go with a longer term.
- VBprogrammer 5y ago
  People use all kinds of accounting tricks to convince themselves that some purchase or other makes financial sense. Trading in their perfectly good 2 year old car for a brand new one, buying on finance when they could buy a cheaper one outright. I'm sceptical that it ever pays off that way.
  - bdxn 5y ago
    It's not an accounting trick; it's historically low rates. At the beginning of 2021 would you rather have paid 350k cash for a house or taken a 30 year mortgage and invested the remaining 80% (after a 20% down payment) into the sp500? Your house might be up around 10-25% depending on the market making your 20% stake worth more. and your 280k cost-basis that you invested would be worth 350k. You'd have already earned your down payment back before the end of the year. If you think the return of your investments will >= 3% mortgage rates then you're losing money by not taking on debt (albeit with a bit of risk).
    - deleted 5y ago
      [deleted]
    - VBprogrammer 5y ago
      If instead of buying the house cash I put it all into bitcoin at the begining of the year I'd now have enough to pay off the mortgage, the early repayment fee and have change to spare. This being the utter fucking fallacy of hypothesising with the benefit of perfect information.
mywittyname 5y ago
> for someone disciplined, taking a 30 year mortgage and paying it off like a 15 year mortgage with significant over payments is a good strategy. This is the worst of both worlds. You pay the interest penalty of a 30 year, with the payment of a 15 year (well, slightly more). The interest difference between a 30 and 15 year mortgage is about 30% (2.x% v 3.x% APR). I did a 15 year mortgage, then refinanced it every 12m or so ($250 each time), resetting the payments back to 180 months each time. That way, I get the interest savings of a 15 year, which is significant, and each refinance makes your payment quite a bit lower because a 15 year loan actually pays back principal. After six years, my mortgage will be the same as it would have been if I originally got a 30 year, but it will be paid off in 21 years instead of 30. There's a risk interest rates rise, or I lose my job and can't refinance. But so far, so good. And honestly, my mortgage now is so close to what it would have been with an original 30 year loan that it doesn't even matter if I can never refinance. The hardest part was the first two years.

ajb 5y ago

The answer to this dilemma is to have an offset mortgage. Your savings offset the amount borrowed, and you only pay interest on the difference. Once you've saved enough to cover it, you pay no interest.

qorrect 5y ago
Why wouldn't you just buy the house outright at that point ?
- lostcolony 5y ago
  Fiscal cushion. If an emergency comes up, rather than having no money to pay for it, you instead can cover it, and just pay a little extra each month going forward until you recover. That said, I don't think they exist in the US.
ineedasername 5y ago
Though something to keep in mind is that offset mortgages are not an option in all locales. The US for example doesn't have them.
- ajb 5y ago
  Huh, I just assumed that the US would have any financial instrument that was available elsewhere. I guess the same US statutory intervention into the mortgage market, that makes long fixed-rate mortgages possible, also makes it difficult to have custom mortgage instruments?

ncallaway 5y ago

This was the approach that made the most sense to me. Purchase a house where you can afford the 15-year fixed mortgage, but take out the 30-year fixed mortgage. Pay it off as if it were the 15-year fixed (ensure that your loan has no penalties for prepayment or extra payments, and that 100% of extra payments go toward the principal). If things go smoothly for you, you’ll pay a marginal amount of additional interest (because your % will be higher as a 30-year than a 15-year). However, if you run into cash flow issues, you have a good amount of reduction in mortgage payments that you can make while keeping the bank completely satisfied.

avidiax 5y ago
No reason to make principal-only payments with interest rates so far below the avg. stock market return. Obviously if a bond paying 3% would be interesting to you, pay the mortgage off first before buying the bond.
- ncallaway 5y ago
  I agree that produces a better expected return, however the downside-risk from a bad outcome is worse for me than the expected upside gain. Essentially, I don't expect my overall happiness and satisfaction to be linearly correlated with my finances, and I expect that non-linearity to be such that I'd rather be more risk-averse in such a way that I have to give up some of the potential gain. If there were a world where I could _guarantee_ the avg. stock market return, then I'd of course take that offer, but sadly such guaranteed returns only exist in the form of scams and ponzi schemes.

mediaman 5y ago

A better strategy is to use the 30 year, and then invest the monthly difference in the market. Why pay down long-term funding of 3.25% cost of money and lose out from a long-term market return of 7%? You're right about the compound interest, but compound interest can work for you as well.

ineedasername 5y ago

>Compound interest Depends on how much better the same amount of money would perform if invested in an index fund. It could be more profitable to throw the difference in monthly payments into a vanguard account instead of a higher 15yr monthly payment. Personally my view is exactly your second point: Buy small enough that you can consistently put $x extra each month against the principle + one full extra payment each year. It's a good middle ground to maintain flexibility And absolutely-- buying the biggest you can fit into monthly expenses may even seem responsible: "I'm not living beyond my means!" but is a razors edge of risk for unanticipated expenses or more significant life disruptions.

grey-area 5y ago

You’re not allowing for leverage, inflation and incredibly low interest rates. In real terms cash is losing significant money every year while assets are gaining money. Debt makes sense as long as you have a margin of safety and can multiply the impact with leverage. IF you believe inflation will be significant over 30 years say, and can lock in a low rate, it is better to go with a longer term.

VBprogrammer 5y ago
People use all kinds of accounting tricks to convince themselves that some purchase or other makes financial sense. Trading in their perfectly good 2 year old car for a brand new one, buying on finance when they could buy a cheaper one outright. I'm sceptical that it ever pays off that way.
- bdxn 5y ago
  It's not an accounting trick; it's historically low rates. At the beginning of 2021 would you rather have paid 350k cash for a house or taken a 30 year mortgage and invested the remaining 80% (after a 20% down payment) into the sp500? Your house might be up around 10-25% depending on the market making your 20% stake worth more. and your 280k cost-basis that you invested would be worth 350k. You'd have already earned your down payment back before the end of the year. If you think the return of your investments will >= 3% mortgage rates then you're losing money by not taking on debt (albeit with a bit of risk).
  - deleted 5y ago
    [deleted]
  - VBprogrammer 5y ago
    If instead of buying the house cash I put it all into bitcoin at the begining of the year I'd now have enough to pay off the mortgage, the early repayment fee and have change to spare. This being the utter fucking fallacy of hypothesising with the benefit of perfect information.

mywittyname 5y ago

> for someone disciplined, taking a 30 year mortgage and paying it off like a 15 year mortgage with significant over payments is a good strategy. This is the worst of both worlds. You pay the interest penalty of a 30 year, with the payment of a 15 year (well, slightly more). The interest difference between a 30 and 15 year mortgage is about 30% (2.x% v 3.x% APR). I did a 15 year mortgage, then refinanced it every 12m or so ($250 each time), resetting the payments back to 180 months each time. That way, I get the interest savings of a 15 year, which is significant, and each refinance makes your payment quite a bit lower because a 15 year loan actually pays back principal. After six years, my mortgage will be the same as it would have been if I originally got a 30 year, but it will be paid off in 21 years instead of 30. There's a risk interest rates rise, or I lose my job and can't refinance. But so far, so good. And honestly, my mortgage now is so close to what it would have been with an original 30 year loan that it doesn't even matter if I can never refinance. The hardest part was the first two years.