4 ms·

This doesn't make sense to me. Why wouldn't you go for a 30 year loan when rates are low? You lock in your low rate, and you lock in a low monthly commitment. I

This doesn't make sense to me. Why wouldn't you go for a 30 year loan when rates are low? You lock in your low rate, and you lock in a low monthly commitment. If budget allows, you can make additional payments towards the principal. This is almost always optimal, even if you can easily afford a shorter term loan. Banks usually give a better rate for a longer term loan.

throwaheyy 4y ago
And that is exactly why 15 year rates are lower than 30 year rates. When 30 year rates got to 2.5%, 15 year rates went down to 1.8%. There’s no free lunch.
- nradov 4y ago
  Flexibility is tremendously valuable. In absolute terms a 0.7% difference is really small. Individual circumstances varied, but for average middle-class consumers the smart move was to take the 30 year mortgage. Then they could make extra principal payments, or if money gets tight one month then just pay the minimum without worrying about defaulting. Sure in an ideal world we would all have 6 months of living expenses in an emergency fund plus multiple independent income streams so that getting laid off would be only a minor inconvenience. But the reality is that most homeowners have few other assets and just one job, so they have to plan within those limitations.
  - AlbertCory 4y ago
    You also are missing the point. At any given instant, your monthly payment for a 15-year will be higher than for a 30-year. You're right that if you can't afford it, then you shouldn't do it. If you can possibly afford the payment for a 15-year: in 15 years you'll have a monthly payment of zero, because you'll have paid it off. After a few years, you'll have started paying off the principal. And, of course, if rates go up (as they have), then in a few years the monthly payment for the 30-year will be approaching what you would have paid a couple years ago for a 15.
    - nradov 4y ago
      You also are missing the point. Potentially having the mortgage paid off in 15 years is meaningless if you have a cash flow problem in 5 years and default. That is the greater concern for most consumers. Rates going up in the future is irrelevant if you have a fixed rate mortgage, so I don't know what point you're trying to make there.
      - AlbertCory 4y ago
        > Rates going up in the future is irrelevant if you have a fixed rate mortgage, so I don't know what point you're trying to make there. OK: assume you locked in a 30-year loan 2 years ago, because it didn't even occur to you to get a 15, or you couldn't afford it. Now, you're set in your place for another 10 years. You didn't expect that kind of stability, but time just flies. So in 12 years, you'll still need 18 years to finish paying it off. There's no point in refinancing, since rates are higher now. Had you gotten the 15-year, you'd be within 3 years of zero mortgage payments. If you're in high tech, quite likely you'll be earning much more after 12 years, and that monthly payment will be no problem. You're right, the "quite likely" does do a lot of work here. You're taking a risk. No argument there. > if you have a cash flow problem in 5 years and default That isn't a problem in practice. Most banks don't want to foreclose and they'll restructure your loan, as long as you're not a deadbeat. And in 5 years, you'll have paid down the principal, at least a little. More than you would have with a 30.
        Arainach 4y ago
        I am this person. I refinanced from a 20 year at 3.6% to a 30 year even lower. I could have afforded a 15 year rate, but intentionally chose the longer term. The payments are lower and give me more cash now to put in the market and earn significantly more than my mortgage rate. At the moment, my mortgage is dramatically lower than inflation. I would take almost unlimited credit at this interest rate and not pay it back early; several hundred thousand was a no-brainer.
        AlbertCory 4y ago
wefarrell 4y ago
15 year fixed rate mortgages are always lower than 30 year fixed rate, at least in the US.
- matmatmatmat 4y ago
  The interest rate is, yes. The monthly payment, no.
  - wefarrell 4y ago
    Obviously. OP said rate, not payment.
- deleted 4y ago
  [deleted]
kazinator 4y ago
> Banks usually give a better rate for a longer term loan. I think, only in rare circumstances, like rates being unusually high, such that they will almost certainly go down. Locking in rates costs money. Nobody will give you a reduction in risk for nothing. Often they are a bad gamble, because if you're in a long term loan, even if the rate is variable, the length of the loan itself provides the averaging to de-risk that. Most people work with spot rates for all sorts of stuff they consume. You don't get to negotiate a 30 year rate on steaks, milk or gasoline. You can still buy those things when prices are low and average things.
- AlbertCory 4y ago
  > I think, only in rare circumstances, like rates being unusually high, such that they will almost certainly go down. You didn't say if that's the case now (I don't actually know one way or the other). If you look at mortgage rates over a very long period, that will help. You definitely can't just compare "now" to "last 5 years."
AlbertCory 4y ago
You're missing the point, or you didn't read the post. A 15-year payment is higher, of course, but after 15 years you've paid it all off. After 5 years, much of your payment is going towards principal, not interest. You can do this calculation in a spreadsheet. The question is: when rates go up, at what point does the new 30-year monthly payment equal the old 15-year, when rates are lower? > If budget allows, you can make additional payments towards the principal. I said that. Most people will not, but YMMV.

throwaheyy 4y ago

And that is exactly why 15 year rates are lower than 30 year rates. When 30 year rates got to 2.5%, 15 year rates went down to 1.8%. There’s no free lunch.

nradov 4y ago
Flexibility is tremendously valuable. In absolute terms a 0.7% difference is really small. Individual circumstances varied, but for average middle-class consumers the smart move was to take the 30 year mortgage. Then they could make extra principal payments, or if money gets tight one month then just pay the minimum without worrying about defaulting. Sure in an ideal world we would all have 6 months of living expenses in an emergency fund plus multiple independent income streams so that getting laid off would be only a minor inconvenience. But the reality is that most homeowners have few other assets and just one job, so they have to plan within those limitations.
- AlbertCory 4y ago
  You also are missing the point. At any given instant, your monthly payment for a 15-year will be higher than for a 30-year. You're right that if you can't afford it, then you shouldn't do it. If you can possibly afford the payment for a 15-year: in 15 years you'll have a monthly payment of zero, because you'll have paid it off. After a few years, you'll have started paying off the principal. And, of course, if rates go up (as they have), then in a few years the monthly payment for the 30-year will be approaching what you would have paid a couple years ago for a 15.
  - nradov 4y ago
    You also are missing the point. Potentially having the mortgage paid off in 15 years is meaningless if you have a cash flow problem in 5 years and default. That is the greater concern for most consumers. Rates going up in the future is irrelevant if you have a fixed rate mortgage, so I don't know what point you're trying to make there.
    - AlbertCory 4y ago
      > Rates going up in the future is irrelevant if you have a fixed rate mortgage, so I don't know what point you're trying to make there. OK: assume you locked in a 30-year loan 2 years ago, because it didn't even occur to you to get a 15, or you couldn't afford it. Now, you're set in your place for another 10 years. You didn't expect that kind of stability, but time just flies. So in 12 years, you'll still need 18 years to finish paying it off. There's no point in refinancing, since rates are higher now. Had you gotten the 15-year, you'd be within 3 years of zero mortgage payments. If you're in high tech, quite likely you'll be earning much more after 12 years, and that monthly payment will be no problem. You're right, the "quite likely" does do a lot of work here. You're taking a risk. No argument there. > if you have a cash flow problem in 5 years and default That isn't a problem in practice. Most banks don't want to foreclose and they'll restructure your loan, as long as you're not a deadbeat. And in 5 years, you'll have paid down the principal, at least a little. More than you would have with a 30.
      - Arainach 4y ago
        I am this person. I refinanced from a 20 year at 3.6% to a 30 year even lower. I could have afforded a 15 year rate, but intentionally chose the longer term. The payments are lower and give me more cash now to put in the market and earn significantly more than my mortgage rate. At the moment, my mortgage is dramatically lower than inflation. I would take almost unlimited credit at this interest rate and not pay it back early; several hundred thousand was a no-brainer.
        AlbertCory 4y ago

wefarrell 4y ago

15 year fixed rate mortgages are always lower than 30 year fixed rate, at least in the US.

matmatmatmat 4y ago
The interest rate is, yes. The monthly payment, no.
- wefarrell 4y ago
  Obviously. OP said rate, not payment.
deleted 4y ago
[deleted]

kazinator 4y ago

> Banks usually give a better rate for a longer term loan. I think, only in rare circumstances, like rates being unusually high, such that they will almost certainly go down. Locking in rates costs money. Nobody will give you a reduction in risk for nothing. Often they are a bad gamble, because if you're in a long term loan, even if the rate is variable, the length of the loan itself provides the averaging to de-risk that. Most people work with spot rates for all sorts of stuff they consume. You don't get to negotiate a 30 year rate on steaks, milk or gasoline. You can still buy those things when prices are low and average things.

AlbertCory 4y ago
> I think, only in rare circumstances, like rates being unusually high, such that they will almost certainly go down. You didn't say if that's the case now (I don't actually know one way or the other). If you look at mortgage rates over a very long period, that will help. You definitely can't just compare "now" to "last 5 years."

AlbertCory 4y ago

You're missing the point, or you didn't read the post. A 15-year payment is higher, of course, but after 15 years you've paid it all off. After 5 years, much of your payment is going towards principal, not interest. You can do this calculation in a spreadsheet. The question is: when rates go up, at what point does the new 30-year monthly payment equal the old 15-year, when rates are lower? > If budget allows, you can make additional payments towards the principal. I said that. Most people will not, but YMMV.