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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
        OK, good for you. Many or even most people would just spend the extra money, not "put [it] in the market and earn significantly more than my mortgage rate." The default rates after the 2008 crash proved that. EDIT: The parent post is a modern sophisticated financial theory, and it's absolutely correct. Your great-grandparents, who lived through the Depression, might have a much different take: "Debt is bad. Do not have any debt." That's irrational, for sure. It probably resonates with you on some level, though.

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
        OK, good for you. Many or even most people would just spend the extra money, not "put [it] in the market and earn significantly more than my mortgage rate." The default rates after the 2008 crash proved that. EDIT: The parent post is a modern sophisticated financial theory, and it's absolutely correct. Your great-grandparents, who lived through the Depression, might have a much different take: "Debt is bad. Do not have any debt." That's irrational, for sure. It probably resonates with you on some level, though.