length of mortgage?

[wednesday]

With all the recent threads on the topic of paying off a mortgage early, or not, I'm curious what folks think is the ideal length of a mortgage. I've seen the math showing how much less you pay over 15 years versus over 30, but also the counter-math for what investing the same amount of money might have done for you instead. If paying a lower amount for longer, freeing up cash flow for investing, is always better, than why not get a 40- or 50-year mortgage? I mean I'm being a little facetious but I'm just curious about why 30 years seems like the most common way to go. Is it mainly so you'll have it paid off before retirement?

Our situation is that we're two years into an interest-only 30-year ARM. And since I know that alone will elicit some knee-jerk criticism, I just want to say that we're aware of the risks of interest-only and ARM mortgages -- given our situation when we bought it made a lot of sense at the time and still does and we have no buyer's remorse whatsoever. BUT, we intend to re-finance in about two years, before the point that our interest rate would adjust up (by as much as 2 percent, it's currently 5.125%).

So ANYway, when we go to re-finance I guess we need to decide on 15 years versus 30. We could easily afford to the payments on a 15-year mortgage rather than a 30-year, I'm just wondering if that goes counter to the advice of "save for retirement rather than pay off your house early." If we re-finance two years from now for 15 years, the house would be paid off when DH is 62 and I'm 50. If we go for 30 years instead, we would be 77 and 65 at pay-off.

I really did not think this far ahead when marrying DH, not that it would have changed my mind, but I'm looking ahead to when I'm say in my mid to late 50's, have kids in college, and have a DH who most likely is no longer earning income and possibly even beginning to have health issues. DH is used to me being uptight about spending, but it used to be, "We can't buy that because we have other bills to pay," and now it's "We can't buy that or I'll end up eating cat food when I'm eighty and you're dead and gone!"

We are pretty committed to putting everything we can into retirement and our house, and when our kids are college-age we will help to the extent we can out of current earnings at that time.

Sorry this is so rambly but is 15 or 30 years the way to go? Are their resources addressing financial/retirement planning when there is a significant age gap between partners?

[kijip]

If I were in your shoes I would get the 15 year mortgage unless you go into the 30 year planning to pay it off early anyways. Who can say if you will even have the income necessary to keep paying the mortgage until your spouse is in his 70s? We chose a 30 year option but we are in our 20s and my husband is in school full-time...we needed to keep the monthly payment very affordable for just 1 income for the next few years. If you are disciplined with saving the difference between the 15 and the 30 year mortgage payment and then using the savings to make a big payoff on the mortgage you might be better with the 30 vs the 15. But only if the interest rate you lock into is lower than what you can get on a relatively secure investment.

[midstreammama]

Originally Posted by kijip

If I were in your shoes I would get the 15 year mortgage unless you go into the 30 year planning to pay it off early anyways. Who can say if you will even have the income necessary to keep paying the mortgage until your spouse is in his 70s? We chose a 30 year option but we are in our 20s and my husband is in school full-time...we needed to keep the monthly payment very affordable for just 1 income for the next few years. If you are disciplined with saving the difference between the 15 and the 30 year mortgage payment and then using the savings to make a big payoff on the mortgage you might be better with the 30 vs the 15. But only if the interest rate you lock into is lower than what you can get on a relatively secure investment.

This is what we did. We refi'd a 15yr into a 30yr. We wanted to become debt free and we are going to pay on the 30yr as if its a 15yr. It just feels pretty good knowing I have that safety net of only having to pay the 30yr payment if need be.

[Herausgeber]

I would strongly consider sitting down with a fee-only financial planner, given your circumstances.

The only real advantage to the 15 year, IMO, is that the rate is generally lower.

Figure out how much you need to save to retire. Max out whatever tax-advantaged vehicles you can to help you get there. After that, throw extra money at the mortgage, whether it's 15 or 30 year, if you want.

But you don't want to be in a situation in which you paid off that mortgage, have no liquid savings or investments, and can't tap the equity in the house anyway because your income doesn't support the payment on a new loan.

[mightymoo]

To answer your initial question - yes 30 years is usually chosen because it cooincides roughly with retirement. Also, 40+ year mortgages are not very common products and have only really come on to the scene recently. I am a big fan of save for retirement before paying off a mortgage, but I would not stretch my mortage out more than 30 years because I want it paid off when we retire. At that point, I will not want my retirement money in the high risk investments that pay the greater interest - the additional interest that makes it worth investing over paying off a mortage, at that point I'll want my money in much safer investments that pay a lower rate of return and at that point the investments most likely would not outpace the interest on the mortgage.

To respond to the greater problem, I think you need to do that math. Based on what you said about your age, etc the 15 year mortgage makes more sense, but it would also depend too I think on how much you have saved for retirement and what you plan to do when you retire. For example, if you have a $300K house with a $250K mortgage - you could chose the 30 year loan, which by the time you retire would only be halfway paid off, and then choose upon retirement to sell the house, take your $150-200K of equity and buy a smaller house or condo outright. If that is your goal, rather than having this house fully paid for, then putting the extra money in other retirement investments rather than the mortgage may make sense. If staying in this house is a priority, then that may make you lean the other way.

If you are trying to decide between a 15 and a 30 year loan, then track what your money does for you in both scenarios over 30 years, with some basic assumptions on rate of return. Excel is a great tool for this. If the 15 year payment is $2000/mo, then take that as your "income". In one scenario, you spend that income entirely on mortgage, then save it for the 15 following years. In the second scenario, you are paying say $1500 to mortgage and saving $500 for 30 years, etc. Then look at your net work in both scenarios at different points - the end of the 30 years, but also the age you plan to retire.

As Herausgeber said, consider your needs when you start retirement and I also second the recommendation for a fee based financial planner - it is a huge weight off my mind when I meet with my financial planner to know that we are on track and when we choose to spend money we are not jeopardizing our future to do it. They also bring up so many things to consider that we never would have thought of on our own, and give us great perspective.

[avendesora]

I think paying mortgages off quickly makes sense if you have a high rate - higher than what you can get on average from savings. Our mortgage is only 5%, so we're quite comfortable letting it sit as long as possible. We did 30 years - 40 years was a possibility, but it had a higher interest rate associated with it. We also chose to not go with the 15 year mortgage because I expect to be an at home mom for a good chunk of time - and it didn't make sense for us to work hard to pay our mortgage off early, only to have it be done right when I go back to work. Also, it might not hurt to have a mortgage when our kids are applying to college.

I really think you have to see what they interest rates are at the time when you refinance.

Aven

[wednesday]

Thanks for all the feedback!

We do intend to stay in this house forever-- modest size, all one level, downtown and on a bus line. I could grow old and be widowed and still live here independently.

The mortgage would be for roughly 120K on a 200K value house. Counting our current escrow payments for tax/insurance, a 30-year mortgage at 6% for that amount would be $827/month. A 15-year mortgage at 5.5% would be $1084/month. The difference is $257, which I would presumably invest elsewhere at a higher rate of return, right?

We have been told by FIL that we can go see the person who manages his portfolio, at no cost to us. My understanding is that he is fee-only, not commission, but he offers this complimentary service to the adult children of his clients. I don't know what the limitations are, but it sounds like we could get some basic advice on this mortgage re-fi issue, and on how to set up DH's retirement funds.

[ookami]

Originally Posted by wednesday

The mortgage would be for roughly 120K on a 200K value house. Counting our current escrow payments for tax/insurance, a 30-year mortgage at 6% for that amount would be $827/month. A 15-year mortgage at 5.5% would be $1084/month. The difference is $257, which I would presumably invest elsewhere at a higher rate of return, right?

It's not just that you could invest the difference elsewhere. It's also that if for some reason you decided to rent out your house, you could cover your mortgage with less. Or if something unfortunate could happen and you needed to borrow or use your savings to make payments, your payment would be less. I think it's all about decided how much you want to hedge your bets. Like you said, seeing a financial planner could help you figure out how much risk you can handle.

[mightymoo]

Originally Posted by wednesday

We have been told by FIL that we can go see the person who manages his portfolio, at no cost to us. My understanding is that he is fee-only, not commission, but he offers this complimentary service to the adult children of his clients. I don't know what the limitations are, but it sounds like we could get some basic advice on this mortgage re-fi issue, and on how to set up DH's retirement funds.

Our financial planner does something similar, is happy to see family members of clients of his even if they just want a short consult, not full portfolio management. I personally would take him up on that, especially if he's willing to talk to you initially for free. It can't hurt to see what he says, and since your FIL obviously trusts him, that's a big plus over anyone else you might see.