Good morning (or afternoon or evening, depending on when you’re reading this)! Today I decided to write a bit about my love of my 15 year mortgage.
You might remember that I wrote last week about how much I hate my mortgage company, code named “Death Star” for their determination to destroy my personal finances. Well, I might hate Death Star but I love the 15 year mortgage itself. I love it so much I’ve written a poem about it – inspired by Sonnet 43 by Elizabeth Barrett Browning:
How do I love thee? Let me count the ways.
I love thee with thine 2.75 percent interest rate
My soul sings happily, when seeing that low rate
For the ends of the term and mortgage freedom
I love thee with thine 15-year term
Most quietly decreasing, month by month
I love thee freely, as thy helps me obtain financial freedom
I love thee purely, as mine balance decreases
I love thee with the passion of one who once had a 8.375% rate
On mine old condo, and with mine old mortgage.
I love thee with a love I seemed to lose
When I had a 30-year term. I love thee with the low interest,
Principal reduction, 11 more years; and, if I work hard,
I shall but love thee better after payoff.
I Had A 30 – And I’m Never Going Back
I used to have a 30 year mortgage, just like a “normal” person. After all, mortgages were something you paid off right before you retired, in your 50’s or 60’s – right? Or maybe never, just like a third of people retiring today. Everyone has a 30 year mortgage. Maybe you pay a little extra on it each month, but you certainly don’t have it paid in your 30’s or 40’s. And that “little extra each month” is optional – life happens and most months that doesn’t occur, am I right?
That might be how most people think, but we’ve established by now that the CMO household is definitively not “like most people.” Having survived a medical crisis that almost killed my husband, job losses, and now with me being the breadwinner and sole income earner, we’re not a typical household. One interesting thing that happens when you survive catastrophic financial events is that you become more conservative. That’s why survivors of the depths of the Great Recession and the Great Depression tend to be more thrifty than others.
From the time I was 20 until I was 33, I had a 30 year mortgage. Well, not A 30 year mortgage – I had four of them.
- Original mortgage on my condo at 8.375%
- Refinanced mortgage on the condo at around 6% (can’t recall the exact rate)
- Original mortgage on my house, purchased in 2006, at around 6.5%
- Refinanced home mortgage at around 5.3%
And in those thirteen years, I felt like I made almost no progress toward getting the mortgage paid off.
Why is that? After all, I followed the “standard” advice and refinanced whenever the rate dropped over a point. That should save me money overall, right?
And sure, it did save me money. BUT every time I refinanced, I re-started the 30 clock-and the higher interest payments – from scratch. With a 30 year mortgage, most of the payments in the first year, five years, even ten years goes to interest. Every month your principal will goes down a tiny amount – maybe a few hundred dollars out of a payment of over a thousand. Every month you see the principal portion of your payment tick up, and the interest portion go down, but on a 30 year this process seems slower than a snail.
The Proof Is In The Math
At the time I got my current 15 year mortgage, almost exactly four years ago, I actually almost got another 30. Why is that? Well I was reading all the “standard” advice:
- How you shouldn’t get a 15 year mortgage because it’s not flexible.
- If you have a job loss, you still have to make those higher payments.
- With rates so low, at 3.5%, you can easily arbitrage the mortgage and earn more in the market
- You can always get a 30 and pay it like a 15 if you want to
The initial reason I didn’t get another 30 year is because of the way my mortgage company, who I’ll call Fake Account Inc., dragged their feet doing the refinance. So I went with my local bank instead, and decided to get a 15 year after seeing the payment.
You see, originally I went into the refinance with the idea to lower our monthly payment significantly. With a current mortgage at 5.375% and rates now at 3.5%, my payment would drop by hundreds of dollars per month. But looking at the numbers my bank ran, the 15 year payment was actually just about the same as my current 30 year mortgage. So my monthly payment wouldn’t go down, but I would have the home paid off by 48-at the latest. Under the 30 year, I would be in my early 60’s by the time the mortgage was gone.
So what did the math look like? Feast your eyes on my amazing Excel:
|15 Year||30 Year||Comments|
|Interest Rate||2.75%||3.50%||30 year is 0.75% higher|
|Monthly Payment||$1,730||$1,145||15 year payment is $585 higher per month BUT…|
|Portion of 1st payment to principal||$1,146||$401||…the amount of the 15 year mortgage going to principal is $745 more than the 30 year. Heck, it’s more than the entire monthly payment on the 30 year!|
|Portion of 48th payment to principal||$1,279||$462||The amount of the 15 year mortgage going to principal is now $817 more than the 30 year. It’s gone up by $133 per month over the years, while the 30 year has only gone up $61|
|Starting balance||$255k||$255k||Both started with the same balance|
|Current balance (4 years in)||$196k||$234k||After four years, the 15 year mortgage balance is almost $40k lower than the 30|
|Balance at 15 years||$0.00||$160k||After 15 years, the 30 year still has a balance of almost $160k. The 15 is paid off|
Of course, the mortgage balance is only half of the math you need to consider – I’ll cover the so-called flexibility of “getting a 30 and paying it like a 15”, and the opportunity cost of a 15, in a later post. But for us, it was a great option. Our payment stayed the same and the mortgage would be gone by the time I was 48 at the latest. Even now, four years later, I don’t regret picking the 15 over the 30.
How About You?
Do you have a mortgage term under 30 years – and if so, what do you think about it? Or do you have biggest mortgage at the longest term you can find, to try and arbitrage the mortgage rate? Perhaps somewhere in between? Let me know in the comments!
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