15 Year vs 30 Year Mortgage

In this environment, what are people's thoughts on doing a 15 year vs a 30 year mortgage? The spread between the two is at about 100 bps. Historically that is pretty wide and seems attractive to do the 15 year if one can afford the higher monthly payment. What do you guys think?

1. If you can afford it get the 15. 2. You can get the 30 year and just pay more a month. I like the second option, just in case something comes up in the future and you need the cash. (Baby, medical emergency, etc.)

3. If you don't plan to stay in this home for 5/10/15 years, why pay the extra principal?

irvinehomeowner said:

3. If you don't plan to stay in this home for 5/10/15 years, why pay the extra principal?

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Because some people don't want debt for 30 years. The interst component over 30 years is huge. We will be done with our mortgage at 45. Not having a mortgage at any time after 45 is a good feeling.

@qwerter:

I understand your answer but it doesn't quite fit the context of my post if 1) You can't afford the 15 year payment and 2) You don't plan to stay in that home 30 or even 15 years.

eyephone said:

You can get the 30 year and just pay more a month. I like the second option, just in case something comes up in the future and you need the cash. (Baby, medical emergency, etc.)

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I agree.  If you pay like a 15 with a 30 year rate, the difference isn't all that much.  Amerisave is quoting me 4.625% 30-yr and 3.75% 15-yr for a $600k loan

$600k loan, 180 payments @:
4.625%:  $4628/mo
3.75%:    $4363/mo

You end up paying 6% more with the higher rate, while keeping some breathing room just in case. 

The wife and I paid off our last house and lived without a mortgage payment.  Yeah, it was nice, but just psychologically because we humans are wired funny that way.  Cash flow improved, net worth didn't really change, and liquidity suffered.  Maybe I would have bought that business if I had more cash in the bank at the time.  Probably not, but who knows?  It did make a little more sense then since our mortgage rate was higher than today's rates, while our savings/CD rates were falling rapidly.

Me personally, I'm sticking to my 30 years of payments with our current house and "keeping my powder dry".  Extra money is squirreled away for future opportunities.  Maybe a little inflation (or deflation?) finds its way into the economy in the next 10 or even 20 years?  Maybe cash will be king someday.  Maybe CDs will once again pay 6% (can't believe I scoffed at that offering!).  A lot of things can happen, and nothing can happen.  I do know that the odds are very good I will never again be able to borrow money as cheaply as I did for my current mortgage.

What are your thoughts on borrowing 50k from your 401k to pay towards the down payment? My 401k will then take 4.5% from my paycheck to pay my 401k back over 120 periods. Doing this helps save ~300 a month from my mortgage payment if I do a 15 yr.

No

No

No

I know, I made the same mistake (not even for a house, for my wife's ring!).  Spend what you can afford and don't steal from your jobless, vulnerable future self.

8)

Probably pay back in 2 years if i did borrow against.

Usually you have 60 days to repay your 401k loan after termination. (if your fired or you leave voluntarily)

I'll be contrary to ps9 and say that I don't mind borrowing from my 401k if:

a. I know I can repay it quickly
b. I know that my job is stable and will be in it for the long haul

It's a better option than a HELOC.

My wife and I did exactly that, again in the name of keeping reserves at the ready.  A 401k loan is allowed only under a few conditions by our employer, and I'm not even sure who needs to approve it.  Money in the bank is there for anything, anytime (barring unusual circumstances). 

I agree it is a bad idea for most people, and most of the time.  Depends on your beliefs and philosophy. If you are "all in" and expect 8% annual returns or more, then I would not recommend it.  For us, I considered the following:
1)  Our 401ks were mostly in cash at the time, making very little, and I did not expect that to change much in the near term (some say "risk averse", I say "value investor")
2)  The % of the accounts we would borrow was close to what I would keep in cash no matter what (OK, maybe "risk averse")
3)  The interest rate is low, and you pay it to yourself (if you're hitting the federal contribution limit, this gives you a little bit more beyond the limit)
4)  My wife and I are conservative in our spending/lifestyle, and I know there's very little risk we would get "squeezed" by the mandatory payback upon job termination.  We are unlikely to change jobs anytime soon (or at all, really), and will likely always have enough in the bank to cover it.

Chairman said:

What are your thoughts on borrowing 50k from your 401k to pay towards the down payment? My 401k will then take 4.5% from my paycheck to pay my 401k back over 120 periods. Doing this helps save ~300 a month from my mortgage payment if I do a 15 yr.

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it depends. if you had the money in some sort of stable value fund where the returns are lower than the interest you would be paying yourself then it would make sense. also, i would only do this if i had the funds to pay it back ASAP if you got laid off or you left on your own accord.

Edit - looks like Daedalus beat me to it.

a

from a pure financial sense it is probably better to keep the 30 year mortgage for as long as possible for the reasons several have mentioned, a rate of return of 5-10% compared to 3.5%-4.5% mortgage rate. also inflation will eat away at the debt over time. but for me, i feel better about not having any debt, just a mental thing. it depends on your financial situation, we have liquidity and will continue to add to that liquidity, paying off the house early wont prevent us from continuing to save. paying off the house guarantees a 3.75% return, not great but close enough to the low end of the 5-10% rate of return range.

if the big one hits, your insurance may not cover earthquakes but it covers fires 

Does it make sense if I can borrow 50K from my 401k at 4.25% and put it towards the down payment? I pay that amount back each paycheck when my 30 year mortgage interest rate is 4.625%?