^No one is saying you have to do a 15. But if you can afford it, you definitely should do it. Not if it’s a stretch, or you’ll be FUBAR if you hit a rough patch. But if you can afford it, it’s by far the better option.
im with MLA and rest of the canucks, 5/1 or 7/1 ftw
Just put together an Excel spreadsheet.
Assuming a $100k house and annual payments:
@5% your payment will be $6,500 and your total interest paid will be $95,000 (on a 30-year fixed). To pay off the note in 15 years, your payment jumps to $9,635, or a 48% increase. However, you’ll only pay $44,500 in interest.
To BVG’s point: If you get a 4.5% interest rate because you chose 15 years instead of 30, then your payment is $9,310, and you pay $39,700 in interest. So over the course of 15 years, you save ~$320 per year on a $100k house. I spend more than that on bubble gum every year.
Anybody thinking of refinancing at these rates?
I’m still in the money on my last refi to a 15 year would probably need 75 - 100 bps more to look at a refi.
The average person does not have the discipline to pay more than the minimum each month. So your estimated savings of only a few hundred each year is based on an assumption that the average borrower is as astute as us CFA-types. The true comparison is the $39.7k vs. $95k.
To STL’s point though, the 15 year mortgage is not meant for those living month-to-month, so you really need to evaluate your income (sources and amounts) before taking this path.
Not sure how that’s relevant. He’s making the argument on AF for AF members, who presumably understand these calculations.
Given what he has presented, for the above average/greek god AF member, why would he/she choose a 15 year over a 30 year fixed?
^Plus, assuming that after-tax investment returns are greater than your mortgage, shouldn’t you pay $6500 per year on your mortgage, then put the other $3100 in an investment account? Doing this grosses you $510,000 after 30 years (assuming a constant 10% return).
Conversely, if you pay the full $9600 per year to your mortgage, pay it off in 15 years, then put the full $9600 per year in the same investment account, your gross will only be $305k.
So the question is–at the end of 30 years, would you rather have a paid-off house and $510k? Or a paid-off house and $305k?
(assuming a constant 10% return)
Answer C) I’d rather have no house, and an absolutely massive investment portfolio. 
I think you’re being facetious, but that’s exactly why. The above average BSD AFer (that’s not quite BSD enough to pay all cash) would pick the 15 year every time. There is no reason to pick the 30 unless you’re paycheck-to-paycheck.
^ Not being facetious whatsoever. According to Greenman’s math (which I’m assuming is correct but haven’t verified personally) he’s saying you are paying $320 more in interest for the optionality of being able to pay a lower monthly payment with the 30 year fixed. Granted, his example is on a very small mortgage for us BSDs, but in any case, wouldn’t you agree that cost is worth the optionality?
edit: obviously the delta in cost goes up if you exercise the option of paying a lower payment, but we’re nitpicking at this point.
All those figures are a linear function of the mortgage. If you want to know how much a $600k house would cost, just multiply those numbers by 6.
So assuming you get a half-point discount by picking 15-year fixed instead of 30-year fixed, you save about $2,000 per year on interest. That’s about what I pay for cell phone service every year.
^15 year fixed rate is almost 1% lower than a 30 year. When I’m extremely bored, I’ll do the math and show why it’s a no-brainer to do the 15.
^OK.
@5%, you will pay $44,500 in interest on a 15-year note. (per $100k mortgage) Payment is $9,365.
@4%, you will pay $34,900 in interest on a 15-year note. Payment is $8,995. You will save $640 per year on interest charges. (Again, per $100k of mortgage).
Mortgage amount 100,000 $ Interest rate (%) 5 Mortgage period (years) 15
Total cost of mortgage
$142,343 Monthly payments $791
Mortgage amount 100,000 $ Interest rate (%)5 Mortgage period (years) 30
Total cost of mortgage
$193,256 Monthly payments $537
Mortgage amount 100,000 $ Interest rate (%)4 Mortgage period (years) 15
Total cost of mortgage
$133,144 Monthly payments $740
Mortgage amount 100,000 $ Interest rate (%) 4 Mortgage period (years) 30
Total cost of mortgage
$171,870 Monthly payments $477
If they invest their $537 instead, and make 8% return, they have a $750,000 portfolio in 30 years, instead of a $100,000 crappy old house badly in need of repairs.