Your Mortgage: Is 30 Years Too Long?
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As many of you know, we bought a new house in January of this year. And unfortunately, the whole thing was a little strange.
We’ve applied for many mortgages in the past- either for our primary residence, rental properties, or the various times we’ve refinanced- but this time was different. Since I became self-employed in April of this year, the bank would no longer count my income toward our loan. That meant that only Greg’s income would count. And since we made significantly less on paper, we were held to stricter standards. Because of the strange circumstances, I had to send and resend documents ad nauseam. In short, it was a huge pain.
Your Mortgage: Is Thirty Years Too Long?
Part of the reason our supposed limited income was so troublesome was that we had chosen to go with a 15-year-loan instead of a 30-year-loan. Basically, since we chose a loan with a shorter term and a higher payment, that mean that we qualified to borrow even less. However, we still thought that a 15-year-loan was right for our situation. Here’s why:
- Thirty years is sooooooooo long. Since I’m thirty-four years old, I feel like I have a pretty good concept of how long that really is. Spoiler Alert: It’s a long time. I simply cannot imagine paying on a loan for what amounts to a middle-age lifetime.
- We want to retire early. A thirty-year mortgage might have been an option when we were twenty, but we’re getting old. Like I said, we’re thirty-four, and paying the minimum on a thirty-year loan means that we would be in debt until our mid-sixties. No thank you.
- Our 15-year-loan offered a lower rate. Loans with a shorter term typically come with a discounted interest rate. And that’s true whether you’re using Caliber Home Loans like we did or another lender like Homepath Loans. 203K Loans, or even Quicken Home Loans. The discounted rate might not be a lot, but it can definitely add up to a lot of money over the term of the loan!
- We’re not moving. I actually said this about our last house, but this time I believe it to be true. We plan to stay in this house forever, or at least until our kids move out. That’s a long time. Therefore, we actually want to pay this baby off and own it free and clear.
The Advantages of a Thirty-Year-Mortgage
Even though a thirty-year-mortgage might not be the quickest way to own your own home, there are still plenty of reasons going this route could be beneficial. A few of the advantages:
- A thirty-year-loan offers added flexibility. If you choose a thirty-year loan and want to pay it off sooner, you can prepay that baby and turn it into a 15-year-loan if you want. Hell, you can turn it into a 5-year-loan. Many people find that added flexibility worth it, even if it means paying a slightly higher interest rate.
- The payment may be lower. Many people choose loans with a longer term because they want the convenience of a lower payment. I don’t blame them. A lower payment can be an attractive deal if you suffer from income instability or expect your circumstances to change over the term of your loan.
- People love their home mortgage deduction. I’m not particularly in love with mine, but many people have some serious appreciation for their home mortgage interest deduction. Of course, everyone’s tax situation is different, and those who pay a lot in taxes are more likely to appreciate the value of such a deduction.
- They want to invest instead. With interest rates so low, it makes sense when someone chooses a loan with a longer term so that they can invest the rest. I mean, the rate on a 30-year loan dipped to as low as 3.52 percent in May of 2013. It’s hard to argue that you couldn’t earn more than 3.52 percent in the stock market over time, am I right?
Everyone’s situation is different and the type of mortgage you choose is an entirely personal decision. However, I think that thirty years is just too long. I’d even argue that most people who choose a thirty-year-loan have no intention of paying their house off, or don’t even care if they do. In fact, a thirty-year-loan is sometimes the best way to get into a house that you can’t really afford to begin with.
What do you think? Is a thirty-year loan too long and boring? Or, do you prefer the flexibility of a longer loan with a lower payment?
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We are not fans of the 30 year mortgage either. When we moved in 2012 we chose to buy a home that we feel would make a good rental one day. Even though we don’t plan to live in it forever, we do plan to keep it forever, so we got a 10 year mortgage on it. Our interest rate is something like 2.875%, so you can’t beat that!
That’s an excellent rate! Ours is slightly higher- 3.25% I believe- but it’s still good!
We initially went with a 30 when we bought our house, but when we refi’d a couple years later, we dropped the term to 15 years and feel like that’s about right. We’re still not in a rush to pay it off since our rate is so low, but the term doesn’t seem so insanely long. We’ll be in our low 40s when we make the final payment on it if we stick to the schedule.
If we paid the minimum payment, we would be 48 on our pay-off date. We’re still prepaying, though not quite the vigor as we used to. I would suspect that it will be paid off around 40 or our early 40’s as well.
I prefer the flexibility that comes with a 30 year mortgage. Even if we planned on paying it off in 15 years I would probably still get a 30 year mortgage just as a “safety” in case we hit financial hardship. Like you said, you can always pay more on a 30-year loan if you want to pay it off faster.
That is so true! You can really make it last as long as you want it to regardless.
That’s what we did. Then, when we retired, we figured we’d pay off the mortgage and be done with it. However. we ended up with dividend paying stocks which pay just over 8% per year and our mortgage is around 5%. So we figured we’d keep the mortgage and bank the extra 3% per year.
At the moment we’re considering trading down to something smaller, because this is the best time of the economic cycle to do that. All we need to is convince ourselves that we will be just as happy in a smaller place. No luck so far, though! 🙂
Most people go with the 30 year loan because they can buy a bigger house with a given monthly payment. Then they refinance every so often and lengthen the term even more. You are smart to choose the 15 year term.
I know, right? I don’t get that. If you don’t want to own a home, just rent. Otherwise “owning” is just an illusion.
We ran into a similar issue when we refinanced earlier this year because we were still in a debt relief program. My income as a freelance writer didn’t cause us any issues as they took my monthly invoices as proof of income that could be counted. I’m surprised your lender wouldn’t find someway to verify your small business (because that’s what it is) income. We ended up with a 30 year loan…and we’re even OLDER than you (brushes off moth balls, and takes a drink of my prune juice), but we figured out how much we would have to pay to break it down to a 20 year loan. We’ll show those bastards we could afford a 20 year loan. 🙂
They wouldn’t count my income unless I had been self-employed for two years. It had only been a little more than a year.
That’s great that you’re going to pay it off in 20 years!!!
Yes the rules for self employed borrowers are brutal Holly. You can use your income as a self-employed writer after one year if you were in the same field/job as your current business for atleast 5 years prior to being self employed.. Congrats on the 15 year loan though, that’s the way to go!
Thank you =)
Wow, mortgages are a huuuuuuuuuuuuuge pain these days. Our last mortgage was a nightmare too. My wife and I both have credit scores of over 800. Neither of us have ever paid a bill late and I have a good job with W-2 income. The house we bought didn’t cost much more than my annual income. We used a loan company that we’d previously used at least 5 times. Despite all of this, they put us through the ringer: “We see you took $2000 out of this account 6 weeks ago. Where did it go and why? Please provide documentation to prove it.” AAAAAAAAAAAAAAAAAAAAHHHHH!!!
Back to your question though, we just do 15 year mortgages for the lower rate. If the rates were the same, we would choose a 30 and then pay up on it to make it a 15. That way, we’d have the flexibility to make the lower payment if some disaster struck.
The other thing is that we had the cash to buy the home outright, however I think that’s silly given how low rates are.
I was surprised at just how far they took it this time. No, they couldn’t count my income, but my husband’s income was more than enough. We had a very large down payment- much more than the typical 20%. We also have excellent credit and were entirely debt-free when we purchased this home because we had already sold our other home. They also scrutinized our bank statements as if we were criminals. It was nuts!
All of this is in stark contrast to 7 years ago. I’m not even sure you needed a heartbeat back then to secure a loan.
We went with the 30 year mortgage when we bought and really wishing now that we would’ve taken the 15 years instead. That said, it does provide some flexibility and now that business is going well we can return to throwing extra at it each month if we like. We used to not care if we had paid it off, but I hate having to make that payment each and every month.
Oh well, at least you can turn it into a shorter loan, right?
Great article, Holly!
I agree, it’s way too long (I love the spoiler alert lol). 15 years is my preferred length. You can always pay off a 30 year mortgage in less (like DC mentioned), but why not force yourself to do it by getting a 15? It’s easier to not pay it off early than to pay it off early. Plus, like you said, the interest rate is lower. It’s a no-brainer for me. Thanks for sharing!
Sometimes I think it’s good to force yourself to do something. Otherwise, it’s easy to get caught up with other things and take far too long to get it done.
We always took out the 30 year loan and just added more to the payment. I like the flexibility, and we’re a little older :0) we’ll sell before then anyway.
Makes sense! You can make it as short as you want, right?
I think it’s usually to get the lower payment so you can also afford the car payment or buy a bigger house. It could also mean your pissed at your adult children. My former boss refinanced his house to a 30 year term and he’s in his mid 60’s. He is mad at his kids because they both defaulted on loans he’s cosigned so he kind of thinks this is his way to make sure they get no inheritance. I know, insane, but kind of funny in a very dark way.
OMG, that’s hilarious!!!
Yea 30 years is pretty damn long! But here in NYC, if the 30 year mortgage wasn’t an option, I don’t think buying a place would be an option. I think when I buy, I’d take the 30 year mortgage, and pay extra when possible. Though I also fall into the “invest” category since rates are low. Oh and my student loans are on a 25 year payment schedule! I would pay them off but the interest rate is in the 2% range. I will pay the higher interest ones off though.
Yeah, in expensive real estate markets a 30-year mortgage is probably a must!
I like 30 year mortgages. We have one at 3.75 and one at 4.625%. Eventually I think CDs will be paying higher rates and over time inflation will make my payments a smaller and smaller portion of our income. We will invest what we would pay extra toward the mortgage so in the future if we want to pay it off we can just sell our investments to do so.
I really hope that you’re right about CDs! I love CDs and haven’t had one forever!
I hear you on the pain of the mortgage process. When I was at my previous firm, I tried to refinance a friend’s mortgage who had her own business and showed consistent business income for years, but you would have thought that “self-employed” was the same thing as “unemployed” with the bank. Anywho, we went with a 30 year because our neighborhood taxes are out of control, but we wanted the school system for our son. The second he graduates high school, we will have a for sale sign in the yard and probably move to a tenement with low taxes.
Yikes. How high are your taxes?
I have a 5/1 ARM on my condo. I liked it over the 30 year because it had a lower rate and over the 15 year because it had a lower payment. I figured that I could either pay it off before the rate reset, I would move, or the rate would not reset high enough that I could not afford the payment. Some people thought I was crazy, but I really think that when you’re buying your first place, especially while single, an ARM isn’t that crazy especially since I can’t rent it out.
Hey, that makes sense. I would be afraid to get a 5/1 ARM at this point in my life, but that doesn’t mean it isn’t the best option some people!
I don’t blame you! I would probably not have gotten a 5/1 ARM if I was buying a house with kids, unless I REALLY thought I could pay it off in 5 years 🙂 A 10/15/20/30 year fixed rate mortgage would be a much better option then. My goal is to not take out a mortgage at all when I go to buy a house in my thirties. We’ll see how that ends up going!
Great article, Holly. I wish young people buying their first home would take this advice to heart — if you start well it save soooo many heartaches down the road…
For me, a 30 year mortgage would be way too long. However, I would just pay it off early as I do like the flexibility. But then you said the 15 year had a lower rate…You probably know where I stand on that one. Lower rate all the way baby! Thanks for the great read, and sharing your headache!
I like the idea of a lower interest rate and we didn’t mind paying a higher payment for it.
We have a 30-year, as it gave us flexibility to get in at a low market, as well as allowing us to pay as much as we want extra, vs. invest. We still have a few thousands in nagging student loans, and once those are gone, I will pay 50% of the extra on the mortgage, and 50% extra into investments.
15-year would have been nice, but again, I like flexibility. Also, our house is PRICEY (something I’m looking to remedy in the next 5 years AKA moving).
We locked a 3.25%, so feeling good about the rate 🙂
I think 3.25% sounds awesome!
Maybe it’s too long? I don’t know; I generally think it makes solid accounting sense for the payments for something to be amortized over its usable life and hopefully any house I buy lasts at least 30 years. Of course, holding onto debt for less time is better, so there’s that…
Yeah, I know. There are pros and cons each way.
Ummm, I was 22 when I bought my house, and 30 years was too long for me, so I can’t imagine what you’re thinking. Canada did away with 30 year mortgages, and I’m thinking maybe we should follow suit. My initial thought was that it would nudge families to buy more of what they can afford, but maybe now.
Yep, pretty much. I know a lot of people who buy the maximum they can afford with a 30-year mortgage.
30 years means a whole bunch more interest paid on house. If I were going to get another mortgage, I’d go the 15 yr. route. I couldn’t stomach the interest causing me to pay that much more for the house.
Yep, that pretty much sums it up!
There’s no way I plan to take 30 years to pay it off, but that is the mortgage we got. I just knew we’d pay a little extra. That said, it’s nice to have the option to pay less when things are tight.
I’m the only one working, and my in-laws live on the premises (guest house) too. So on the off-chance I did have to stop working, we’d be able to keep up with at least the minimum payment.
Also, it does allow us to put more toward retirement, which is a priority we need to focus on.
Sounds reasonable to me! I think that sounds like a great plan.
I personally feel if I had the choice I would go with a 15 year assuming no other debts, otherwise I would go 30 year especially with the interest rates so low. I would assume the 15 years because sometimes psychology gets in they way and 15 extra years later you just paid off a 30 year note. 15 yr pushes you to get it done.
That’s pretty much how I feel!
When I refinanced, I went with a 15 year mortgage. I will pay it off in less than 3 years.
I think the key is to buy a home that you can afford to finance on a 15 year loan, and then make the decision between 15 & 30 based on your long-term financial plans. Don’t be house poor with a 30 year loan.
We mortgaged for 25 years, which is the max in Canada. However, even so, we plan to pay it back within 15 years. If we pay it back at the normal rate I’d have been 48 (my fiance 51) when we finished paying our mortgage, but at 15 years I’d be looking at 38 which would be much more preferable.
Great article! I and my wife don’t yet have a home but we are certainly getting the 15 year mortgage when we do. You have to be careful about some 30 year mortgages as some may have pre payment penalties. It is also interesting to note that half of those 30 years you are jus paying down interest.
A friend of mine recently bought a house and decided that, although they wanted to pay it off in 15 years, they would get a 30-year fixed rate mortgage. His reason behind this was, he could pay additional principal each month to pay it down in 15 years as his mortgage did not have a big pre-payment penalty. He viewed the 30-year mortgage as a bit of an insurance policy in case something fell off the tracks he could revert back to the lower monthly payment to help weather the storm then get back on track to pay it off in 15 years. I thought this was an interesting idea. What do you think?
Though I agree that 30 years might be too long as you said the flexibility is nice. I think we will likely go with a longer term (25 since I suspect Canada will soon get rid of 30 the 30 yr term) but fully expect to pay ot off early (ideally 15). We’ll have to see what our situation is when we go to buy again in a few years.
I want to be REALLY aggressive whenever I decide to get into the property market and smash the loan as quickly as possible. Good luck with your mortgage, and what a pain your income didn’t count. I think in New Zealand if you’re self employed you need at least two years of income “proof” before they’ll do anything for you.
I know someone who paid off their house and then wanted to get a second home because they were just “paying too much in taxes without the mortgage deduction!” So they took out a 15 year HELOC and bought a weekend/summer home (3 hour drive away so they do use it frequently) with that money in cash. The funny thing is, is that they’re still paying interest, so it’s not like they’re getting free money!
I think for young home-buyers, 30 year mortgages make sense if they know they’ll be in an area for a while. But definitely, if you’re older, a 30 year doesn’t make sense. If you’re within retirement by 30 years, you should consider a shorter mortgage.
We have a 30yr mortgage, and we probably will continue with 30yr mortgages in the future. In our area, the rate between 15yr jumbo and 30yr jumbo wasn’t too much different: 3.9% vs 4.1% for the 30yr. The 30yr gives us flexibility, and we were glad of it when my townhouse wouldn’t sell *and* we were paying daycare for the first time. We’re making just over the minimum payment (rounded up to make budgeting with nice easy numbers), but plan on paying a bit more once all our other debt is gone.
While the 30 year is a long time, we just chose that for our new house. The only reason is we wanted the security of a lower payment, but we can pay it off at anytime. We don’t need to worry about having a higher payment when we have no prepayment penalties. I think of it as just a little security.
We took the 25yr option, but when we went to sign the papers we set it up for payments every two weeks (not twice a month), and rounded the payment up to the next even hudred dollars. Those two changes immediately knocked it down to around 21yrs. We meant to make extra payments to speed it along, but home improvements, kids and life in general always seemed to take priority. I think that’s the downfall of taking the longer term and planning to pay extra. You have to be proactive and actually do it. Eventually after about 8-9 yrs we got our act together and rounded up the regular payments even higher and finally started making those additional payments and now we’ll have it done in a total of 14yrs.
For anyone in their 20s considering buying, they should first figure out if they’ll be one of the clever ones intending to retire (or be financially independent) by 35 or 40. Knowing when you want to be completely debtfree and able to do whatever you like should be a big part of deciding how much mortgage to commit to and on what terms.