Pros and Cons: 30-Year Mortgage vs. 15-Year Mortgage

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Debt Free

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Who thought 30-year mortgages were a good thing?

As late as the 1920's, someone taking out a mortgage to buy a house in the U.S. would most likely get a short-term balloon mortgage. Typical terms: 50 percent down, and five years to pay off the other 50 percent. At the end of the five years, it was common to re-finance into another five-year loan.

DYI Quick Comment:  Mortgages work very well under those guidelines as purchasers of properties became debt free within five to ten years.  With 50% down the mortgage owner had plenty of “skin in the game” lowering SIGNIFICANTLY the possibility of default protecting the bank.   

Then came the Great Depression. Many banks failed, and surviving banks didn't want to refinance these balloon mortgages. Banks foreclosed. Between 1931 and 1935, a quarter million people lost their homes each year.

DYI:  The great depression was caused by reckless policies of the newly minted Federal Reserve – a bank created in 1913 with zero reserves and is privately owned to this day.     

President Franklin D. Roosevelt stepped in, explaining why the government shouldn't just sit by: "Even before I was inaugurated, I came to the conclusion that such a policy was too much to ask the American people to bear. It involved not only a further loss of homes, farms, savings and wages, but also a loss of spiritual values -- the loss of that sense of security for the present and the future so necessary to the peace and contentment of the individual and of his family." 

To stabilize the economy, Roosevelt created federal agencies that form the basis of the housing market the United States has today. They provided mortgage insurance, established a secondary market for mortgage loans, and converted 1 million loans into long-term mortgages.

The maximum length of a mortgage was extended to 30 years in the 1940's, making home ownership even more affordable -- and stimulating the housing market. Today, Roosevelt's economic fix not only is still with us, it's the norm. In the first half of this year, the 30-year fixed-rate mortgage accounted for nearly 90 percent of new mortgages.

 DYI:  Instead of curing the disease by eliminating the cause – our central bank – Roosevelt chose to treat the symptoms through government management of private markets (fascism) by the creation of 30 year mortgages and government/private institutions (socialism).  In the end this became nothing more than a gift to the bankers who would enjoy charging interest for 30 years as opposed to 5 or 10 years maximum.  Also as our transportation system freeways and secondary roads improved families would move more often seeking better employment.  This would occur on average every 7 years, with 30 year mortgages being the norm very little principal being paid.  So….the clock starts all over again with another 30 year debt almost guaranteeing a lifetime of interest payments.  

Pros and Cons: 30-Year Mortgage vs. 15-Year Mortgage

Crunching the numbersLet’s say that a 30-year-old borrower is buying a house for $160,000, and her marginal tax rate is 25 percent. At the time this article was written, 30-year loans were at 5 percent and 15-year loans were at 4.5 percent. 

Using Calculators4Mortgages’ amortization schedule calculator, we’ll compare the two mortgage terms by plugging in the mortgage amount and the 15- and 30-year interest rate.

• A 30-year term would give a monthly payment of $859 (payment does not include taxes and insurance, which vary by locale). The borrower would pay $149,211 in interest, and $309,211 over the life of the loan.

• A 15-year term would give a monthly payment of $1224. She’d pay $60,318 in interest, and $220,318 over the life of the loan.

How do you feel about debt? What is your tolerance for risk?

Many people are strongly averse to debt of any kind — and with good reason. Dave Ramsey is firmly in this camp, saying: 

"Don’t borrow money. Period. If I can’t get you to postpone the purchase that long, I strongly suggest you save a down payment of 20 percent or more, choose a 15-year (or less) fixed-rate mortgage, and limit your monthly payment to 25 percent or less of your monthly take-home pay."

Here's How Many Americans Are Living Paycheck To Paycheck (Hint: It's A Lot)

More than three-quarters of workers (78 percent) are living paycheck-to-paycheck to make ends meet — up from 75 percent last year and a trait more common in women than men — 81 vs. 75 percent, according to new CareerBuilder research. Thirty-eight percent of employees said they sometimes live paycheck-to-paycheck, 17 percent said they usually do and 23 percent said they always do. Having a higher salary doesn't necessarily mean money woes are behind you, with nearly one in 10 workers making $100,000 or more (9 percent) saying they usually or always live paycheck-to-paycheck and 59 percent in that income bracket in debt. Twenty-eight percent of workers making $50,000-$99,999 usually or always live paycheck to paycheck, 70 percent are in debt; and 51 percent of those making less than $50,000 usually or always live paycheck to paycheck to make ends meet, 73 percent are in debt.

 DYI:  DYI is firmly in the Dave Ramsey debt adverse camp.  America is a debt trifecta of expensive homes, expensive cars, along with a large dose of student loans strangulating our everyday citizens budget.  When emergencies arrive there is no savings resorting to credit cards once credit is maxed out bankruptcy is all that remains along with a bevy of failed marriages.  The solution is simple purchase a house no greater than 2x your yearly income - $50,000 income equals $100,000 house – reducing costs in line with your income.  Purchase used cars or modest new cars when ever possible with cash.  And stay as far away from student debt as possible.  This will drop off the need for short term debt (credit cards) tremendously so much so within a few years you will be debt free including the house.  Leaving plenty of money for savings and investment and FUN!

Cheers!

DYI