Tuesday, May 1, 2007

15 or 30

well, after quite some deliberation, we decided to opt for a 30 year mortgage rather than a 15. gasp! on our last house we secured a 30 year mortgage when we bought it and then refinanced a year later to a 15, and we felt that would be the prudent thing to do again.

since we're not experts at home buying, we figured that on a 30 year note, we would have the flexibility to pay extra towards principal and essentially turn the 30 into a 15, but if we started with a 15 year mortgage, we wouldn't have that same flexibility. this is especially important the first year or two in a new house at least in texas where we live, where property taxes are pretty high. mortgage bankers generally will take the previous years taxes and use that to calculate your payment. in our case, since we built a new house, our year ago appraisal would have been that of an unimproved lot and taxes would be a lot lower.

almost without question, i certainly think that a 15 year note is the way to go. when you look at the amount of interest you pay over 30 years, you basically are paying for your house twice! on a fifteen, that gets cut down to about a 1.5x multiple. it comes down, of course, to what kind of return you can get on your money as to which one (or even a longer term) to go with. since we're rather conservative, we'd rather take the guaranteed return by paying down our mortgage -- but not to the exclusion of other investments. other people might opt to take a longer term (and hence a smaller monthly payment) and find a better return on stocks or other investments.


tehnyit said...

Is your loan flexible enough that you can pay more per month?

We have just entered in a 30year mortgage as well, mainly due to a lower monthly repayment figure. However, we plan to make more than the requirement repayment amount, aiming at 10% more. Our mortgage has a redraw facility on the extra repayments, just in case we need it for something.

aggressive saver said...


yeah, we could pay extra -- we have no prepayment penalty. it's actually one of the reasons we went with the 15. we can basically turn it into a 15 year by paying extra (of course, at a slightly higher interest rate than what we could have secured on a 15 year note). having that flexibility is nice. i haven't paid extra yet, though, as i have found other investments that i feel are better returns right now.