Mortgage - 30 year fixed + extra principal or 15 year?

Question

We're looking to refinance and are trying to choose between a 30 year fixed or 15 year fixed. Given the economy there are always worries one of us will be laid off, so the 30 year gives lower minimum payments. But a 15 year requires much less interest over the length of the loan. However, if we pay extra on the 30 year we can pay it off earlier.

For example (not our real numbers, they are much higher, we're in CA):
$200k for 15 years at 5% = $1581.59/m 
$200k for 30 years at 5% = $1073.64/m

but if we pay an extra $508/m on the 30 year we can pay it off in 15 years.

Are there any issues with this logic assuming the mortgage does not have a prepayment penalty?

Anonymous · Accepted Answer

There is nothing wrong with the logic, as far as I can tell.  Here is my advice, since you asked, LOL!

Consider taking a somewhat different approach.  Get the 30 year mortgage to keep your payments low in case one of you gets laid off, becomes sick or disabled, or passes away.  (Hopefully, none of those things will happen!)

But, instead of making extra principal payments, put the $500 per month in a federally-insured money market, savings or certificate account earning as close to 5% APY as you can find.  Banks need money right now, and people are afraid to deposit, so they are paying premium rates for deposits.  If you do some shopping around, you should be able to find a rate close to 5% APY.

In 15 years, you will have enough money to pay off the mortgage if you want to.  In the meantime, if you have any kind of financial setback, you have cash in the bank to cover it.  15 years is a long time, and something could happen in that span of time.  If you have a pile of cash available to you, you don't have to worry about losing your home.

Extra payments you make to the mortgage increase your equity, but that is money you can't get back if you need it.  If you lose your job, or your wife loses her job, no lender is likely to give you a home equity loan.

STEVEN F · Answer

If you take a 30 year mortgage, and make payments that would have been required for a 15 year mortgage, and all other terms are the same, it will be paid off in 15 years and the total interest will be the same as the 15 year loan.

That said, if you are worried about losing a job, you shouldn't buy ANYTHING you can't comfortably afford without the job.

? · Answer

If you are sure your income sources will not change then you should refinance to a 15 Y FIX. If not, you can still pay off your 30 Y FIX simply by paying more each month. Right not the market has changed some. You may get a 15 Y FIX at a rate of about ~5.5% at the lowest depending on your address and you will have to pay some points. The time of 4.5% is over for now. I can do this type of loan for you if your interested. I can make it so that you have a 4.5% rate for the first 6 months. Check my website.

Anonymous · Answer

I  asked the same question three times, and didn't receive an answer

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Mortgage - 30 year fixed + extra principal or 15 year?

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