On 30-Year Fixed Mortgages

I recently came across a post on LinkedIn by a Certified Financial Planner (CFP). The author claimed he would always select a 30-year mortgage over a 15-year. Specifically:

I personally will always pick a 30 year mortgage over 15
Why?
I prioritize flexibility
I want as much free cash flow as possible as it provides tons of optionality

This post got a lot of upvotes and hearts from other CFPs or MBAs (Master's of Business Administration). You can tell because they all put CFP® or MBA after their name.

A lot of the comments signaled the same thing. Some claim "flexibility is 🔑" or that "choosing [a] 15 year over [a] 30 year is like choosing to walk uphill in the snow both ways to school when you could just ride the bus...". I enjoy flexibility and detest walking uphill in the snow. So they must be right.

Some other comments suggested to get the 30-year fixed and amortize it like a 15-year fixed. In other words, go ahead and spring for the lower obligated monthly payment offered by the 30-year, but pay it off as though you got a 15-year by contributing the delta to principle.

This is a better take than claiming that flexibility is everything or using inapt metaphors. However, I strongly disagree with these points.

Average Homeowner Duration

The median homeownership duration is 13 years, as reported by the National Association of Realtors. This varies by region, with areas like Pittsburgh, PA and Honolulu, HI seeing longer periods like 16 years. Some areas dip to around 8. Where I live in Baltimore, the median is closer to the national median, at 14 years.

However, notice that none of these numbers even approach the duration of a 30-year fixed mortgage. Many of these timeframes aren't even half of that.

So why would you want to take out a 30-year loan on a place where, statistically, it's unlikely that you'll live in through the completion of the loan?

The commenters in the above post claim that the lower monthly payments allow you to hedge your bets against uncertainty. For instance, if you're laid off, you might be unable to afford the difference between a 15-year and 30-year loan (though the monthly payment isn't that much different).

Lenders understand this risk. That's why 30-year fixed rates have higher interest rates -- a lot can happen in 30 years. One might say twice as much as in 15 years.

But you know what would provide even more flexibility? Paying cash for your house. If you're laid off, you just need to pay property tax and maybe some insurance and you'll still have a place to live. Now, most people, including myself, can't afford to do this.

But maybe you can get closer to this number. Maybe you can get a 15-year mortgage, with a lower interest rate, and treat it as a 7.5 year loan. On a $300k loan over fifteen years, at 6%, your monthly payment would be $4,211. Of that, you're paying $1,680 in additional principal payments. Conversely, if you were to stick to the 15-year schedule, you could subtract the additional principal payments to get a monthly payment of $2,531.

If either of these prices sound steep, you might put in a higher down payment or look at more affordable housing. Quite frankly, if you can't afford the 15-year loan at all, I don't think the house becomes magically affordable at 30-years, regardless of how much additional you put in principle each month.

I'm a fan of Sam Dogen's 30/30/3 rule of house buying. Though, I would actually go even further and limit my own house purchase at 2x the highest salary in the household. If you make $50k and your spouse makes $100k, I don't think your loan should be greater than $200k. Even if that that means saving up for a larger down payment or adjusting your price point.

Your goal should be to minimize your effective interest rate. This is really only possible with 15-year fixed and adjustable mortgages. Aim to payoff your mortgage (when it has a positive effective interest rate) as quickly as possible. You'll never regret paying off debt and you'll save so much in interest.

Motivations

I'm retiring in five years, so the mortgage is on the top of my mind. I don't want there to be any existing debt in retirement. This necessitates paying off my mortgage sooner than the term of the loan.

If working until 65 is your game plan, maybe a 30 year is right for you. You'll pay more in interest, regardless of how you pay it off, when compared to a 15-year. But maybe that is just the price of flexibility?