15- or 30-year mortgage term on primary residence?

Question

I'm in the market to buy a new house and am looking for some thoughts on the pros and cons of 15- or 30-year mortgages.

My husband and I paid off our current home's mortgage in 2008, and it's been a great feeling to be completely debt-free. That really reduced our costs and allowed us to invest more in retirement accounts. However, we cannot live off of our retirement accounts today and we really need to diversify our income.

For that reason, we plan to take on a mortgage when we move and to use the proceeds from the sale of our home for real estate investing. While I'm okay with the idea of having a mortgage again, I'm struggling to choose between and 15- or 30-year term.

My first instinct is to go for the 15-year mortgage because I can build equity more quickly and I would avoid being highly-leveraged on my personal residence. However, most real estate investors have to borrow money anyway, and there is no cheaper money that what you can borrow on your own home. A 30-year mortgage would free up more of today's dollars for investing...

I really need to figure this out before I find a house to make an offer on. : )

So what's your vote: 15- or 30-year, and why?

Is there another option I should be considering?

Thanks for you help!

Jason G. · Answer

30 year.  If you so choose you can always pay down a 30 year faster, but you cannot pay a 15 year mortgage slower.

Escott Anderson · Answer

As someone who just took out a 15 year on our primary residence last year... Yes, go 30 year. At the time, it seemed getting that 3/8 of 1% better interest rate was worth it. Now, I'd rather have an extra $500+ per month to invest.

Alexander Felice · Answer

opportunity cost is is higher than interest costs

go 30 year, unless they let you get a 50! lol

15 year has no real benefit other than feeding an emotional trap that makes people think debt is bad.

Thomas S. · Answer

30 year.

Unless you intend to take out a HELOC when the equity builds there is no point in having cash lying around in a home not earning it's keep. Keep investing and pay off the home when you retire if you must.

Steve K. · Answer

Account Closed , 35 years ago, I use to advocate paying off the mortgage first. I've re-thunk it!

I, too, want my retirement nest egg to grow faster than afforded by stocks & mutual funds. Thus I entered REI 5 years ago.

I"m a strong believer in the BRRRR method, and am comfortable with the extra leverage....to help wealth grow faster.

So, I'm looking for fix and hold rental properties that will earn 10% to 20% IRR. If I leave a ton of equity in my primary residence, that money is earning a yield equal to the ~3% or 4% APR mortgage. So if you're truly playing catch up on retirement, you have your precious capital in two buckets:

a) equity in the house earning 4% only

b) REI earning 10% +

Then, it's the same argument on prepaying the mortgage ....you're sending a couple hundred dollars to the bank to avoid 4% interest. Don't do it; put the max in "strategy b". Buy, only you can decide if you're on fast growth or slow growth mode, and if the risk/reward of extra leverage is right for you.

Account Closed · Answer

Thanks, everyone! I needed some perspective. : )

Sam Rust · Answer

My current house has a 15 year mortgage (3 years in), the original plan was to pay it completely off. Over the last 6 months we have been talking more and more about diversifying in real estate, and the safest and most obvious way for us to jump in is to access our equity through a refi. We are in that process now, and are heading towards a 30 yr fixed loan because it will be a smaller payment, thus freeing up cash flow to fund deal(s). At the beginning it sounds like you want to scale at a good pace to improve your retirement prospects, just remember the more cash and free cash-flow you have, the more options are available!

You can always pay a 15 like a 30, the interest difference is not that different. In real estate, having a 30 yr fixed rate mortgage of 80% ARV hardly qualifies as highly-leveraged. Ultimately, you and your husband need to decide your "risk-tolerance" and then act accordingly.

Best of luck!

15- or 30-year mortgage term on primary residence?

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