I am going to copy and paste from a good FIRE discussion on this. I guess it always depends on your goals, but I think the 30 year mortgage clearly wins out in any situation. And, if you really wanted to just not have a mortgage, you could always make separate principal payments.
"There has been some debate between 15-year vs 30-year mortgages in yesterday’s AMA and daily discussion threads, which prompted me to dig a little deeper, and I found that most discussions on this topic neglect to account for the effects of inflation. Specifically, discounting the price of future payments due to inflation, because your mortgage payments are spread out over 15 or 30 years, and you’re paying with cheaper dollars every successive year.
Assume you have a $400,000 mortgage, rates are 3% for a 15-year mortgage and 4% for a 30-year mortgage, and inflation is 2%:
With a 15-year mortgage, your total money paid after 30-years is $497,219. With a 30-year mortgage, your total money paid after 30-years is $687,478.
That looks like a huge difference, you’re paying $190,259 extra dollars over the course of the mortgage. But let’s adjust these numbers for inflation:
With a 15-year mortgage, your total money paid after 30-years (in today’s dollars) is $429,817. With a 30-year mortgage, your total money paid after 30-years (in today’s dollars) is $517,924.
Now the difference is reduced to $88,107 (in today’s dollars).
So then the next question becomes, can you make more than that by taking the difference in your monthly payments and investing the difference? But there are a few more things to consider, like the tax savings from the mortgage interest deduction vs the tax cost from your investment returns. The math starts to get a bit complicated but playing with numbers in this calculator gives the following results:
House price: $500,000 Down payment: 20% Mortgage rate: 3% (15-year), 4% (30-year) Return on investments: 6% Tax on investments: 15% Marginal tax rate: 25% Amount of non-housing tax deductions: $0 IRS Standard Deduction: $6,300 Mortgage limit for interest deduction: $1,000,000 Inflation: 2%
Without accounting for inflation, the 30-year mortgage is better by $81,237. Once you factor in inflation, the 30-year mortgage is better by $164,863. The higher your return on investment and the higher the inflation rate, the more the 30-year ends up ahead. Even if you reduce the return on investment from 6% to 3%, the 30-year mortgage still comes out ahead. Trying different numbers, it’s difficult to see the 15-year beat the 30-year unless you reduce inflation close to zero.
Of course, I’m just discussing the financial side here, there might be other reasons you’d want to pay off the mortgage sooner, like peace of mind from not having debt. Although personally I’d have more peace of mind knowing I made the financially optimal decision, regardless of whether that includes having debt or not. There are also other reasons you might prefer the longer mortgage, like flexibility and cash flow.
Finally, since this is /r/financialindependence/ where people are already focused on optimizing their finances, traditional arguments about how “if you don’t pay off the mortgage you’ll just end up spending the money instead” don’t really apply. I think most people here can be “trusted” to invest the difference, since they’re aggressively saving and investing most of their income already.
I’m just surprised that most discussions I’ve seen on 15-year vs 30-year mortgages don’t discuss the effects of inflation at all. Am I missing something here? Discuss.
Edit: I suppose I should mention a few other assumptions: 1) That you've put down 20% and aren't paying PMI. Otherwise you'll need to factor in the cost of that into the calculations. 2) That you aren't planning to move in < 10 years. Otherwise you might consider renting or a non-fixed rate mortgage. Either way, you'll have to do the math to figure out what's best.
Also, since so many people have asked: this calculator assumes that with the 15-year mortgage, once you've paid off the mortgage you're taking the same monthly payment and investing it instead.
Edit 2: A few people have argued that inflation is not relevant because it applies equally to both scenarios. This is not correct, because its effects on the mortgage payments are occurring over two different time spans (15 years vs 30 years). The 30-year mortgage allows more time for inflation to eat away at the real cost of the mortgage. You can see this using the calculator I linked earlier, using the tool at the top of the page. Vary the inflation rate between 0-10% and see how the real cost of the mortgage changes."
