Rich Girl Roundup: Is the 15-Year Mortgage Dead? (And Is It Even Worth Doing?)

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Rich Guy Gavin asks, “Is the 15-year mortgage worth it?” Plus, given how few people can afford them nowadays, Katie and Henah chat through if the 15-year mortgage is dead. We run the numbers, the factors to consider, and some workarounds to make the 30-year mortgage more appealing.

Welcome back to #RichGirlRoundup, Money with Katie’s weekly segment where Katie and MWK’s Executive Producer Henah answer your burning money questions. Each month, we’ll put out a call for questions on her Instagram (@moneywithkatie). New episodes every week.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• Today’s 15-year mortgage rate vs. 30-year mortgage rate

• 15- vs. 30-year mortgage calculator via Nerdwallet

• Rational Reminder: Renting vs. Buying a Home: How to Decide

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Katie:

Welcome back, Rich Girls and Boys to Rich Girl Roundup, our weekly casual convo on The Money with Katie Show. I’m your host, Katie Gatti Tassin. And this is a quick message from our sponsors.

Alright, before we get into it, this week’s upcoming main episode is about money and divorce. I know really sexy light stuff from me as usual, but given the reality of how and half of marriages end in divorce and how the lower earning partner usually gets the shaft, it’s a topic that feels vital to cover. So it’s also a part of what I’m covering in my upcoming book. Get pumped. Alright, onto the roundup. Henah, how are we doing today?

Henah:

I’m good. This week’s question came from Gavin W, should I get a 15- or 30-year mortgage? And more broadly, this is something you and I have discussed, is the 15-year mortgage dead, is it worth considering?

Katie:

My initial response to his question when we talked about this was, it’s interesting to me that anyone’s even asking this because people can’t afford 30-year mortgages today, let alone 15. So I’m kind of, I don’t know, I’m shook.

Henah:

I think I know one person in my life who has a 15-year mortgage.

Katie:

Are they rich?

Henah:

Yeah, I would say so. One of them is a lawyer, one of them works somewhere that has a geological formation name and where they work. So you can do the math there, but I actually did not know that the 30 year mortgage was introduced in the 1940s and that the 15 year mortgage was the default until we did that episode and you shared that.

And when I heard that I was like, oh, well now this housing situation that we’re in now makes so much more sense, but I figured we could start by running the numbers of what a 15-year mortgage would be. So let’s say that you’re trying to buy, I don’t know, let’s say $500,000 for easy math, a house and that’s around the median and you have your $100,000 down payment. 20%. So I looked up today’s 30-year fixed rate mortgage, and that’s 6.875%. So sub-7% baby, we made it. And the 15-year fixed rate mortgage is 5.49%.

Katie:

That’s a pretty wide discrepancy.

Henah:

It is. And so I went into NerdWallet as one does, and I used their 15- versus 30-year calculator. And this is just for principal and interest. So the monthly payment for a 30 year is about $2,600. The monthly payment for a 15 year is $3,265.

Katie:

Okay.

Henah:

When you amortize that overall of the length of the loan, the total cost of your down payment principal and interest for a 15-year loan is around $690,000 for the $500,000 house. But for the 30-year loan it’s over a million. And so yeah, on paper it feels a little bit like a no brainer to try to do the 15-year mortgage.

But obviously I think your question is the right one, which is it realistic because that’s a $600 difference per month and that doesn’t include taxes and HOA fees and maintenance. And I could be totally wrong, but isn’t it harder to secure a loan with that high cost unless you’re, what’s the rule that you have to make a certain amount?

Katie:

Yeah, there’s a certain debt to income ratio, but this would be—actually, this is a great question. I’m not sure how they look at this because the debt that you’re borrowing is the same, it’s just the repayment period that’s changing. And so I’m not sure if they’re looking at monthly gross income to decide what percentage the monthly payment represents or if they’re looking at your income compared to the total loan amount. So I’m not sure.

Henah:

But, ostensibly it would be harder to get the loan with that higher monthly cost unless you make more.

Katie:

Yeah, I think even lending requirements aside, it would be more challenging theoretically to pay a mortgage at $600 higher. Well, I think originally I was like, oh, Gavin, don’t even stress yourself out, brother. Just go for the 30 and be done with it. But then I think actually this math is quite compelling because it makes purchasing a home look a lot more reasonable, frankly. I mean $680k on a $500k home versus a million. I was like, okay, you have my attention.

So what I wanted to do was layer in the opportunity cost to fully understand these two scenarios. So do you want to hear the opportunity cost?

Henah:

Okay, well, I feel like I also tried to think of other workaround. Let’s tackle yours and then I’ll share maybe the other ideas I had. Okay, go ahead.

Katie:

So scenario one is you take the 15 year, so your house is paid off in 15 years for a total cost of $688k, and you have $0 in investments. By year 15, assuming all you have is $3,200 a month, right? That’s your max capac.

Henah:

Max capac.

Katie:

Max capac. Then you start investing the entirety of your former mortgage payment into the stock market in year 16.

Henah:

So the $3.2k you’re now shoveling into the market.

Katie:

You basically go from 15 years of just paying for the mortgage and then that’s gone. And then taking the whole $3,200 a month mortgage payment and shoveling that into the stock market for the following 15 years. So by year 30 you have paid $688k for the house and you have $973k in investments.

Henah:

I wish I could whistle, I would do that long whistle of impress—I’m impressed.

Katie:

Nick, let’s get a long whistle inserted here. Can we pipe that in?

And then in scenario number two, your house has paid off in 30 years for a total cost of about $1,050,000. And by year 15, assuming that you’ve been paying off the mortgage for $2,600 and then taking the remaining $600 that would’ve gotten toward the 15 year and you’ve been investing that in the market, you have roughly $183k in investments by year 15 when the 15-year mortgage person has zero.

But then here’s where the tables turn and things womp womp, is that assuming you’re still paying off the mortgage for all 30 years, you’re going $2,600 a month the entire time and you’re doing $600 into the stock market the entire time. You have roughly $690k in investments by the end of year 30 and you’ve paid a million for the house. So each path costs the same amount each month we’re talking $3,200 bucks, but in one it’s the mortgage for half the time and then the investments for the other half. And scenario two is a split for the entire time. So I think given those parameters, the 15-year mortgage actually looks quite attractive. But that’s like saying, yeah, well if you can just play basketball like LeBron, then you’re good.

Henah:

We’re making the assumption that everybody can afford to pay it…

Katie:

Is it an option? Yeah. Can you afford to do that without being stretched thin?

Henah:

Yeah, so the reason that I was like I have also thought of a workaround is because I think then what a lot of people have told us they do is they get the 30-year fixed rate mortgage and then they just make additional principal payments and that lowers the interest and then they’re able to pay it off anyway. And you could do it aggressively enough that you could do it on the 15-year timeline if you wanted to and you had the cash. But then at months where you don’t have that extra cash, you could just pay the actual balance.

So the reason I was thinking of that, and then I know obviously there’s the interest tax deduction for mortgages. So I was, especially in those early years, you’re primarily paying just interest on that loan. So you could even leverage that, which I guess we’d have to factor into your different scenarios as well. But I feel like that flexibility of knowing that you’re not at max capac, what did you say? Max capac?

Katie:

Max capac.

Henah:

Max capac. And knowing some months you can go harder and some months you might just stay the course. I feel like that’s kind of nice.

Katie:

Yeah, it’s like the 30 year just gives you more optionality because I think I was watching something the other day where someone was talking about their friend who had a 15-year mortgage and heartbreakingly lost the home because the mortgage payments were so high and someone lost their job and they couldn’t make the payments anymore. And who knows if they would’ve been low enough with the 3- year that they could have kept it, but you just kind of have less slack in the system and you don’t really have the option to pay less. Whereas with the 30, to your point, you could pay more and go faster. You can’t really go slower with the 15 year if you’re like, ah.

Henah:

Well, I’m trying to also run the math of if you invest in the market with the 30-year that you had given the example of is your home going to appreciate so much in those first 15 years that you would make up that difference if you were aggressively trying to pay it off in 15 years…

Katie:

In your net worth?

Henah:

Yeah, like, versus just taking the money, putting it in the stock market with the additional money that you have? Could you just make the additional payments when possible and then invest the leftover money instead? Is there a world in which it would net out more? But it seems like from your math, maybe not.

Katie:

It’s hard to say. And I’m no math whiz. So here’s another one. Do your own due dil, but

Henah:

Due dil. Now I want to pickle.

Katie:

Got to do the due dil. But I think the big sticking point that gets people is they see that 5.4% and they’re like, ooh, that would be so sexy to have a 5.4% instead of a 6.8%. And so it’s like, ah, should I pay the extra point and a half for the flexibility of being able to pay faster if I want to or not? The other thing that frankly, I’m not sure how to factor this in mathematically, but I feel like there’s probably also something to this of is your plan to stay in this home forever wherein paying it off faster? I don’t know. There’s something weird about rushing to pay off a house that you’re just going to sell in five years. So I don’t know if that’s also something to, traditionally you think of home equity as being kind of expensive because it’s just sitting there in the value of your home.

And traditionally homes do not appreciate faster than say, money in the stock market appreciates. Ben and Cameron of Rational Reminder did a great episode about how paradoxically the most expensive time to own your home is when you own it outright because so much of your net worth is just sitting there barely outpacing inflation versus when you’re using the bank’s money and your net worth can go be earning more for you in other places. So there’s also this piece of like, ah, I don’t know how to factor that in, but that also feels important of like, are you going to be there for a long time or are you just passing through?

Henah:

We talked about this in the show too, it’s your home. So maybe it’s more about where you’re going to spend the next 15 to 30 years and what you actually want that experience to be like.

And if you have, I mean I had this theory obviously, right, that this probably a small contingent of homeowners can actually afford a 15-year mortgage and therefore have one. And so I actually tried to find how many people have them. I was not successful, but I did find the lowest interest rate that I’ve ever seen at the end of 2021. Do you want to take a guess at what it was?

Katie:

It’s probably like a fricking fart in a prayer. It’s going to be some obnoxiously low number.

Henah:

It was 2.1%.

Katie:

Agh. They were just given houses away.

Henah:

Truly, it was the stupidest decision of mine to move and not buy a home at that time, but maybe not because I ended up moving right away. And that actually speaks to your other point.

Katie:

Yeah, true. You never know what life will hold, at least in this case. I don’t think that there’s always a clear answer. I think it’s hard to put that price on flexibility and how you value that. And obviously if you can afford both easily, then maybe go for the 15 year If you’re like, yeah dude, that’s no problem for us. Maybe you live in a really low cost of living area. But I do think that hopefully this has provided a framework for how to run the numbers for yourself so that you can make an informed choice.

And yeah, Gavin, keep on rocking it baby. Sounds like you’re doing great if the 15 years on your radar. Alright, that is all for this week’s Rich Girl Roundup. We will see you on Wednesday to talk about money in marriage/divorce, how to think about protecting yourself and your finances if that time ever comes and what to know maybe if you’re even already going through it or think that you’re about to go through it, so we will see you on Wednesday.