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August 23, 2012 by: JoyfullyPrudent

Mortgage: 15 Year Note or 30 Year Note?

Oh I love this topic!  I am so passionate about it because IT WORKS!  Let me first start with a quote from my favorite financial adviser, Dave Ramsey, regarding this topic: “Thirty year mortgages are for people who enjoy slavery so much they want to extend it for fifteen more years and pay thousands of dollars more for the privilege.” 

Now you might guess the answer to the question: 15 YEAR NOTE all the way.
 
You’re either one/or more of these five people:

1. You live in an apartment (or with parents) and will be buying a house in the future – you people really need to read this…you have the advantage.
2. You live in a house currently and are making payments on a 30 year mortgage – you need to pay extra payments (based on a 15 year note) or refinance (read towards the end of this post in red to see if this is a smart move).
3. You live in a house currently and are making payments on a 15 year mortgage – you are on the right track, but make a goal to pay even more if you can.  And I bet you can.  This is what we did.  Our 15 year note became a “not even” 3 year note (33 months), but we were in a good situation.  We were DINKS (Double Income, No Kids…oh the days).
4. You live in a house, but are planning to move into another one in the future – this will be useful information for your future home as well.
5. You live in a house you actually own!!! – Bravo!  You must be reading my blog because you just love me or perhaps you love seeing my awesome baby – I don’t blame you!  I’m totally kidding…well kind of.
 
I’ll start with WHY you should get a 15 year note versus a 30 year note, which is always what seems to be “recommended.” 

  • You will NOT pay extra on your mortgage like you promised yourself when you were signing the 30 year note!  97.3% of people do not make extra payments.  Most people do a 30 year note, with the idea of paying it like a 15 year.  That way if something goes wrong, you can use the extra money…Umm, something will always “go wrong.”  I find that every month, something comes up, especially if you own a home.
  • Mathematically, it makes sense!  Dave Ramsey gives an example in his book that I’ve shared below.  This was our debt amount as well, but I believe our interest rate was a little lower.
Purchase Price: $130,000
 
Down Payment: $20,000
 
Mortgage Amount: $110,000
At 7% Interest Rate
 
30 Years: $732/month          $263,520 over the full 30 years – gross!
 
15 Years: $988/month          $177,840 over the full 15 years – ahh much better!
 
Difference: $256/month       $85,680 – Yikes!  Do you know what you could do with that kind of money…college, a new house, a new car, pay off debt…!
 
Ok, so if that doesn’t make you want a 15 year note, I really don’t know what will!  Are you kidding?  You rather pay $256 less a month to end up paying $85,880 more over that time?  That just doesn’t make sense to me.  And it makes me mad when PAID financial advisers, advise this to their clients.  $256 is a do-able amount to find in your budget that will save you big time.  And if $256 really isn’t a do-able amount, then you are probably paying too much for your house in the first place based on your household income.  Pay no more than 25% of your take home pay towards your house.
  • Your tax deduction that you get for having a mortgage is NO bargain!  I just have to quote Dave Ramsey from his book regarding this issue because he says it so much better than I could, and well, he’s hilarious:  “If you have a home with a payment of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction.  If, instead, you have a debt-free home, you would in fact lose the tax deduction, so the myth says keep your home mortgaged because of tax advantages.  This situation is one more opportunity to discover if you CPA can add.  If you do not have a $10,000 tax deduction and you are in a 30 percent bracket, you will have to pay $3,000 in taxes to the IRS.  Personally, I think I will live debt-free and not make a $10,000 trade for $3,000.  However, any of you who want $3,000 of your taxes paid, just email me and I will personally pay $3,000 of your taxes as soon as your check for $10,000 clears into my bank account.  I can add.” 
  • 15 year notes just sounds so much better.  I remember when Ryan got a 15 year note for the house.  I could see the light at the end of the tunnel.  Of course I didn’t know that light was around the corner.  But a 30 year note?  That just sounds SO far away.  We got the house when I was 22, so that would’ve meant paying it off at 52.  Oh geez…we would have probably been through one or two houses by then and our kids off to college. 
Another bonus: If you pay your house off fast, you can purchase all your future homes in CASH.  Or worst case scenario, take a loan on a really small amount with a much better, upgraded house.  This is our current plan.  We’re still saving so that when we decide to move, we will just take the money from our house and combine it with what we’ve saved to get our dream home with cold, hard cash and still be debt free. 
 
My advice: Get a mortgage you can pay off in 15 years, and make a goal of paying MORE, especially if you are young and have no kids.  Trust me, it will change your life (and your kids’ life).  If you’re already paying on a 30 year note, go to Dave Ramsey’s website and use his calculator to calculate the payment at your interest rate on your balance for however many years more you want to pay it (unless you can calculate it on your own…I’m not that smart).  My husband used to do this almost monthly…it was very fun for him to see just how fast we could do it.
 
If you have a great interest rate, there is no need to refinance!    If you can save on interest, then consider refinancing.  If you do, DO NOT PAY POINTS OR ORGINATION FEES (this is usually the down side of refinancing).  It will not be worth the interest you save by refinancing.  Ask for a “par” quote (no fees).
 
Sorry longest post ever, but lastly, YOU CAN PAY OFF DEBT!  YOU can do this.  I started these posts because being debt free has really changed my life.  I hear so many stories of friends who are enslaved with debt and bound from doing the things they really love because of money they still owe.  Don’t know where to start?  Start here with Dave Ramsey’s 7 steps.  And, NO, I’m not an endorser in any way for him or his company.  He just helped us get loose!
 
I thought I’d share a picture of our house since this post is about mortgages.  I love this one because it had just snowed!


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Comments

  1. 1

    micheal clark says

    August 24, 2012 at 7:53 am

    Nice thing to know, thanks for sharing, mortgage note for sale becoming a home busniess, every body stepping in it…

    Reply
    • 2

      joyfullyprudent says

      August 24, 2012 at 3:53 pm

      Interesting. Never heard of it.

      Reply
  2. 3

    Michala says

    October 23, 2012 at 2:39 am

    I love this! My husband and I sold our last home an purchased a tiny fixer upper we could afford on a 15 yr mortgage. We pay extra each month and calculated out that we could pay off our home in 11 years. We paid off all three cars- no credit card debt, but I now only teach part time to be home with our daughter, and my husband is a teacher as well.

    I have to ask.. how on two teacher salaries did you pay off your home in 33 months?? SO amazing! It gets hard sometimes when everyone around us lives on credit, but we have been going Ramsey strong now for three years. We are very determined to pay off our home FAST! Any pointers?

    Reply
  3. 4

    Lora Holmes says

    November 9, 2012 at 6:33 pm

    I love the way how you explained your argument! 🙂 The best reason why a 15-year mortgage is better is that you’ll be debt-free sooner, which is always better. BUT, there are instances wherein a 30-year mortgage is the better choice. If you don’t have enough emergency funds, for example, then it might be challenging for you to keep up with monthly payments on a 15-year mortgage. In the end, choosing your mortgage terms must be based on what you have today and what you perceive in the future. Love your post!

    Lora Holmes

    Reply
    • 5

      joyfullyprudent says

      November 9, 2012 at 7:00 pm

      Yes you're right Lora. You have to look at your individual situation. 15 year notes are usually $200-300 more a month compared to a 30 year note, so if you can't afford that extra payment, a 30 year might be better. Although, I would encourage those that have to get a 30 year note based on not being able to afford that $200-300 a month, to get a less expensive house with a 15 year note. The extra thousands of $$$$ you will spend on interest (and still owing money in 20+ years) is not worth it. But just my opinion. Thanks for reading!

      Reply
  4. 6

    Genny says

    November 27, 2012 at 2:01 pm

    “Get a mortgage you can pay off in 15 years, and make a goal of paying MORE” I totally agree with you on this. It’s a smart move to get a shorter loan because you will not only save a lot of money that way, you will also get the freedom of owning your home as early as possible. It’s better to retire free and clear of any debt, right? So take the opportunity while still you have the capability to pay a larger amount for the loan.

    *Genny Stutesman

    Reply

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