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I'm slowly working towards buying my first home (yay!), and have been playing around with the numbers. As far as I can tell, there's literally zero advantage for getting a 10 or 15-year mortgage since I can just get the exact same mortgage in a 30-year version, and just pay it off within whatever year window I choose.

So let's say I wanted to pay off my house in 10 years. If I get a 30-year mortgage and pay it off in 10 years then the same interest is paid as if I got a 10-year mortgage to begin with. Plus, if I get a 30-year mortgage then I have a cushion in case I run into major financial hardship.

Yet everywhere I look I see people online going on about how unwise 30-year mortgages are, as if they are irresponsible or something. Why is this?

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    This is interesting. In Australia 30 year mortgages are standard and are considered necessary for someone to own a house anywhere within 1h drive of one of our major cities. – Stephen Jun 19 '16 at 23:15
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    Out of curiosity, do you have any examples of places where you saw people saying a 30-year mortgage is unwise? – BrenBarn Jun 20 '16 at 0:11
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    duplicate of money.stackexchange.com/q/43231/5458 – Ben Voigt Jun 20 '16 at 1:52
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    @Kevin: That's untrue on both counts. Shorter isn't impossible, and is in fact common if your deduction limit runs out earlier. Paying off earlier is allowed. You can pay off 10% annually, which essentially makes every mortgage a 10-to-30 years. – MSalters Jun 20 '16 at 9:39
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    @kevin I've bought 4 houses in my life and refinanced mortgages twice that I recall, so I've had at least 6 mortgages. And every one one has had a "no prepayment penalty" clause: I can make whatever extra payments I like and pay off as early as I like. I can't swear that all mortgages are like this, but they are certainly easy to find. – Jay Jun 21 '16 at 14:30
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Two reasons are typically cited (I've heard these from Dave Ramsey):

  1. Generally you get a little better rate on a 15-year loan than a 30-year loan, so equal rates at 15 and 30 years is (typically) a false comparison. It's less risk for a bank when there's a shorter term. If you've got these side-by-side, I'd suggest looking for a better lender for the 15-year loan in particular.
  2. If you make the payments on time, a 15-year loan always gets paid off in 15 years or less. A 30-year loan that you plan to pay like a 15-year loan may get paid off in 15 years. Yes, having flexibility is nice, but often people rationalize using that flexibility for things they don't really need.

So I wouldn't refinance to a 15-year loan just for item 2, but would definitely look at it for the better interest rates.

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    @TTT Of course if you make payments on time for 30 years with a 30 year loan then you'll pay it off, but the OP was suggesting making extra payments to pay off a 30 year loan in 15 years. Sometimes that happens, but not always. – Jared Jun 20 '16 at 22:48
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    @R.. I think the larger factor in determining PMI is the down payment percentage (no PMI if 20% down, otherwise locked in until 20% equity and some time has elapsed). – Jared Jun 20 '16 at 23:05
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    I think the point on #2 is that lots of people have good intentions, but don't follow through. If you are a totally responsible person, more flexibility is good because then if unforseen circumstances come up, you can adapt. But in practice, it's sometimes good to put something in place to force yourself to do what you know you ought to do. Like, if you're trying to lose weight, it makes good sense not to have a lot of chocolate candy around the house. Sure, you could simply choose not to eat it. In theory. – Jay Jun 21 '16 at 14:12
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    @jared Yes, every house I've bought the rule has been that if you have less than 20% down, you pay PMI, and the PMI ends when you hit 20% equity, sometimes subject to other conditions. With a 15 year mortgage, you'll hit that 20% sooner, so it would help indirectly. BTW if you have some extra cash, throwing it at a mortgage with PMI can be a better investment than you'd think just from looking at the mortgage interest rate. If you get over that 20% threshold, you eliminate the PMI on 100% of the remaining balance. Paying $1 extra could eliminate PMI on $100,000 and save you a bundle. – Jay Jun 21 '16 at 14:18
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    All, I appreciate the discussion about the pro's and con's of 30 year mortgages, but the original question clearly asks why they are "seen as unwise", as in 'what are the common accepted answers?'. You're welcome to your own opinion, but that wasn't the point of this question. – Jared Jul 14 '16 at 15:47
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I haven't heard 30-year mortgages called unwise. As @jared said, the shorter terms often will be cheaper if you are going to pay off within that term anyway, but the extra cost of the 30 may still be justified because it gives you the "safety net" of being able to fall back to the lower payment if money gets tight. Cheap insurance if you might need that insurance.

That wasn't something I was worried about, so I took a 20-year, later refinanced as 15-year, and got a slightly better rate by doing so.

Consider how long you expect to own this house, and shop for the best deal you can find. Remember to figure points into the real cost the loan. There are calculators on many bank/credit-union websites that can help you do this comparison.

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    I took a 30 year despite expecting to pay it off much faster, just for that safety net in case things went bad... I've never regretted that decision even though things went right. It was relatively cheap insurance. – Brian Knoblauch Jun 21 '16 at 18:30
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I can just get the exact same mortgage in a 30-year version, and just pay it off within whatever year window I choose

This is an assumption which often does not come true. The "advantage" of a 15 year mortgage is you hopefully never decide you want more toys or to go out to eat and suddenly your mortgage takes 30 years to pay off instead of 15.

Plus, if I get a 30-year mortgage then I have a cushion in case I run into major financial hardship.

That same cushion can turn into other luxuries. Maybe you want new furniture. "I won't pay extra on the mortgage this year." Suddenly it's year 22.

This is not a 100% guarantee by any means, but it is something which is relatively likely.

Yet everywhere I look I see people online going on about how unwise 30-year mortgages are

I read a lot of online financial resources and almost never see this claim.

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    Really? I absolutely do see this claim, because they're not going to be the same rate - I've never seen a bank that had the same rate for 15 year and 30? I wouldn't necessarily call it "unwise", but I would call it "unwise if you were definitely going to pay it early anyway", since you're basically giving up free money (because you're paying down a strictly-worse-rate mortgage.) That's weird that they'd be the same rate. – neminem Jun 20 '16 at 17:55
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As mentioned, the main advantage of a 15-year loan compared to a 30-year loan is that the 15-year loan should come at a discounted rate. All things equal, the main advantage of the 30-year loan is that the payment is lower.

A completely different argument from what you are hearing is that if you can get a low interest rate, you should get the longest loan possible. It seem unlikely that interest rates are going to get much lower than they are and it's far more likely that they will get higher. In 15 years, if interest rates are back up around 6% or more (where they were when I bought my first home) and you are 15 years into a 30 year mortgage, you'll being enjoying an interest rate that no one can get.

You need to keep in mind that as the loan is paid off, you will earn exactly 0% on the principal you've paid. If for some reason the value of the home drops, you lose that portion of the principal. The only way you can get access to that capital is to sell the house. You (generally) can't sell part of the house to send a kid to college. You can take out another mortgage but it is going to be at the current going rate which is likely higher than current rates.

Another thing to consider that over the course of 30 years, inflation is going to make a fixed payment cheaper over time. Let's say you make $60K and you have a monthly payment of $1000 or 20% of your annual income. In 15 years at a 1% annualized wage growth rate, it will be 17% of your income. If you get a few raises or inflation jumps up, it will be a lot more than that. For example, at a 2% annualized growth rate, it's only 15% of your income after 15 years.

In places where long-term fixed rates are not available, shorter mortgages are common because of the risk of higher rates later. It's also more common to pay them off early for the same reason.

Taking on a higher payment to pay off the loan early only really only helps you if you can get through the entire payment and 15 years is still a long way off. Then if you lose your job then, you only have to worry about taxes and upkeep but that means you can still lose the home. If you instead take the extra money and keep a rainy day fund, you'll have access to that money if you hit a rough patch. If you put all of your extra cash in the house, you'll be forced to sell if you need that capital and it may not be at the best time. You might not even be able to pay off the loan at the current market value.

My father took out a 30 year loan and followed the advice of an older coworker to 'buy as much house as possible because inflation will pay for it'. By the end of the loan, he was paying something like $250 a month and the house was worth upwards of $200K. That is, his mortgage payment was less than the payment on a cheap car. It was an insignificant cost compared to his income and he had been able to invest enough to retire in comfort. Of course when he bought it, inflation was above 10% so it's bit different today but the same concepts still apply, just different numbers. I personally would not take anything less than a 30 year loan at current rates unless I planned to retire in 15 years.

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    "Buy as much house as you can" is a big gamble, though. Yes, it COULD work out great like it did for your father. But if you bought a house at the peak of the real estate boom in the 1990s, today it could be worth much less than you paid for it. If you have to move, say because of a job change, you could be forced to sell at a big loss. I bought a small house in 1999 for $84,000 that I am trying to sell today, and I'll be lucky if I can get $60,000 for it. I'm just fortunate that the cost of the house was modest compared to my income, and I can deal with the loss. – Jay Jun 21 '16 at 14:23
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    I'd like to warn people who are doing "comparison costs" to make sure they calculate the total payout if you have a 30-yr mortgage but make increased payments to pay off in 15 years. The bank does recalculate the interest every month based on the remaining principal. It turns out that most of the money you save by getting a 15-yr mortgage is due simply to the fast payout time, not the reduced interest rate. – Carl Witthoft Jun 21 '16 at 18:34
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    My advice is always to buy as little house as possible. Maintenance costs and taxes will eat the gains of all but the very best housing markets. Houses should be viewed as tools, not investments. – Brian Knoblauch Jun 21 '16 at 19:01
  • @BrianKnoblauch What you are ignoring is inflation and home prices will tend to align with inflation. Since we currently have very little inflation, this isn't very impactful but the very low and even negative interest rates that are being maintained could result in high inflation in the near future. If you wait to buy the kind house you intend to own in the long run, you can end up spending a lot more for it than if you stretch a little in the beginning. And every time you buy or sell, a lot of money gets sucked up in fees. – JimmyJames Jun 22 '16 at 14:09
  • @Jay There's always the option to just walk away from the house. It will screw up your credit so it's not necessarily the right thing to do but it's perfectly legal to do so. – JimmyJames Jun 22 '16 at 14:11
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As the answer above states, future inflation mitigates "unwise" for a longer term mortgage, at least in financial-only terms. But consider that, if you lose your ability to make payments for long enough time ANYTIME during term, the lending institution has a right to repossess, leaving you with NOTHING or worse for all the maintenance you've had to do. You can never know, but eleven years into my mortgage, I lost enough of my income for just long enough time to have to sell for just enough to pay the remainder of the mortgage and walk away with empty pockets.

To help clarify understanding even better, contrast the 30-yr mortgage with the other extreme: save up and own from day one. When I did the math a few years ago, buying with a 30-year mortgage would cost cumulatively almost 3 times the real house value in mortgage payments with never the freedom to suspend payments when I might need to. Being a freedom-loving American, I determined to buy a house with cash. DON'T FORGET that mortgageable properties are over-priced just because buyers less wise than you are so willing to borrow to buy them, so I decided to buy some fixer-upper that no bank would lend on. I found such a fixer-upper, paid cash, never have to worry about repossession by a lender, can continue to save up for my dream home which I'll own a lot sooner, and will have a nice increase in house value while I fix it up to help get me there, and NO INSURANCE PAYMENTS to some insurer who'll tell me what I can't do with MY property.

Let the next buyer of your fixed-up, paid-off house pay YOU the over-priced amount they are willing to pay just because THEY can get that 30-year mortgage, and you enjoy the freedom to dream and adjust your budget to the needs of the moment and end up with a house in 30 years (15, more realistically) that is 2.5 times more valuable. And keep from fighting with your spouse over finances in the meantime.

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    "buying with a 30-year mortgage would cost cumulatively almost 3 times the real house value in mortgage payments" - No. A 4% fixed $100K mortgage will have $172K in total payments. Nominal dollars. With inflation at an average 3%, the real cost drops to about $116K, and we can ignore the tax savings which for many, makes it an even $100K. This is the result of insanely low rates. – JoeTaxpayer Jun 21 '16 at 18:05
  • this sounds like a good plan if you have the skills to fix up a home yourself, however I'm willing to bet a lot of people do not. (from my personal experience, if I tried to do this, the home would actually be worth less when I was done.) – Michael Jul 3 '17 at 5:38
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30 year loans usually have higher interest rates. You pay more interest over the life of the loan on a 30 year loan A 15 year loan will have higher monthly payments than a 30 year loan 30 year loans are virtually all fixed interest rate loans. 10 year loans often are variable interest rates.

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    The interest rate on my 15 year mortgage was enough lower than a 30 year mortgage from the same lender that the difference in the monthly payment was very small. I went for the 15. – Steve Jun 21 '16 at 21:14
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In England, currently and for most of the last fifty years, the standard length of the mortgage term is 25 years.

A mortgage can be either a capital-and-interest mortgage, or interest-only. In the former, you pay off part of the original loan each month, plus the interest on the amount borrowed. In the latter, you only pay interest each month, and the original amount borrowed never reduces: you pay premiums on a life insurance policy, additionally, which is designed to pay off the original sum borrowed at the end of the 25 years.

No one in England thinks that a 25 year loan has any drawbacks. The main point to appreciate is that the longer the period of the loan, the less you need to pay each month, because you are repaying the original loan - the capital - over a longer period of time. Thus, in principle, a mortgage is easier to repay the longer the term is, because the monthly payment is less.

If you have a 12 year mortgage, you must pay back the original amount borrowed in half the time: the capital element in your payment each month is double what it would be if repaid over 25 years - i.e. if repaid over a period twice as long.

Only if the borrower is less than 25 years away from retirement is a 25 years mortgage seen as a bad idea, by the lender - because, obviously, the lender relies on the borrower having an income sufficient to keep up the repayments.

There are many complicating factors: an interest-only mortgage, where you pay back the original amount borrowed from the maturity proceeds from a life policy, puts you in a situation where the original capital sum never reduces, so you always pay the same each month. But on a straight repayment mortgage, the traditional type, you pay less and less each month as time goes by, for you are reducing the capital outstanding each month, and because that is reducing so is the amount of interest you pay each month (as this is calculated on the outstanding capital amount).

There are snags to avoid, if you can. For example, some mortgage contracts impose penalties if the borrower repays more than the due monthly amount, hence in effect the borrower faces a - possibly heavy - financial penalty for early repayment of the loan. But not all mortgages include such a condition.

If house prices are on a rising trend, the market value of the property will soon be worth considerably more than the amount owed on the mortgage, especially where the mortgage debt is reducing every month, as each repayment is made; so the bank or other lender will not be worried about lending over a 25 year term, because if it forecloses there should normally be no difficulty in recovering the outstanding amount from the sale proceeds.

If the borrower falls behind on the repayments, or house prices fall, he may soon get into difficulties; but this could happen to anyone - it is not a particular problem of a 25 year term.

Where a default in repayment occurs, the bank will often suggest lengthening the mortgage term, from 25 years to 30 years, in order to reduce the amount of the monthly repayment, as a means of helping the borrower. So longer terms than 25 years are in fact a positive solution in a case of financial difficulty.

Of course, the longer the term the greater the amount that the borrower will pay in total. But the longer the term, the less he will pay each month - at least on a traditional capital-and-interest mortgage. So it is a question of balancing those two competing factors.

As long as you do not have a mortgage condition that penalises the borrower for paying off the loan more quickly, it can make sense to have as long a term as possible, to begin with, which can be shortened by increasing the monthly repayment as fast as circumstances allow.

In England, we used to have tax relief on mortgage payments, and so in times gone by it did make sense to let the mortgage run the full 25 years, in order to get maximum tax relief - the rules were very complex, but it tended to maximise your tax relief by paying over the longest possible period. But today, with no income tax relief given on mortgage payments, that is no longer a consideration in this country.

The practical position is, of course, that you can never tell how long it might take you to pay off a mortgage. It is a gamble as to whether your income will rise in future years, and whether your job will last until your mortgage is paid off. You might fall ill, you might be made redundant, you might be demoted. Mortgage interest rates might rise. It is never possible to say that you "can" pay off the loan in a short time.

If you hope to do so, the only matters that actually fall within your control are the conditions of the mortgage contract itself. Get a good lawyer. Tell him to watch out for early-redemption penalties. Get a good financial adviser. Tell him to work out what you will need to pay in additional premiums on your life policy if you are considering taking an interest-only mortgage. Try to fix your mortgage rate in the first few years, for as long as possible, so that in your most vulnerable period, with the greatest amount owing, you are insulated against unexpected interest rate fluctuations.

Only the initial conditions can be controlled, so it might be prudent to take as long a term as possible, even though a prudent borrower will leave himself room to reduce that term, and a prudent lender will leave room to extend it, in case of unpredictable changes in the financial circumstances.

In England, most lenders are, in my experience, reluctant to grant mortgages for less than 25 years. That is simply a policy. Rightly or wrongly, the borrower usually has no choice about the length of the mortgbage term. Hence, in the UK it can be difficult to find a choice of interest rates based on differing mortgage terms. I am aware that the situation in the USA is rather different, but if I personally were faced with the choice I would be uncomfortable about taking on a short term mortgage, because of the factors I have outlined above.

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    Welcome to Money.SE. There's something about an answer that runs more than a single screen of text that usually results in a very low signal to noise ratio. (Read that - you could have said all this in a single paragraph). "No one in England thinks that a 25 year loan has any drawbacks." This was enough for me to call it quits. OP's tag specifically said US. Sweeping generalities are rarely accurate, especially when finances are concerned. – JoeTaxpayer Jun 20 '16 at 13:31
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    @JoeTaxpayer: I think this is a superb answer that not only gives context and points to consider for the OP, but detailed, well-thought-out and organically structured advice for other people who may come along. I don't think your attack was necessary or useful. – Lightness Races in Orbit Jun 21 '16 at 17:18
  • @LightnessRacesinOrbit - I respect your opinion. 6 members agreed with my opinion. Part of the attraction of this site is that we are a diverse group, with different views on personal finance. There's an ongoing "would the downvoter please explain?" I felt compelled to do so, and offered my 2 reasons. I really hope it doesn't read as an "attack." – JoeTaxpayer Jun 21 '16 at 17:23
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    Although I'm a US person and have no use for UK information, I still found it interesting as a point of comparison. Different tax laws and different lending environments can produce surprisingly different outcomes -- or surprisingly similar outcomes. The long answer was both useful for other UK borrowers who might find this question in spite of the original question being targeted to the US, and for US people curious about other ways things are done. – Steve Jun 21 '16 at 21:11
  • @Steve - I've often been saddened by a question I thought great, with perfect answers, only to see them voted closed as off topic. This answer does little to address the question as asked. – JoeTaxpayer Jun 22 '16 at 12:31
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At this time there is one advantage of having a 30 year loan right now over a 15 year loan. The down side is you will be paying 1% higher interest rate.

So the question is can you beat 1% on the money you save every month.

So Lets say instead of going with 15 year mortgage I get a 30 and put the $200 monthly difference in lets say the DIA fund. Will I make more on that money than the interest I am losing? My answer is probably yes. Plus lets factor in inflation. If we have any high inflation for a few years in the middle of that 30 not only with the true value of what you owe go down but the interest you can make in the bank could be higher than the 4% you are paying for your 30 year loan.

Just a risk reward thing I think more people should consider.

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    This answer estimates the incremental cost of a 1% difference in interest rate at (1% times accumulated difference in payment) but it is really (1% times entire remaining principal, plus x+1% times accumulated difference in payment). That's quite a large difference. (Note that compounding is ignored in both formulas, so even my "correction" is only a first-order approximation, more appropriate for hand-waving than actual calculation) – Ben Voigt Apr 26 '17 at 4:34
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I'll start by focussing on the numbers. I highly recommend you get comfortable with spreadsheets to do these calculations on your own.

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I assume a $200K loan, the mortgage for a $250K house. Scale this up or down as appropriate. For the rate, I used the current US average for the 30 and 15 year fixed loans. You can see 2 things. First, even with that lower rate to go 15 years, the payment required is 51% higher than with the 30. I'll get back to that. Second, to pay the 30 at 15 years, you'd need an extra $73. Because now you are paying at a 15 year pace, but with a 30 year rate. This is $876/yr to keep that flexibility. These are the numbers.

There are 2 camps in viewing the longer term debt. There are those who view debt as evil, the $900/mo payment would keep them up at night until it's gone, and they would prefer to have zero debt regardless of the lifestyle choices they'd need to make or the alternative uses of that money. To them, it's not your house as long as you have a mortgage. (But they're ok with the local tax assessor having a statutory lien and his hand out every quarter.) The flip side are those who will say this is the cheapest money you'll ever see, and you should have as large a mortgage as you can, for as long as you can. Treat the interest like rent, and invest your money.

My own view is more in the middle. Look at your situation. I'd prioritize

  • Fund 401(k) to get the entire company match, if available
  • Pay off high interest debt, you should never carry 12%+ credit card debt month to month. Always pay in full.
  • Pay off the other debt, such as student loans.
  • Liquid emergency account, funded to about 6 months worth of living expenses.
  • Use the correct retirement accounts (pre or post tax) to get to 10% saved per year, minimum.
  • Kill off that mortgage.

In my opinion, it makes little sense to focus on the mortgage unless and until the first 5 items above are in place. The extra $459 to go to 15? If it's not stealing from those other items or making your cash flow tight, go for it.

Keep one subtle point in mind, risk is like matter and energy, it's not created or destroyed but just moved around. Those who offer the cliche "debt creates risk" are correct, but the risk is not yours, it's the lender's. Looking at your own finances, liquidity is important. You can take the 15 year mortgage, and 10 years in, lose your job. The bank still wants its payments every month. Even if you had no mortgage, the tax collector is still there. To keep your risk low, you want a safety net that will cover you between jobs, illness, new babies being born, etc.

I've gone head to head with people insisting on prioritizing the mortgage payoff ahead of the matched 401(k) deposit. Funny, they'd prefer to owe $75K less, while that $75K could have been deposited pretax (so $100K, for those in the 25% bracket) and matched, to $200K. Don't make that mistake.

  • All you are saying is that to pay off your mortgage in half the time, you must pay twice as much each month, in which case your disposable income will be squeezed - severely - for 15 years. That is a long time to be exposed to risk, unless you have an option up your sleeve to reduce your monthly payment in bad times. What it really boils down to is whether the borrower is willing to pay an insurance premium of $73 a month in order to have an option of reducing his monthly payment by half whenever he needs to. If money is too tight to pay that premium, the risk he proposes taking is too great. – Ed999 Jul 24 '16 at 15:15
  • Yes, that's part of what I said, although I don't call 60% higher payment "twice" the amount. And my answer suggests that's it's not only about liquidity, but alternate uses for that money. – JoeTaxpayer Jul 24 '16 at 16:11

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