Reply to If you don't have a 15 year mortgage, you're living beyond your means?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]We refinanced to a 2.875% 30 year conforming mortgage during the first year of the pandemic. It's still a great decision because there are very few areas where we can get that kind of leverage and invest the rest in the stock market. Oh and we have a PITI ~$3K and nearly $1 million in home equity ($1.5 million home). With inflation where it is, having low cost, long term fixed debt is a great "investment". Right now, I can invest our cash in a high earning account! It has nothing to do with living beyond our means. It's the equivalent of shorting Treasuries.[/quote]

I’m one that is absolutely in favor of the 15 year route. That being said, well played…assuming you’re being truthful. I refinanced with a cash-out refinance mortgage from a 15 year to a 30 year with the sole objective of having money to invest in growth equities post-COVID crash. My monthly payment didn’t change, but I walked away with more than $1M in cash that I turned around and invested in the market a few months back. Portfolio is already up from $1M to $1.7M. [/quote]

I'm the PP. I think a 15 year is fine but it reduces your flexibility and only provided 40-50 bps of interest rate savings relative to a 30-year (at least at the time I was considering a refi). For some, a 15-year is a good way to create forced savings if you lack discipline elsewhere in your financial budget. While I could save a little on interest, I figured having the flexibility to accelerate the paydown on a 30-year (to make it a 15) was better optionality. However, since inflation spiked, I've stopped all prepayments. I am happy to make my minimum fixed payment each month and if inflation continues at an elevated rate, it will look better and better with time That's our only debt and with a PITI of ~$3K, it's lower than we'd ever get for an equivalent apartment in our area of Montgomery County. [/quote]

Our 15 year payment was lower than the 30 we originally had when we refinanced as the interest rate was lower.  We always pay extra to principal.   Cannot wait to pay it off. [/quote]

Why? If it's a good rate, you're better served saving the excess cash and using it to invest in the market long term. For us, paying a 2.875% interest rate that is also tax deductible is much lower than the long-term return on other investments. I get that there is a psychology benefit to being completely debt free. However, "good" debt with modest leverage can actually enhance your returns.[/quote]

Everyone knows that what you’re saying is true…in theory. But let’s look at the actual reality.

Let’s assume Stock Market Return = 8% (Compounding Monthly)

[b]Person A:[/b]
$500K 15 year 2.5% = $3333 / month
Total Mortgage Interest Paid = $100,146
Monthly Stock Market Contribution (Years 1-15): $0
Total Value at Year 30 = $0
Monthly Stock Market Contribution (Years 16-30): $3,333
Total Value at Year 30 = $1,153,345
[b]Person A NW in Year 30 = $1,053,199 + Home Value[/b]

[b]Person B:[/b]
$500K 30 year 2.5% = $1975 / month
Total Mortgage Interest Paid = $211,253
Monthly Stock Market Contribution (Years 1-30): $3,333 - $1,975 = $1,358
Total Value at Year 30 = $2,023,908
[b]Person B NW in Year 30 = $1,812,655 + Home Value[/b]

At the end of 30 years both Person A and Person B own their homes outright. However, [i]Person A that chose a 15 year mortgage has $759,456 less net worth than Person B who chose a 30 year mortgage[/i]. They both invested monthly mortgage savings in the stock market, but Person B was able to accumulate much more thanks to 30 years of interest compounding vs. 15…even with less contributed per month. 
 
[b]Everyone with a 15 year mortgage knows this[/b] and they’ve taken this more conservative route because they’re already investing 20-40% of their income into the stock market and are seeking diversification through home ownership. Problem is we’re really dealing with a comparison to Person C. This is a person trying to compete with Person A, trying to keep up with Joneses, as it were. Instead of pushing the full $1,358 / month in the stock market, Person C is dumping another $500 / month into car payments, another $300 / month into dining out, another $200 / month into a home cleaning service, and another $200 / month into a vacation fund. They’re then left with a paltry $158 more to invest per month and here’s how that plays out:

[b]Person C:[/b]
$500K 30 year 2.5% = $1975 / month
Total Mortgage Interest Paid = $211,253
Monthly Stock Market Contribution (Years 1-30): $3,333 - $1,975 - $1,200 = $158
Total Value at Year 30 = $235,477
[b]Person C NW in Year 30 = $24,224 + Home Value[/b]

Not nearly the same picture as before, is it? In reality – and as substantiated by HHI affordability data from mortgage applications in the DMV over the past three years – almost all 30 year applicants are like Person C. So, yeah, pat yourself on the back for opening up some [i]financial flexibility[/i] until you realize you’ve flexed your way into spending most of it to maintain pace with Person A, costing you more than $1M in lost net worth over 30 years. [/quote]

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