Compare 30 year vs 15 year mortgage

More than 5 million homes get sold in the country each year. Assuming 80% of them are financed through a mortgage – 4 million households face the question ’30 year vs 15 year mortgage’ every year (and in my opinion 90% – 3.6 Million – do not understand all the differences):

How to compare 30 year vs 15 year mortgage?

Β First off – there is no straight forward answer to the decision between 30 year mortgage vs 15 year mortgage, here is a screenshot of an Excel spreadsheet that I developed to make my decision:

30 year vs 15 year mortgage

30 year vs 15 year mortgage


What are the factors that go into that decision?

1. Mortgage interest rate – 30 year as well as 15 year
2. Your ability to pay higher monthly mortgage payments in 15 year scenario (My Excel does not cover it but something to keep in mind)
3. Return on investments – market return – this is the rate of return you expect to earn on your investments (idea being – mortgageΒ  payments are low in 30 year scenario, you will invest the balance in assets that will produce returns). This is cell M2 in my Excel. I used 8%, you can change it to whatever you like
4. Tax break – this is the tax deduction you get on mortgage interest payments. Right now the Excel shows 35%, you can change it (Cell U2).
5. Finally – the capital gains tax rate (Cell U3). I took 23.8% – 20% capital gains tax rate and 3.8% NII tax – net investment income tax.

Spreadsheet Columns, starting at Row 9

A – E: Refer to 30 year mortgage scenario
30 year vs 15 year mortgage

30 year vs 15 year mortgage _ 30 year columns

Column A – period (1 = 1st month, 180 = completion of 15 years, 360 = 30 years)
Column B – Monthly mortgage payment
Column C – Interest part of the monthly mortgage payment
Column D – Principal part of the monthly mortgage payment
Column E – Outstanding principal (money you still owe to the lender)
G – J: Refer to 15 year mortgage scenario
G – J are for 15 year scenario what B – E were for 30 year scenario
L – P: Compare 30 yr plan vs 15 year plan
30 year vs 15 year mortgage

30 year vs 15 year mortgage _ Comparison

Column L – difference in mortgage payments = cash in hand
Column M – Monthly return on investment (cash in hand multiplied by monthly return expected)
Column N – Cumulative portfolio value (every month there will be additional cash in hand that will be invested to generate the monthly market returns)
Column O – Monthly mortgage is less on 30 year but the principal outstanding is more. This is the Extra Principal owed (on 30-yr plan)
Column P – How much better is 30 year plan?
R – X: Tax savings on 30yr plan
This section talks about the extra mortgage interest paid on 30 year plan, tax savings due to mortgage interest deduction, cumulative tax savings over a period of time, market returns on the cumulative tax savings, and the portfolio value of the end result (tax savings + market returns on these tax savings).
30 year vs 15 year mortgage

30 year vs 15 year mortgage _ Tax considerations

Columns Z – AA:
Z calculations show how much better is 30 yr plan over 15 year (negative value shows how much worse 30 yr plan is vs 15 year). Column AA is just the PV (present value) of Column A.
Also – the answer depends on the time you will end up staying in the house, this chart here shows how much better / worse 30 year mortgage is as compared to the 15 year mortgage (x-axis is the time spent in the house).
30 year vs 15 year mortgage _ difference

As you will notice – till about 96 months (about 12 years), 15 years was better…. but after that 30 year turned out to be better….. peaking at about 210 months (17.5 years)… and then again coming back close to 0 at the end of 30 years.

Please also note – this is for 8% market return, 35% tax break on interest (ignoring the mortgage interest phaseout that starts to happen at $166,800 AGI).
Caveats
1. This analysis assumes that you are a disciplined financial investor – if you suspect that you will end up spending the money (rather than investing) if your mortgage payments are less, then forget this whole mumbo jumbo – just take the ‘shortest duration’ mortgage that you can afford to pay and pay it off in the quickest possible manner.
2. One thing I have not included here specifically are ‘state taxes’. They also should be included for a complete picture.
You can download the Excel here – http://onemoredime.com/wp-conten…
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25 thoughts on “Compare 30 year vs 15 year mortgage

  1. Hi Bobby,

    I found your blog accidentally. All the posts are great quality but what impressed me the most about your blog is the ‘ACCURACY’.

    I read a lot and invaribly find incorrect information all the time.

    EXAMPLE 1:

    1. http://www.realestate-school.com/step-by-step says I need 70% to pass the real estate exam

    2. http://www.larsoned.com/realestate/licensing/howtoobtainalicense/ says I need 75% to pass the real estate exam

    One of them has to be wrong!

    EXAMPLE 2:

    1. http://www.larsoned.com/realestate/licensing/howtoobtainalicense/ says I need 63 hours of classroom course

    2. https://www.realestateexpress.com/general/floridarealestatelicense.asp says I need only 45

    One of them has to be wrong again!

    I have read all your posts over the last week and could not find even one piece of information that was not accurate, thanks a lot mate.

  2. Hey Bobby,

    Thank you for not only for posting this, but also working up and giving us the spreadsheet to look through the numbers ourselves(!). I’ve just spent the last hour playing around with various scenarios and this is a cool tool to see how the two compare when either market conditions the or the spread between the interest rates change.

    So a couple of questions to make sure I am on the same page. (Im going to make a lot of really big assumptions about my ability to not only know, but control the future market FYI πŸ™‚ )
    – Keeping with numbers in your scenario, by the time all is said and done between the two, cumulatively, I would be saving ~444.15$ as of today (which would be the future value in 30yrs of 4,857$)
    – So that being said, realistically, should closing costs be also factored in (in conjuncton as you said with individual state taxes)? Depending upon how much one will have to pay for closing costs, it may make it a moot point, or actually sway it in the other direction.
    – Lastly, speaking strictly hypothetically, if I am only in this for making money, (excluding housing price fluctuations, me actually wanting to have a property, selling costs, with the assumption I can sell it the precise month I want for what i’ve got into it no more or less (I know this is assuming a lot hee hee hee:)))) to have the greatest profit I should probably sell my house around the height of the curve which sits around 13,045$ in your example, yeah?

    Great post, thanks.

    • Hey back Deli,

      You are not talking the same language that you did a month back when we first met, you weren’t using terms like ‘spread’ before. I can see that you are reading/ learning a lot, I am very happy for you.

      1. I do not see where you are getting $444.15 number from, can you please tell me the cell number? I see $872 (Cell L10) as the difference between mortgage payments.

      2. Closing costs should NOT be included here.

      Why? Because closing costs do not change whether it is a ’30 year mortgage vs 15 year mortgage’

      Closing costs include things like origination charges, title insurance, inspection fees, credit pull charges, appraisal, insurance, property taxes, and other pre-paid expenses. I have a whole list that I can share.

      None of these depend on whether it is a ’30 year mortgage vs 15 year mortgage’. Hence, not included in this analysis.

      Having said that, you should necessarily include closing costs into ‘investment property’ analysis just like the way I have included selling costs here:

      Profit and Loss for Investment Properties

      3. I see your point but I think you are being over-creative. Here is a better way to look at things in ‘that specific month’:
      A. Am I making money on the house? If it is rented
      B. How much money am I making vs the amount of money I can get if I sell the house?
      C. If I sell the house, where can I invest the proceeds?
      D. Will I make more money in this new investment?
      E. Are there ways to make the new investment without selling this house?

  3. Thanks for your great analysis.

    Based on your excel sheet, it seems that the final graph shows ’30 yr plan profit over 15 yr plan’.
    So doesn’t that mean between 0 months and 96 months, 30 year is WORSE (since it is a negative value), and after that, 30 year is BETTER?

    Am I misunderstanding something here?

    • You are not misunderstanding, that is the case.

      Think of it conceptually – 30 year mortgage invariably will have a higher interest rate as compared to a 15 year mortgage. Agreed?

      If you were to sell your house in 1 year, which would work out better? 15 year because you pay lower interest rate.

      If you were to sell your house in 2 years, which would work out better? 15 year because you pay lower interest rate.

      This continues… but there is a tipping point which takes over (and 30 year interest becomes more lucrative even though it has a higher interest rate) due to the following 2 reasons:
      1. You are able to make more return on your investments as compared to the mortgage interest rate (the monthly payment on 30 year is lower, so you have money at hand to invest)
      2. You get a mortgage interest tax deduction – i love deductions (15 year has higher interest so higher deductions)

      • Hi Bobby, I loved your excel and shared it with few of my friends. All is good except the final kicker. Like AI mentioned, it looks like 30 year is worse till 96 months and then 15 yr takes over. Column Z/AA represents profit if you choose 30 yr plan. If it is negative that means 30 year is worse right. I read your comment above but didn’t quite understand. Sorry. πŸ™

        When you say 30 year has lower interest rate you mean, you pay less in interest (dollar amount) over a period (even though interest rate is high).

        I also noted a small discrepancy in one column:
        Column U: Tax Saving Return should be S10*$M$3 instead.

        • Hey – you do not have to be sorry Cartman, I see both your points and I think both of them are valid πŸ™‚

          1 – What I meant was 30 year interest rate is higher than 15 year interest rate. I have updated the response to Al above – please see if it makes sense now? And once again, thank you for your feedback, it does help me improve the quality of content here

          2 – I will download the Excel later to see if Col U needs to be change; in either case Col V is what it should be, right? So the end result does not change at all….. I will look into Col U soon and get back to you.

          I am glad that you shared the Excel with your friends – right now I have a lot of ideas and a lot of drive, but I am having a tough time reaching out to people, appreciate your help – encourage your friends to subscribe using their email addresses.

          Also, if all goes well (yeah, I know the chances are 1 in 200), I will make a deal on Shark Tank

          • I hope you will get the deal. If not, take it as a good learning experience. At least you got to see some hot chicks. πŸ™‚

            So, just to be clear, the conclusion is that 15 is better till the break even point of 96 months and then 30 year takes over. So, if someone plans to buy a house and keep it for 5 years then 15 year is better right? If so, you should update your post too. πŸ™‚

          • 15 years is better till the break even point of 96 months given my assumptions around 15 year rate, 30 year rate, tax deduction, and investment returns. Otherwise the break even point will vary but YES – 15 years is better if you hold the house for a smaller duration and 30 years is better if you hold the house longer duration.

            Updated the chart title in the post too, thank you πŸ™‚

          • Awesome. I’m trying to close a mortgage now. Once I’m done, I’ll try to enhance your excel and will share it with you.

          • Ha ha. Thanks for the compliment. I used to be a financial analyst and played with excel long back. Now I am a software dev. After the financial crisis I went to hibernation with respect to investing. Recently reading up on diversification. I saw your profile. Seems like you have a great portfolio. In a few years I am planning to have something like what you have. Let’s see how it goes.

  4. I have a question on your calculations on colums “N”

    N = L ( cash on hand in 30 yr)+ M (return)

    Don’t you have to pay taxes ( captial gain) on the return column M and then make the addition ?

    • Great point, Fred. Post-tax returns is what matters in many cases… look at Column W (that is titled “Tax savings Cumulative post-tax”).

      If I do the taxes on Col M and then make the addition like you suggest, the end result is going to be identical mathematically.

      The reason I like the Col W approach more – because this way I can explain (to advance readers) how to use the ‘portfolio money’ even without paying the capital gains taxes. For example – why sell securities to make a down payment for your car? Why not just borrow using margin? Playing the game of Credit

      • Hey Bobby,

        Thanks for the reply. Sorry, i am still confused a bit.

        If i understand correct. The Col W is the taxes on the saved interest which got invested. Right ?
        So we should do the same for col M. Which is the return on extra capital we saved because of choosing 30yr mortgage and got invested.

        The reason i am asking this is it might affect final result in Col “Z” which indirectly considers col M value and its not taxed.

        Pls correct me if i am wrong ?

        • Hey – now I see what you mean and you are 100% correct. The disconnect existed because I personally was thinking I will invest Col M in tax advantaged accounts and Col W in taxable accounts.

          Here is an updated Excel that treats both the ‘investments’ as being made in taxable accounts.

          Updated Excel

          In the renewed scenario – 15 years is good till about 11 years and beyond that 30 years takes over.

          Thank you Fred, I enjoy our discussions πŸ™‚

          • Great. Appreciate you spending time to fix the excel sheet.

            I am in the same boat debating if i should pay extra on my 30 yr mortgage to match 15 yrs or invest in the market. Looks like investing the difference in some robo advisory firm like betterment will fetch me more dollars at the end of 15 yrs plus i have control over the money.

          • Paying extra on 30 years to match 15 years is not accurate – you still pay more interest.

            30 yr rate is more than 15 years, so even if you pay off 30 year mortgage in 15 years, you are still paying a higher interest rate.

          • Hi Bobby,

            Since you are looking at correcting the formulae in the excel, could you consider my suggestion too I mentioned earlier?
            Column U should use Tax savings in Column S instead of Cumulative savings in Column T.

  5. I see a major component missing in your excel here. After 15 year you have a full mortgage payment available for investment . which you can invest for next 15 years. That would be a big game changer in the calculation.

    • It is not missing.

      Col L has the extra cash you will have in ’30 year scenario’ as compared to the 15 year scenario. In the example quoted, this monthly mortgage difference is $872. So the cash at month 1 is 872… month 2 it is 872* 2… so on and so forth till month 180 (15 years) – when cell L189 when it is 872 * 180.

      Now look at cell L190 – it is cell L189 MINUS the entire mortgage you pay in month 181 (in the 30 year option)…. and this continues, every month, the mortgage amount ($1,999) continues to be deducted from the ‘cash at hand’.

      You are right – after 15 year mortgage is paid off, the entire mortgage payments are available for investments. That is precisely what Col L is doing: first it increases (cash available to invest elsewhere) because 30 year mortgage is less than 15 year mortgage… it goes on increasing till 15 years….And then it starts to go gown (so much so that it starts to become negative starting month 268 – somewhere in the 23rd year.

      • Thanks for your quick response. I can see it in the calculation now. It is by far the best logical calculation i have seen on internet. Great and informative post !!

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