Mortgage: 30 yr, 15 yr, or cash?

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hey
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Mortgage: 30 yr, 15 yr, or cash?

Post by hey »

Hey, I am a first-time home-buyer looking to purchase a roughly $750k home with a bit over $1M in liquid assets (retirement excluded). I'm pretty new to the mortgage game, so I'm looking for some general advice and pointers to some reliable resources. I don't anticipate any other major expenses and any money I don't spend will likely go into a simple three-index-fund allocation. I have no intentions of moving, but I could imagine things change over the course of the years.

It seems like putting $600k (assuming 20%) into the stock market over 30 years should far surpass the amount of interest paid. I guess it would be nice to have my home paid off, but not worth the money I could make. A 15-year mortgage seems like a middle ground; not sure why I should consider that.

Other things on my mind: escrow or not, percentage down, timing, and shopping for rates. Thank you for any thoughts.
Goal33
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by Goal33 »

Keep it simple.

Find the house and make specific decisions like this later.

Just don’t pay points. Get lender credits to cover all, much, or some of your costs. Move in. Decide later if you want a 15 or a 30 or to own it out right. Refinance into the loan you want or pay it off.

Good luck. Don’t miss the forest for the trees.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by grabiner »

How much would it cost you to liquidate the assets? If most of that $1M is in stock, then you want to minimize capital gains, which is likely a reason to put the minimum 20% down.

Otherwise, what matters is the trade-off between risk and return; see Paying down loans versus investing on the wiki. Taking out a smaller mortgage gives you a low but risk-free return, comparable to investing in bonds. You can have a higher expected return, with more risk, by buying stocks.

I would prefer a 15-year mortgage, though. The advantage is that you pay interest at a lower rate while paying down the mortgage, so it costs you less to hold the money in stocks. And given the size of your portfolio, you don't have a liquidity issue.

I made the same decisions myself. I had enough stock to pay cash for my home in 2013, but I would have had a huge capital gain, so I put 20% down and took out a 15-year mortgage. The rate was so low, and deductible on both federal and state tax, that it didn't make sense for me to pay extra...

until rates dropped. In 2020, low-risk bonds earned less than my after-tax mortgage rate, and I could liquidate cash without a tax cost, so I paid it off. (I sold stock in my taxable account for a capital loss, then moved an equal amount from bonds to stock in my employer plan, so I effectively sold bonds to pay off the mortgage.)
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by Apathizer »

Why would you dump 3/4 of your considerable wealth into something ill-liquid like a home/house? If I had that much I'd rent an apt and never work again.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by Metsfan91 »

30 Year mortgage! Keep your cash invested! Stock market return over 30 years should be higher than mortgage interest rate.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by JoeRetire »

hey wrote: Fri Jan 28, 2022 10:38 pm It seems like putting $600k (assuming 20%) into the stock market over 30 years should far surpass the amount of interest paid. I guess it would be nice to have my home paid off, but not worth the money I could make.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by DeliberateDonkey »

It's fair to assume that equities will, over a long enough time horizon, outperform the interest paid on your mortgage.

It's also fair to assume that the interest you pay on your mortgage consists of (mostly and effectively) taxable dollars, whereas investment gains in non-retirement accounts will eventually be (mostly and effectively) taxable, even if at a favorable (i.e. LTCG/QD) rate. Furthermore, the interest rate you pay on your mortgage will likely far exceed the dividends received from any investment-grade fixed income you hold in said taxable portfolio to offset the risk of holding equities.

I think it is a question of risk tolerance (both practical and emotional) more than anything. Most of the answers you receive will likely (and rightly) point out that, based on past performance, the math works out in favor of investing. On the other hand, I would ask you to consider whether, having a paid off house, you would still choose to take out a mortgage simply to invest the proceeds. If not, why not? The answer to that should help you determine your risk tolerance.

Personally, I paid off the house. So far, the math has not been in my favor. On the other hand, I no longer deal with the mortgage servicing industry, so my sleep quality has improved markedly.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by thedayisbrave »

I personally always do a 30 year because it is more flexible... you're not locked into the higher monthly payment that a 15 yr gives. Just make sure it doesn't have a pre-payment penalty... that way, if you want, you can still pay it down in 15 years, or 20, or whatever. But if you have some months where money is tight, it'll make things a little easier. YMMV.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by KlangFool »

OP,

A) 20% down payment and 30 years fixed rate mortgage.

B) Do not pay down or pay off your mortgage until you are Financially Independent (FI). Aka, your portfolio is big enough and you can retire now.

C) If you feel like the mortgage is a burden to you financially, you are buying too much house. Do not buy the house. Paying down or pay off the mortgage would not help you.

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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by DVMResident »

One oddity of mortgages is the different types (30y, 15y, ARMs) don't move in lock-and-step. One day, one might be better than the others; and a few weeks later, another type type might be more attractive. This is especially true right now with Fed activity.

For example, I've been looking for a house for the last 6 weeks. 30yr were looking the most attractive. However, we put an offer this past week and the ARMs/30yr spread widen. My quotes came in at 30y 3.25% vs 7y/6m ARM 2.325% (no points, 20% down). Offer fell through, but the ARM was clearly more attractive than it had been.

I wouldn't get hung on a specific product right now. Find your house, get the offer accepted, get a couple quotes from your lender, and then come back here with the options.

Happy hunting. :sharebeer
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by steve r »

This was cut from a similar thread where I calculated the return you must get from the lower payments to break even. Understand this math and I think you will get why the 15 year loan is a great option.

Assume a $100,000 loan. (Bankrate.com mortgage and savings calculators, deposit a .01 to start)

15 year at 2.15 percent payment of $782. The 30 year loan rate at 2.75 percent is $540 or $242 less. With this loan you will still owe $60,000 15 years out. See payment schedule.

What safe rate do you need to covert $242 per month in savings to grow to $60,000 in 15 years? 4.2 percent. That is a very good essentially risk free after tax tax free rate. A "satisfactory return. " (and if todays rates are used, this safe return will be closer to 5 percent). (In other words, if you put money in the bank, you would need a 6 + percent return (ish) that is taxed to get this equivalent -- that is very hard to find).

Of course, this depends on your ability to pay such loans / liquidity. This does not appear to be an issue.

I would add that this allows you to slowly increase your equity exposure and reduce bond exposure in other accounts over time as your "safe" asset of home equity rises.

I agree with others that keeping some money invested is the right action (i.e. take a mortgage) ... unless you are near retirement or something.

Finally, FWIW, IMHO the 30 year and the 15 year mortgage are the most competitively price mortgages available (best for consumers). The 10, 20 and 25 year equivalent loans are generally not as competitively priced and likely should be avoided.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by willthrill81 »

thedayisbrave wrote: Sat Jan 29, 2022 7:50 am I personally always do a 30 year because it is more flexible... you're not locked into the higher monthly payment that a 15 yr gives. Just make sure it doesn't have a pre-payment penalty... that way, if you want, you can still pay it down in 15 years, or 20, or whatever. But if you have some months where money is tight, it'll make things a little easier. YMMV.
While 30 year mortgage payments are obviously lower than 15 year mortgage payments, they come with higher interest rates too. Some folks take out a 30 year mortgage with the explicit intention of paying it off in 15 years, but the cost for doing so may be what many would consider to be substantial, as described in this thread.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by willthrill81 »

steve r wrote: Sat Jan 29, 2022 9:07 am This was cut from a similar thread where I calculated the return you must get from the lower payments to break even. Understand this math and I think you will get why the 15 year loan is a great option.
There's another advantage to the 15 year mortgage based on behavioral finance: if you take out a 15 year mortgage, you're less likely to spend too much on a house due to the higher monthly payments vs. a 30 year mortgage.

Less expensive homes, combined with a 15 year rather than a 30 year mortgage, result in less mortgage interest being paid, lower property taxes, likely lower utility and maintenance costs, and less empty space to fill with unnecessary stuff.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by cbs2002 »

Goal33 wrote: Fri Jan 28, 2022 10:43 pm Keep it simple.

Find the house and make specific decisions like this later.

Just don’t pay points. Get lender credits to cover all, much, or some of your costs. Move in. Decide later if you want a 15 or a 30 or to own it out right. Refinance into the loan you want or pay it off.

Good luck. Don’t miss the forest for the trees.
Best advice here. I'm making the assumption you have good reasons to buy this house now for this much money, and that you can easily afford the PITI. Assuming so, get the lowest rate zero cost 30-year mortgage you can find and keep your money invested. Refinance as appropriate based on future interest rates and whether you really want to stay in this house more than, say, ten years. Done.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by jmw »

I pretty much agree with everyone above me with regards to 30, 15, cash, stay invested, big down payment, small down payment, keep it simple, etc.

Another tiny but possible consideration is asset protection from anything other than divorce. In California, the location of the OP according to the forum profile, the house is protected from creditors up to $600k in a forced sale or bankruptcy. The money in ERISA accounts (401k, governmental 457, 403b) are protected from creditors in unlimited amounts. Up to low $1M in an IRA are supposedly protected, but the protection in California is actually weak because it depends on the judge deciding what is necessary for bare minimum survival support of the household. The money in taxable accounts can be levied by judgment creditors, so no asset protection at all. With adequate insurance, debt aversion, and lack of personal financial crisis, this is just a tiny consideration. Most people never get sued, but you see lawsuits flying left and right sometimes for big money when you randomly look at California superior court dockets.

I throw it out there because I think the optimal decision is probably some sort of middle ground between a low, risk-free return with asset protection and full risk in the 3-fund portfolio without asset protection in taxable accounts.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by Firemenot »

We don’t know your location, age, and how long you think you’ll stay in your first house — all of which are relevant factors. At these ultra-low interest rates, I’d personally do a 30 year mortgage, especially if you live in a non-recourse state (e.g., California). With a 30 year mortgage you’ll likely do much better in the stock market long-term if you stay in the house long-term. Of course, you have to be disciplined to actually save the difference between the 15 and 30 years payments in the stock market, which many people aren’t. If you think you’re likely to over-spend, then a 15-year mortgage will force you into a smaller house and force you to save (in an illiquid asset).

Another thing to factor is career risk. For example, if you lose your job or if you might want to take some career risks that put your salary at risk in the short term (e.g., start a business, go to a commissioned sales role, etc.), then the lower required payment of the 30-year will be nice. You’d also have more liquid cushion with income volatility if you’re diligent about saving the delta in mortgage payments.

Good luck!
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by hey »

Thank you all for the advice. Lots to read and think through to apply to my situation. This will take some time to digest. Also lots of straightforward and simple advice. Thanks for both. In the meantime, a few responses:
How much would it cost you to liquidate the assets? If most of that $1M is in stock, then you want to minimize capital gains, which is likely a reason to put the minimum 20% down.
Roughly $200k in cash (as I have been planning for this down payment) and the rest in stock. LTCG is a fixed 20% so what is the incentive to spread it out? Just on the same principle that money not spent is money invested (same logic behind the 30 yr option)?
Why would you dump 3/4 of your considerable wealth into something ill-liquid like a home/house? If I had that much I'd rent an apt and never work again.
I enjoy my job and it’s hard to find nice homes to rent.
On the other hand, I would ask you to consider whether, having a paid off house, you would still choose to take out a mortgage simply to invest the proceeds. If not, why not?
Good way of thinking about that! I don’t feel like it’s common advice to borrow to invest, so I wouldn’t likely do that. Not against it, up to some amount, though. However, a mortgage is so much more common, so I feel good doing it (maybe even more so than buying in cash). To add to my risk tolerance, I’m all about broad-based index funds but am probably 90% in stock.
I'm making the assumption you have good reasons to buy this house now for this much money
The only major purchase I’ve been saving for has been a house and I like my options in this price range. Is this a good enough reason? My self-imposed guideline has been to not require selling my investments to pay my mortgage, but I don’t see why that would be so bad. Open to any advice here.
We don’t know your location, age, and how long you think you’ll stay in your first house — all of which are relevant factors.
Location: in the process of moving from LA to Atlanta.
Age: 35
How long in first home: no way to know… maybe 7… maybe 20.
you have to be disciplined to actually save
I have a proclivity to save to the point where I feel like I need to start enjoying my savings more.

Thank you everyone for the thoughtful responses.
Keith5337
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by Keith5337 »

The OP asked about escrow. Put at least 20% down and do your own escrow. That you you are responsible for the tax/insurance payment and don't have to worry if the mortgage company is making them on time.

Also, the 20% down keeps you from paying PMI.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by SagaciousTraveler »

It hasn't been mentioned but a 10 year is nice if the math works on your monthly payment.

Our 10 year is 2.15%. We chose it because we don't like living in debt and it coincides with our first child heading off to college/trade school/military. We'd like to use the extra monthly income to be flexible with any support they should need and take more mini vacations as we become empty nesters.

You can run the numbers all day but some of the decision will be emotional and/or psychological.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by newyorker »

hey wrote: Fri Jan 28, 2022 10:38 pm Hey, I am a first-time home-buyer looking to purchase a roughly $750k home with a bit over $1M in liquid assets (retirement excluded). I'm pretty new to the mortgage game, so I'm looking for some general advice and pointers to some reliable resources. I don't anticipate any other major expenses and any money I don't spend will likely go into a simple three-index-fund allocation. I have no intentions of moving, but I could imagine things change over the course of the years.

It seems like putting $600k (assuming 20%) into the stock market over 30 years should far surpass the amount of interest paid. I guess it would be nice to have my home paid off, but not worth the money I could make. A 15-year mortgage seems like a middle ground; not sure why I should consider that.

Other things on my mind: escrow or not, percentage down, timing, and shopping for rates. Thank you for any thoughts.
I would do 20 percent down 30 year. Hell yeah on escrow. Makes life so much easier.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by evancox10 »

Just do 20% down on a 30 year. Rates are super low and presumably you’re getting a deduction too. Especially with inflation showing up again, why not take the cheap loan? There is very, very little interest savings to be had going shorter term, and you can always pay it off sooner if you want.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by Ron Ronnerson »

hey wrote: Fri Jan 28, 2022 10:38 pm It seems like putting $600k (assuming 20%) into the stock market over 30 years should far surpass the amount of interest paid. I guess it would be nice to have my home paid off, but not worth the money I could make. A 15-year mortgage seems like a middle ground; not sure why I should consider that.
At today's low mortgage rates, the chances are in the favor of the stock market to beat the rate on the mortgage. However, this is not a guaranteed outcome whereas paying down the loan would be.

Only you can decide if paying off the home faster is worth it to you to quite likely (but not definitely) have less wealth over the long-run. Some people like 15 year terms on the mortgage over a 30-year because you pay considerably less interest over the life of the loan, cash flow improves once it's fully paid off, and it helps some people feel more secure once they don't have to think about the mortgage any longer.
hey wrote: Fri Jan 28, 2022 10:38 pm Other things on my mind: escrow or not, percentage down, timing, and shopping for rates. Thank you for any thoughts.
Escrow and percentage down are person preferences too. I personally do not have an escrow account because I like controlling the timing of payments (which can be advantageous in terms of taxes in some situations) and I also like knowing that the payment has posted on time. Additionally, my wife and I each open up a credit card when our property tax due date is coming up and earn a bonus on the new card simply by making one transaction (paying the property tax bill installment). We've done this for years and effectively reduce our annual property taxes this way.

I would put down enough to get good terms on the loan (favorable interest rate and avoid PMI). If you're in a non-recourse state, I would not put down more than is necessary to secure the loan you're after. I prefer 30-year loans, especially when rates are as low as they are at the moment, and putting down just enough to avoid PMI.

I would not try to time the market on home purchases or mortgage rates. Buy when it's the right time for you (you find a place that you'd like to live in and can afford) as no one knows what will happen in the future. I personally like to stay put in a home for a long while so that transaction costs can be minimized (along with the hassles of moving).
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Mortgage Points or Lender Credits?

Post by hey »

[Thread merged into here --admin LadyGeek]

Hey,

From viewtopic.php?p=6483195:
Just don’t pay points. Get lender credits to cover all, much, or some of your costs. Move in. Decide later if you want a 15 or a 30 or to own it out right. Refinance into the loan you want or pay it off.
Why shouldn't I pay points? I can either keep the point difference in the stock market (if I take lender credits) or the monthly payment difference in the stock market (if I pay points). In my calculations from the rates offered me, the points options wins by a little over a factor of 2.

Bonus questions:
1) Should refinancing really be in my plans? With rates climbing and closing costs, it seems more like a backup plan than Plan A.
2) Online lenders seem to have much better rates than local lenders. Are there any substantial considerations I should take into account before just going with the lowest rate? I have a bit of time before closing.

Thanks.
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Re: Mortgage Points or Lender Credits?

Post by exodusNH »

hey wrote: Tue Mar 22, 2022 4:37 pm Hey,

From viewtopic.php?p=6483195:
Just don’t pay points. Get lender credits to cover all, much, or some of your costs. Move in. Decide later if you want a 15 or a 30 or to own it out right. Refinance into the loan you want or pay it off.
Why shouldn't I pay points? I can either keep the point difference in the stock market (if I take lender credits) or the monthly payment difference in the stock market (if I pay points). In my calculations from the rates offered me, the points options wins by a little over a factor of 2.

Bonus questions:
1) Should refinancing really be in my plans? With rates climbing and closing costs, it seems more like a backup plan than Plan A.
2) Online lenders seem to have much better rates than local lenders. Are there any substantial considerations I should take into account before just going with the lowest rate? I have a bit of time before closing.

Thanks.
Points are fine if you're going to keep the loan for 6+ years. If you think you might sell or refi before then, you will have paid more points than you saved in interest.
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Re: Mortgage Points or Lender Credits?

Post by Admiral »

hey wrote: Tue Mar 22, 2022 4:37 pm Hey,

From viewtopic.php?p=6483195:
Just don’t pay points. Get lender credits to cover all, much, or some of your costs. Move in. Decide later if you want a 15 or a 30 or to own it out right. Refinance into the loan you want or pay it off.
Why shouldn't I pay points? I can either keep the point difference in the stock market (if I take lender credits) or the monthly payment difference in the stock market (if I pay points). In my calculations from the rates offered me, the points options wins by a little over a factor of 2.

Bonus questions:
1) Should refinancing really be in my plans? With rates climbing and closing costs, it seems more like a backup plan than Plan A.
2) Online lenders seem to have much better rates than local lenders. Are there any substantial considerations I should take into account before just going with the lowest rate? I have a bit of time before closing.

Thanks.
It's impossible to give a good answer without specifics. Points have their place: buying down the interest rate can pay for itself based on the breakeven time and how long you will be in the property. If, say, you're forced to move before the breakeven then points were a bad idea.

You can, of course, do anything you want with money you don't use to pay points. But buying down the rate is a known savings for a set amount. Putting the money in the stock market is unknown, and could result in a loss.

At present I would say that no, refinancing to a lower rate in the near future seems unlikely. Unless the 15 is easy for you to swing, consider a 30 and then a refinance to a 15 (with a lower balance, obviously) later.

Back in 2016 I paid points to get a 2.25% mortgage rate, through a broker, when most of the rates I was seeing were for 3%. I don't regret it.

I see no reason not to go with the best deal, wherever that is. All these guys usually just turn around and sell the loan in a few months anyway.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by LadyGeek »

hey - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by HMSVictory »

I will play devils advocate and say pay cash for the house and be done with it. :D

You could do worse then having a paid for house at your age. You can then invest your income for the rest of your life to build your investment portfolio and add to your $250k you have left over.

Yes - you will most likely earn a much higher rate of return by investing the money instead of putting it into the house by taking equity risk. Over longer periods of time we have been richly rewarded for taking equity risk.

I'm not sure where the $1M came from but if it is an inheritance do you think it would make the person who left it to you smile to know that you purchased your home (outright) with the money? Just something to consider.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by Admiral »

Keith5337 wrote: Sat Jan 29, 2022 4:30 pm The OP asked about escrow. Put at least 20% down and do your own escrow. That you you are responsible for the tax/insurance payment and don't have to worry if the mortgage company is making them on time.

Also, the 20% down keeps you from paying PMI.
Just as a point of clarification: some servicers require escrow, regardless of the down payment. FHA backed loans will not waive escrow. Some servicers will, after you ask, and with sufficient equity. If you miss a tax or insurance payment, you're back to escrow until the loan is fully repaid.
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Re: Mortgage: 30 yr, 15 yr, or cash?

Post by Jungle »

Seems like it's kind of a classic question on this forum :beer

If I were in your shoes I would not want to have 3/4 of my net worth locked in an illiquid asset, I'd go with the 30 year. You could always pay it off faster.

Of course, I say this as someone who presently has 45% of their NW in their primary residence, lol. I took a 15 year and paid it off in 6.5 years. I just don't like debt. Plus it was a guaranteed return at the interest rate rather than the higher, but riskier return of the stock market. Shoveling money at the investments now to get that ratio down.
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