Is it Really Better to get a 15 Year Loan Instead of a 30 Year Loan?

I am blasted with commercials on every radio station about why a 15 year loan is so awesome, and 30 year loans are the stupidest idea ever. I have a lot of loans, in fact I have over 30 mortgages on my rentals and flips. I have one 15 year loan on a commercial property, because that was the longest loan my bank would give me.

The reason you hear so many advertisements for 15 year loans, is not because they are so amazing. It is because the bank wants you to refinance into a new loan. When you refinance, you pay closing costs and origination fees to the banks. The more people refinance, the more money the banks make. I am not saying it is always bad to refinance, but you should be listening to the banks for financial advice.

Why do the banks say a 15 year mortgage is better than a 30 year mortgage?

The banks will say that a 15 year mortgage saves tens of thousands of dollars over a 30 year mortgage, which is technically true. However, you are paying the loan off in half the time, so it makes sense you will pay less interest since you are making half the house payments. Here is what the math looks like.

A $200,000 loan will have a payment of $955 at 4% interest with a 30 year term. If you make the minimum payments you will pay $143,740 in interest over 30 years.

A $200,000 loan will have a payment of $1,479 at 4% interest with a 15 year term. If you make the minimum payments you will pay $66,288 in interest over 15 years.

However, we are missing something here. A 15 year mortgage has a lower interest rate of about .5%.

A $200,000 loan will have a payment of $1,430 at 3.5% interest with a 15 year loan. The total amount of interest paid will be $57,358.

It is pretty obvious that the 15 year loan is better right? You are saving $86,000 in interest!

Why is a 15 year loan not all it is cracked up to be?

Yes, you are saving a lot of interest with a 15 year loan, but you are also paying a lot more into that loan every year. Your payment is $475 a month more, which means you are paying $85,500 more in payments over those 15 years. Yes, you have paid off the mortgage, which is great, but at what cost?

What if you would have invested that money into something that earns 7 percent a year? You would have over $150,000 after 15 years if it was compounded yearly. You could take that $150,000, pay off the rest of your loan after 15 years (about $76,000 would be left on the 30 year mortgage), and have $74,000 left over plus a paid off house.

If you can find higher returning investments like real estate, you would make even more money.

https://investfourmore.com/2014/05/16/get-15-30-year-loan-buying-rental-properties/

What other advantages are there to a longer loan?

A longer loan means a lower payment. Yes you pay much less interest, but that is because you are paying so much more every month. With a lower payment comes other advantages.

1. You have more money to save and invest as we already discussed.
2. You have a lower payment if you lose your job or something else happens.
3. Your debt to income ratio is lower if you want to buy more houses or cars.
4. If you decide to rent the house, you will make more money with a lower payment.

Ilike 30 year loans because I can use my cash for other investments that make me much more money. Interest rates are still stupid low and I can make much more with real estate. It is a no brainer for me. For people who cannot save money, maybe it makes sense as a forced savings plan.

Thoughts?