If you pay off debt completely, it lowers your monthly overhead and you can live on less income, or if you maintain the same income you can spend more or save more. Paying off debt early is not just piece of mind. It is weird how it has become common sense that certain debt, like a mortgage or student loans, are good debt. They are easier to deal with than short-term credit card debt, but ask anyone with student loans if the debt is “good.”

I submit you save EVEN MORE money than the original assumption.

His analysis assumes *POOF*, all money disappears after you pay off the 15 yr mortgage.

Another big factor in determining a 15 yr. vs a 30 yr. is the size of the monthly mortgage payment. Yes, giving up extra money to interest over the course of the loan hurts, but for many people, so does an extra few hundred dollars per month. That amount keeps many people from buying a house.

I don’t think there is a ‘one size fits all’ approach for many financial issues, and it can be dangerous to claim there is. The best thing to do is research each case on its own merits and make the best financial decision for those circumstances.

There is an opportunity cost of foregone investment with the 15 year loan. For the benefit of a shorter payoff, you’d be paying an extra $450 (approx) every month for the 15 year mortgage. That’s $5,400 per year you could be investing for the first 15 years. I haven’t done the math, but that amounts to a pile o’cash after 15 years of compounding. And at 4% annual inflation, the after-tax cost of 30 year mortgage money for someone in the 28% tax bracket is close to zero.

Get statistics on inflation here:
http://www.inflationdata.com/inflation/

What would happen to your current mortgage if you threw $2000 against the principal (or whatever the closing costs would be) and then starting increasing your payments to what the 15-year loan would be? Might turn out to be cheaper and paid off sooner. Spreadsheets are great for doing this what-if? projections.

You’ve already indicated you plan to stay in the house another 20 years. But life happens and something may change your mind in a few years.

Off the top of my head, I doubt this approach would be to your advantage, unless you could get a much lower interest rate. When the time comes, and you have a better picture of what interest rate you could get and what your personal situation is, model the numbers and see what they tell you.

The true increase in the cost of living is not just found in the price of gas. Look at the annual cost increase in a college education, which is rising at an average of 10% per year. Or look at the 50% spike this year alone in the cost of corn due to increased demand for ethanol and the artificial price supports of the U.S. Farm Bill.

As an aside, the average cost for unleaded gas in the U.S. is extremely low in comparison to other industrialized nations, where in Europe for example, the cost of gas at the pump is over $7.00 (at the present exchange of euros to dollars). The increase in Europe consists of taxes, which provides some disincentive for driving and provide an incentive to use public transportation (such as light rail, high speed trains, subways, and buses) – which is of MUCH higher quality and utility in Europe than in the U.S.

So, to continue my main point, if you look at the Federal Reserve numbers for M3 (which the Fed stopped to publish in March ‘06, ostensibly to save $2.5 million in costs a year), which is the broadest measure of the money supply, M3 increased in 2006 by 13.7%. The main reason the increase in the money supply does not increase inflation by a commensurate amount is that the dollar is still a “hard” currency that can purchase petroleum, and the nations of the world are still absorbing the “excess” dollars put into circulation. One day the world will not need the U.S. as much as today to “consume” their products, and large holders of dollars will use their huge holdings of U.S. treasuries to manipulate U.S. foreign policy. To wit, last week China threatened to liquidate much of its holdings in U.S. currency if the U.S. govt. imposes trade sanctions to force a yuan revaluation. See this U.K. Telegraph article http://tinyurl.com/267s4n.

For me, it is a matter of not IF but when a recession/stagflation and double-digit inflation occurs due to the Fed’s manipulation and debasement of the U.S. money supply. I learned a great deal about this through http://www.mises.org if anyone wants to get a deeper understanding of my perspective.

1) A small quibble with Trent’s figures:
Assuming a rate of inflation of 4%, then the true interest on the 15-year mortgage is 5.91-4=1.91%, and on the 30-year mortgage 6.23-4=2.23%. Thus, if you amortize these figures for a $200,000 loan, your true costs in today’s dollars are $230,174.21 for the 15 year mortgage and $274,483.30 for the 30 year mortgage, for a difference of $44,309.09 (and not $32,352.10 as Trent says above). You’re welcome to check my figures at http://www.amortization-calc.com/

2) Also, an unstated assumption of Trent’s example is that these are straight fixed-interest loans, and not 5/25 or 7/23 balloon mortgages that require a reset of the interest (with a requisite re-financing) 5 or 7 years, respectively, down the line.

I took Trent’s numbers for the 30-year mortgage, and using a spreadsheet remodeled the payments a bit. The first year they are per the loan agreement, but each year after that the payments increase by 4% to match the assumed inflation rate.

With the revised payment plan, the 30-year mortgage is paid off in less than 17 years. The payment amount equals and then exceeds that of the 15-year note after 8 years, but as Trent points out they’re with cheaper dollars.

Plus you have the option of dropping your payments to the regular amount if you have a financial rough spot — for instance to stretch out your emergency fund if you lose your job.

I, being a 25yr old male, living in the Bay Area (Ca.), am hoping to purchase a house in the next year or so and have roughly a 100k downpayment. I always smile to myself and become jealous of the people who live in decent price states. In the Bay Area, pricing for a decent, half fixer up’er house start around $600k. A decent house in a decent area starts around $700k

Sounds great to be able to pay off a morgage in 15yrs, but… some of us, (like myself) will have
to take a 30yr morgage and hope to have it payed off earlier (plus $8k+ year in property taxes etc..).

Another way to read that would be: people who’re rich enough to retire early also have the spare cash to pay of their mortgage early.

Correlation does not prove causation:
http://en.wikipedia.org/wiki/Correlation_does_not_imply_causation

> thats all i need to know.

Actually it’s not.