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Comment by VBprogrammer | Hacker News Reader

Compound interest means that you will be paying a lot more money for the same house if you buy over 30 rather than 15 years.

However, for someone disciplined, taking a 30 year mortgage and paying it off like a 15 year mortgage with significant over payments is a good strategy. It means if you need to tighten your belt you can always drop down to the normal payment for a spell without so much as having to speak to the bank.

The worst option is to take the 30 year mortgage and then buy the larger house that the longer period allows you to afford.

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You’re not allowing for leverage, inflation and incredibly low interest rates.

In real terms cash is losing significant money every year while assets are gaining money. Debt makes sense as long as you have a margin of safety and can multiply the impact with leverage.

IF you believe inflation will be significant over 30 years say, and can lock in a low rate, it is better to go with a longer term.

People use all kinds of accounting tricks to convince themselves that some purchase or other makes financial sense. Trading in their perfectly good 2 year old car for a brand new one, buying on finance when they could buy a cheaper one outright. I'm sceptical that it ever pays off that way.

It's not an accounting trick; it's historically low rates. At the beginning of 2021 would you rather have paid 350k cash for a house or taken a 30 year mortgage and invested the remaining 80% (after a 20% down payment) into the sp500? Your house might be up around 10-25% depending on the market making your 20% stake worth more. and your 280k cost-basis that you invested would be worth 350k. You'd have already earned your down payment back before the end of the year.

If you think the return of your investments will >= 3% mortgage rates then you're losing money by not taking on debt (albeit with a bit of risk).

If instead of buying the house cash I put it all into bitcoin at the begining of the year I'd now have enough to pay off the mortgage, the early repayment fee and have change to spare.

This being the utter fucking fallacy of hypothesising with the benefit of perfect information.

Personally I wouldn't touch bitcoin, nor do I consider it an asset. Returns on stock investments are historically high for the last couple of decades it's true, but if you take the average of say 5% a year, it's still much better than putting that money into a mortgage, when you can borrow the money over a long time period at < 1% (as in the UK for example), or even at 3%.

It's not a trick, it's simple maths. It certainly doesn't always work, and there are risks involved, so not everyone will agree on the right decision, but there is clearly a path where borrowing money to pay for a large asset makes sense.

You've basically just reinvented the endowment mortgage. That went really well for everyone in the 90s.

No. I wasn't suggesting investing to pay off the mortgage (endowment mortgage), but investing as an alternative use of funds compared to paying off a debt held at low interest rates in a rapidly depreciating currency.

Imagine a more extreme example:

Interest rates 0.1%, Inflation 10%, 30 year term, leverage meaning your 50k becomes say 500k invested.

Now it makes sense to take on as much debt as you can get over say 30 years, and to put off paying it as long as possible, because even after a few years the payments will be quite minor compared to your inflating income, and at the end of the 30 years the debt you have left and the interest payments on it will be trivial compared to your income.

> for someone disciplined, taking a 30 year mortgage and paying it off like a 15 year mortgage with significant over payments is a good strategy.

This is the worst of both worlds. You pay the interest penalty of a 30 year, with the payment of a 15 year (well, slightly more). The interest difference between a 30 and 15 year mortgage is about 30% (2.x% v 3.x% APR).

I did a 15 year mortgage, then refinanced it every 12m or so ($250 each time), resetting the payments back to 180 months each time. That way, I get the interest savings of a 15 year, which is significant, and each refinance makes your payment quite a bit lower because a 15 year loan actually pays back principal. After six years, my mortgage will be the same as it would have been if I originally got a 30 year, but it will be paid off in 21 years instead of 30.

There's a risk interest rates rise, or I lose my job and can't refinance. But so far, so good. And honestly, my mortgage now is so close to what it would have been with an original 30 year loan that it doesn't even matter if I can never refinance. The hardest part was the first two years.

>Compound interest

Depends on how much better the same amount of money would perform if invested in an index fund. It could be more profitable to throw the difference in monthly payments into a vanguard account instead of a higher 15yr monthly payment.

Personally my view is exactly your second point: Buy small enough that you can consistently put $x extra each month against the principle + one full extra payment each year. It's a good middle ground to maintain flexibility

And absolutely-- buying the biggest you can fit into monthly expenses may even seem responsible: "I'm not living beyond my means!" but is a razors edge of risk for unanticipated expenses or more significant life disruptions.

This was the approach that made the most sense to me.

Purchase a house where you can afford the 15-year fixed mortgage, but take out the 30-year fixed mortgage. Pay it off as if it were the 15-year fixed (ensure that your loan has no penalties for prepayment or extra payments, and that 100% of extra payments go toward the principal).

If things go smoothly for you, you’ll pay a marginal amount of additional interest (because your % will be higher as a 30-year than a 15-year). However, if you run into cash flow issues, you have a good amount of reduction in mortgage payments that you can make while keeping the bank completely satisfied.

No reason to make principal-only payments with interest rates so far below the avg. stock market return.

Obviously if a bond paying 3% would be interesting to you, pay the mortgage off first before buying the bond.

I agree that produces a better expected return, however the downside-risk from a bad outcome is worse for me than the expected upside gain.

Essentially, I don't expect my overall happiness and satisfaction to be linearly correlated with my finances, and I expect that non-linearity to be such that I'd rather be more risk-averse in such a way that I have to give up some of the potential gain.

If there were a world where I could _guarantee_ the avg. stock market return, then I'd of course take that offer, but sadly such guaranteed returns only exist in the form of scams and ponzi schemes.

A better strategy is to use the 30 year, and then invest the monthly difference in the market. Why pay down long-term funding of 3.25% cost of money and lose out from a long-term market return of 7%?

You're right about the compound interest, but compound interest can work for you as well.

The answer to this dilemma is to have an offset mortgage. Your savings offset the amount borrowed, and you only pay interest on the difference. Once you've saved enough to cover it, you pay no interest.

Why wouldn't you just buy the house outright at that point ?

Fiscal cushion. If an emergency comes up, rather than having no money to pay for it, you instead can cover it, and just pay a little extra each month going forward until you recover.

That said, I don't think they exist in the US.

Though something to keep in mind is that offset mortgages are not an option in all locales. The US for example doesn't have them.

Huh, I just assumed that the US would have any financial instrument that was available elsewhere. I guess the same US statutory intervention into the mortgage market, that makes long fixed-rate mortgages possible, also makes it difficult to have custom mortgage instruments?

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