In college I hosted a radio show on Saturday mornings. The show host team included me (a real estate agent at the time), a mortgage broker, an insurance broker, and a financial advisor. On one of the shows we began to discuss mortgages and dug into the details of 15 versus 30-year adjustable rate versus fixed, interest only versus fully amortizing. As we discussed the 15 vs. 30-year the financial advisor advocated for a 15 year mortgage. I said that I would go with a 30-year 100% of the time. A long, contentious discussion ensued.

Why did I (and do I now, as much as ever) argue for a 30-year mortgage? What were her reasons for preferring a 15-year mortgage?

Let’s start with why she thought you should choose the 15-year:

1. Pay off debt faster (you would own your home sooner).

2. Lower interest rate and overall interest (can’t argue with that).

3. Faster equity growth (more of your payment goes towards principal).

I think all of these are valid points. Before I make my case for the 30-year, let me begin by saying that I don’t believe that buying a house is an investment. Owning a home costs more than renting everywhere in the country. I outline this in my article, “Buying a Decade Ago in a Hot Market“.

Now that we have it established that I believe that buying a home should be viewed as an emotional purchase rather than an investment, let’s walk through the financial reasons of why you’d prefer a 30-year mortgage over a 15-year and why you might NEVER want to pay your mortgage off!

1. Lower payments: If you take a $400,000 mortgage at 4% over 30 years vs. 15 years your payment on the 30 year would be $1,909.66 vs. $2,958.75. That’s a difference of more than $1,000 per month or 55%!

2. Your equity earns 0%: If you own a $400,000 house and it goes up 10% over a few years, you made 10%. If you had a mortgage of $320,000 (you put 20% down or $40,000) you made a 100% return or 10x more! In either scenario you made the same $40,000. If you have equity in your home it earns 0%. You can argue it makes the amount of interest that you are paying. But at today’s rates of ~3%, if you can’t earn more than that, than you need to stop reading since you haven’t been paying attention to anything I’ve said, published or taught!

3. You don’t actually own your home: The bank can foreclose until you have it paid off. The government can seize your property. You can have a lien put on your property. You can lose it in a lawsuit. It’s a myth that owning your home happens without a mortgage.

Given the above, my argument is that you’d be better off taking that extra $1,000 per month and investing it. Let’s say you invested it at 15% over those 15 years. You’d have almost $670,000. That’s enough to pay off the remaining $258,171.20 on your mortgage AND have enough left over to buy another $400,000 house!

But there’s an even bigger point. Let’s say you get into financial trouble 5 years after you bought your house. If you’d been investing that extra $1,000 you’d have more than $88,000. You could make payments for 46 months on the house.

You’re ALWAYS better off having cash in the bank versus equity in your home. I would argue that instead of investing it, you could be more conservative and sink that extra money into a high cash-value life insurance policy and have the best of both worlds. You could then have a policy that would cover your family and pay off your house if something happened to you or just have cash in the future if you needed it to pay your bills and have the flexibility to invest it instead.

So what do you think? 15-year or 30-year mortgage?