30 Year Mortgages Are For Suckers

I have a confession to make.  I live and work in New York City, but unless I get a major upgrade in pay, I don’t ever expect to own a home here.  Why?  Home prices are crazy here, but even worse than that, I think that 30 year mortgages are for suckers, and that’s the only way that I could ever be able to afford mortgage payments.  Before you get all upset with me for talking down to you about your own mortgage situation, hear me out.

I’m 32 years old now.  According to the website, Department of Numbers, the median home price in New York was $525,000 in October 2010.  That’s more than half a million dollars.  These days, in order to get a decent mortgage rate (unless it’s FHA ) and avoid private mortgage insurance you need to have about 20% to put down on the home.  Add to that closing costs and taxes and I’m looking at a minimum of probably $115,000 that I have to show up with.  If I were to live in a cardboard box and scam my way to eating every day and not pay one more dollar to any bills, avoid the IRS, and hitch-hike my way to work, I might be able to save that much in about 4 years.

Let’s assume that I’m willing to break a few laws and save that money.  I would be staring down the barrel of 37 by the time I qualified for the mortgage and stepped foot in

holy cow - 30 Year Mortgages Are For Suckers

Holy cow Batman. We’ve been robbed!

my home.  Let’s say that I could actually afford the payments on the 30 year mortgage.  According to the Bills.com mortgage calculator to the right, if I have a 30 year mortgage for $420,000 at a rate of 5.5% (I’m assuming that interest rates will go up a bit by the time I save my money), I’m looking at monthly payments of $2,834.71.  There is no way in hell that I could afford that, but let’s roll with it and assume that I can.  I’m now stuck shelling out over $1,000,000 by the time I have paid off my mortgage for an original loan amount of $420,000!   Holy cow Batman, I’ve been robbed.

But that’s not the only thing.  If I get my mortgage at 37 and I’m lucky enough to make all of my payments on time, I’ll be 67 by the time that I finish paying it off.  That’s convenient because the government says that someone my age can now retire at 67 and collect Social Security, if I live that long.  But wait, 37 is a decent age to purchase a house isn’t it?  It sure is.  What if you’re 45?  What about 50?

This is where I might lose some of you.  I think that getting a 30 year mortgage when you are 40 and above is the absolute most crazy thing that you can do.  I know that we are living longer but really, do you want to be 70 or older and still paying a mortgage?  What are the odds that you are still making the same income at 70 that you are at 40?  What are the odds that you don’t have any health problems that will suck up all of your money?  Do you have kids?  Those little beasts and their college costs are expensive, especially if they shop with the wallet of mom and dad.  Have a spouse?  What if you get divorced and have to split up your assets?  Those are just a couple of things that can happen in 30 years.  I can not assume that at 70 or older I will be able to pay that kind of a mortgage or that I won’t need some kind of mortgage help.

Now, before you send me hate mail, if you want a 30 year mortgage, by all means do what works for you.  If you decide to get a 30-year mortgage then reduce the length later or pre-pay the mortgage, then more power to you.  You do what works for you.  It’s my understanding that the vast majority of people with a 30 year mortgage will probably take the entire time to pay it off, if they ever do.

Am I just crazy?  Would you get a mortgage at 50?  Tell me if you think that I’m wrong.

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36 thoughts on “30 Year Mortgages Are For Suckers

  • How old we’d be after paying off a 30-year mortgage was definitely a consideration for us. When we retire, I don’t want a mortgage hanging over our heads during a time when our income will be vastly reduced.

    We did wind up buying a home in the NYC metro area two years ago (at the age of 30), but thankfully had the 20% down. At least we know we’ll have it paid off by 60, at the worst. And there’s no way in hell I plan to take any equity out of the house at any point.

  • While I wholeheartedly agree with you that 30+ year mortgages are for suckers. I’m one of those suckers! Hah, I actually have a 5year – 35 year amortized mortgage, signed when I was 22. I chose this purposely because I wanted to get the very lowest payment possible in the first few years. I knew that I would have some major expenses coming up after buying and wanted to keep my cash flow healthy. I signed the mortgage with the intention of prepaying and made sure that the fine print of the mortgage allowed prepayments, it did. I’m allowed to pre-pay up to 20% of the balance per calendar year and started making extra payments less than two years after buying the house. I’ve now made 7 prepayments and have already cut 14 months of the end of the mortgage. I will be resigning in a year or two and whatever balance is left at that point will be rolled into a shorter mortgage.

    Doing this is NOT for everyone, you need killer self restraint do do this. The thing is too that my mortgage isn’t very large… I only owe 50,000 at the moment. I would never do this with a 500,000 mortgage. In the end I’m still happy I went with the way I did things, if I have a bad month my payments are practically zilch and if I have a good month I can pay as much as I want. It gave me the freedom I needed starting out and now that I’m doing better I also have the freedom to get rid of the thing.

    I would never get a 30 year at age 50, those people are STUPID! You’re right, the vast majority never prepay, like I said it takes killer self restraint but it is possible. =)

    • See, you’re both young enough and you’re prepaying so I think that we’re on the same team. Plus, your mortgage is pretty decent. My BF has a cousin that is having his home built and he’s pushing 50. He’s counting on a 30 year mortgage. I just don’t get it!

  • I refinanced my home and got a 15 year mortgage at 56! I will have it paid off when I am 70. Does this blow your mind! I could have paid it off earlier, but it was a 5% mortgage. My payment is less than the appropriate rent for my home and my balance is very low. In addition, my tax bracket reduces the effect. I chose to invest my money elsewhere. Mortgages are not inherently bad! They are bad if you are over extended, high interest or if you are upside down.

    • By all means I don’t think that mortgages in and of themselves are bad. I just think that a mortgage that will outlive your life expectancy is ridiculous.

  • Bought the house in ’96. I was 34, Jane 40.
    We took the 30 year mortgage because Jane works and we were planning a child. So for the first 5 years we had a nanny. Once the nanny was gone and J2 in school all day, we started aggressively paying the mortgage down. It should be paid off in 2017, 21 years in all, the same year J2 will start college.
    We might have been able to make the payments of a 15 or 20 year term back then (96) but to what end? That difference in payment went to nanny, retirement, college savings.
    The one thing about the 30 year? You can always pay it offer sooner. You can always refinance if the rate drops.

    • The thing is though that most people don’t may it off sooner . It’s been proven that 97 percent of people don’t . Just think of all of the extra money that went to interest that you could have now .

  • At 50? No. Is it still a goal of mine? Yes. I want to own a home because my fiance and I want a large family. Renting and leasing a 4 bedroom+ home is going to be absolutely ridiculous when that time comes, and you may as well get a mortgage because you’ll be shelling out probably double that IF you can find accommodations. I’m with you, but stability is my thing.

  • Anything above 25 years is insane unless there is some strategy behind it but above 25 years just for the sake of buying a place is possibly making someone mortgage poor.

    I have accelerate our mortgage so much that after 5 years, I have only 10 years left on it. Thanks to the low rates though, I have 2.4% interest at the moment so I pay as much as I can on the principal.

  • I believe that 30 year mortgages are for suckers too! When I buy a house, I’m definitely going to get the 15 year loan, plus I’m going to pay it off even faster, like in 3 years! My wife and I have already come up with our plan to do so. We won’t have to sacrifice fun either. 🙂 Can’t wait!

    • You have a plan. I love it. I don’t think you should NEVER get a 30 year loan, but if you’re young and can plan why the heck not plan for the shortest term possible?

  • I think if one can avoid a 30-year mortgage, then by all means do so! Age is a factor when I think about owning property. I’m a couple of years away from 40 and still would like to own a house. However, living in an expensive state (the west coast version of NYC 😉 ) means I need to get creative, figure out a way to finance a home on a 15-year mortgage, or take a 30-year and pay if off sooner.

    • But at least you’re thinking about it and planning. If you get a 30-year mortgage at 40 and resolve to pay it off sooner then I think that’s a legitimate reason to get one.

  • We started with a 30 year mortgage, refinanced to a 15, and it will all be paid off when I am about 48.

    I can totally understand your hesitance to buy. Do you think you will stay in New York forever?

    I think people took out 30 year mortgages with no intention of actually staying 30 years. With housing prices rising rapidly for awhile there, people planned on selling after a few years and making a nice profit. However, things aren’t working out that way anymore and many people are stuck.

  • Sandy,

    I didn’t read all the comments, but I don’t get the hatred for the 30 year mortgage. Just because you have an amortization table that takes you to the YOUNG age of 67…doesn’t mean you have to let it run its course. In New York PrePayment penalties are illegal on mortgages (as long as you don’t pay it within a year), so with your skills you could pay it off in 20 or 10 or even 7 (well maybe not 7).

    I love the 30 because it gives me the freedom to use extra cash elsewhere…

    • I don’t HATE it and in fact I would have to get a 30 year mortgage with these prices. You know that I would diligently sock away extra cash at the mortgage but there are so many people that don’t and won’t. I don’t see the point in getting a 30 year mortgage at 50 with no plans to prepay and your mortgage will outlive you…unless you want to leave the home and mortgage to your kids.

      Plus the idea of paying all that interest gives me heart burn.

  • Hi Sandy, I’m not that fond of 30 year mortgages either. I have relatives who just got one in their 60s and they are retired! I urged them to get something they could afford outright, but they wanted a much bigger place. Now they are upside down on the house already, so they couldn’t sell if they wanted to. Hopefully expenses don’t rise too fast so they can keep up with the mortgage. I don’t know that any of their kids wants it either as there’s not much employment in the area.

    Personally, I think you are better off renting right now between prices falling and fraudulent behavior by banks that is largely unpunished. Maybe you will move someplace cheaper when you are a bit older. Moving from Boston to Dallas was great for my finances.

    • Wow, in their 60’s? I would rather rent at that point. That way they are not responsible for upkeep, etc. I guess they have to do what works for them. The only other places that I would really consider living are Maryland, Delaware and Florida and they’re not too cheap either.

  • I’m not inherently opposed to a 30 yr mortgage. What I am opposed to is buying more house than I need. We are currently in a small poor community outside a major city in Texas. The commute is terrible, but we are able to live “below” our means (we are paying off too much debt, other wise we’d be doing exceptionally well right now). We could move closer in and save money on gas and car upkeep, but then we’d pay the difference in housing, so we’d be in the same financial boat.

    • My argument is that if it takes you 30 years to pay off a home then chances are that you’re buying something more than you can afford. If you get a 30 year mortgage to get a great rate and then pay it off in 20 years then I applaud you for thinking strategically. Jennifer, you are doing what you have to do to take care of your debts. You are to be commended!

  • I’ve been a “sucker” – twice – with the 30-year mortgage. Both times things didn’t work out, and after running the numbers in both cases, I came out a loser. The realtors, escrow folks, appraisers, title agents, etc. didn’t lose at all, though: they made money.

    And therein lies the problem with buying a home. We’ve all been so brainwashed into believing it’s the “American Dream” that we’ll sacrifice our lives to attain it. You gotta hand it to the real estate biz – they market, and we suck it up like so many vacuums. Let’s hope the last couple of years of real estate bubble bursting brings some pricing – and purchasing – sanity to the whole homeownership game.

    Now my family rents. We have lawn care service, a nice pool and jacuzzi (actually two of each), ample parking, and make a phone call when anything breaks – and don’t have to pay for the repairs. Forget the mortgage – we had more stress and higher blood pressure when we had those. Now, life is pretty good.

    • ‘We’ve all been so brainwashed into believing it’s the “American Dream”’. I love that line. We shouldn’t be comfortable owing a large debt for such a long time. It’s 30 years! You can have a child at 29 and be a grandfather at 59 and would just be paying off the mortgage.

    • I am retired, 69 year old male. In good health and have been thru two divorces in my life. They cost me over $400,000 in child support and alimony. I have been renting since 1996. I am sick of it. Tired of buying this condo for the landlord that owns it.

      I have enough to buy a house out of my IRA. Have good SS and pension. Live with my son 42 years old. I am looking to buy a house that is within my budget, because prices are so low and interest that I can own for less than I am paying in rent. Once I get settled with my son and by the way have another 32 year old son that may go in with us, and buy a fixer upper for dirt cheap price, I will take a 203K loan out to fixit up to be able to live in it and then finish it off with the two sons. Will put it in an irrivocable trust for my children so the State cannot, after 5 years take it to pay my Nursing Home bill, if I ever have to go into one.

      Makes no sinse to continue paying the rest of my life for someone else to own the property I am living in, that being a non relative landlord.

      You have to pay to live, either rent or mortgage payment. If I continue the rest of my life to pay rent out at $1200.00 a month, I will have nothing to show for it or leave in value to my children. Who cares if it is a 30 year mortgage. Once I die, I could care less. It will then be the kids responsibility to sell the house and split it or live on in it and make the payments till done.

      Oh yes, makes more sense to get a 30 year and add an extra principle payment each month. You pay it off in 15 years and did not have to pay the higher interest rate to get a 15 year mortgage.

      Thats the way I see it.

  • We have a 30-year on a house we tried to sell and failed. Although I did not want to be a landlord, we had no choice but to rent it out, which I’m now thinking might have been a good thing. The monthly rent doesn’t quite cover the mortgage (plus insurance plus property tax), but it’s enough that we can manage, and we get to deduct the interest expense. If we can get renters most of the time, and if rent steadily increases (while the mortgage stays the same, and property tax doesn’t spike up too much), then the house will have paid for itself in 24 years (we lived there for 6), right around retirement age…and we can either sell the house for some cash, or keep renting for a steady monthly income stream. Or maybe even move back into it.

    If I had the option, I would like to be able to refinance it to a 15-year, but the house is so under that no one would refinance us at this point. But…if I add an extra few $$$ to each month’s mortgage payment, then I can get it paid off in about 15 years, so I am going to try to do that starting next year. Besides, with a pre-payment plan, if I don’t have the extra money one month, then I don’t have to pay that extra, so there is a little more flexibility and peace of mind that I’m not locked into a 15-year where I am definitely obligated to pay the extra that I refinanced to.

    I know the NY area is very expensive…a 30-year option for a home does not work for everyone. If half a million is not in the ballpark, how about buying something less expensive outside the city to rent out, while you yourself live in a rental in the city? When you are ready to retire, your house/apt/condo may have paid for itself, and you can retire into a place fully paid for (by renters). If I had money, I would love to invest in some very cheap foreclosures now to turn into rentals for an extra income source in retirement when the mortgages are paid off.

    Of course, landlording is not for everybody…there are a lot of considerations. But from the statistics I read, the nightmare stories really account for a small portion, 95%+ renters are relatively problem-free.

    • Hi Jenny

      I think that you made the absolutely best of a situation. There are people walking away from their homes because the house is underwater or because they could not sell it, but you’ve made what I think is a responsible choice of renting it out and deciding what you would like to do with it. I am incredibly horrified by the people walking away from their homes just because they can or because the house is underwater. Plus, they’ll be in for a shock when the tax man comes.

      I need to decent down payment for a home but I am committed to paying off ALL of my debts first. It makes no sense for me to buy a home and still have all the debt that I have. I think it’s the responsible way to go.

      Good luck with your home.

      • Well, if there are rental problems, I will post about it and gripe! 🙂 I think you are right, it makes sense to pay off all your debts first. And even after that, there are probably a lot of other things that are on your list as far as savings and investing go…retirement, education for children, etc. etc. before you start thinking real estate. I do hope that you get to your goal quickly and then some! Best of luck!

  • We have a 30 year mortgage. I wouldn’t consider us suckers. We got it because we were building a new home and had not listed or sold our first home. While carrying 2 mortgages, having a low payment was handy (though even still the payments were painful).

    Now that we only have one mortgage, we have we have lots of room in our budget. We have no debt. We bought a new car (well, slightly used – a 2011), and paid it off in 6 months. We have also increased our investments (both retirement and otherwise). We plan on replacing another car and then will start plowing away on the mortgage and will have it paid for before we are 40.

    Having a smaller forced payment makes it easier to adjust and prioritize your financial goals. Right now with our VRM at 2.25% — our goals are not to pay off the mortgage, but to invest in our future however we see fit.

  • I have a 30 year mortgage and 33, we just refinanced again. I don’t worry about it. Right now when bills are big and our cash flow is low we just pay what we can. In the future we’ll pay it off and probably be done around 55, it’s for a $600k home with 25% DP. As they say it’s life.

    The earlier years when you have less disposable income it’s better to have flexibility. Then as you get older and more income it’s easier to pay down a low fixed cost, besides the fact with inflation you are paying less than rent.

    We’ve lived here 7 years and I know our mortgage now is less than renting. And when we’ve refinanced we’ve done a smaller amount each time so it’s been nice.

  • If I die with a mortgage balance in a house my family loved with great memories can the bank come after me in heaven?

    Just curious.

  • I realize this post is 3 years old now, but there is a lot of questionable decision making and bad info being passed around. So, let’s examine the two scenarios more closely to determine the real cost and benefit of these two choices, using the numbers and assumptions given in the post wherever possible.

    Scenario 1 – you buy the house. $525k @5.5% for 30 years becomes a total expense of $1,020,495.60. At the end of the 30 years you own the house. To get a rough idea of what that home would be worth, let’s assume a very modest rate of inflation of 2.5% a year for the 30 years. This matches the general inflation rate of the economy over the long term and for housing as well (in general, not the past 10 years of insanity). The house is then worth $1,101,222.98. This is a conservative estimate.

    Scenario 2 – you rent for (I assume) no less than 2k a month in NYC for something that’s not decrepit. Obviously rents go up and factoring in the same rate of increase (2.5%) you would shell out $1,070,735.09 in rent over 30 years. “But wait!”, you say – “what about all that money I didn’t spend early on?! I saved every single penny of it and invested as retirement savings!” Fine let’s say you did that. I put this into Excel and ran the numbers assuming a 7% return. Taking that $2,834.71 as mentioned in the article – the first month you stuff 834.71 into your retirement account for 30 years. The next month the rent goes up to 2004.17 with the model (1/12 of 2.5% increase) and you save/invest 830.54 for 29 years and 11 months. After 13 years and 11 months you have a total (savings + capital gains) of $444,681.05 in your retirement account thanks to paying rent. But that’s when the music stops. Because right after this point, your rent begins to exceed the fixed payment of the mortgage. This increased cost (plus the missed capital gains) equate to a loss of $185,526.60 for the remaining 16 years. You still end up in the green, though, at the end – to the tune of $259,154.45.

    The final result? From a net worth perspective – with the house you shelled out $1.02 million over 30 years for a home valued at $1.1 million. But you own the home so that’s $1.1 million in clean net worth. With renting you own nothing at the end except you retirement savings. When you account for the remaining 16 years of capital gains your $445k turns into $1.313 million. “HA! See! I have an extra $212k”…not so fast. Yes, that’s true. But you still have to pay rent, while the person now owning the home does not. At this point in time using the model, rent would be around $4,200 a month, leaving you just over 4 years of rent before that $212k is consumed. All the while, the person owning the home is NOT shelling out this money toward the mortgage and can use it for savings or discretionary spending.

    It’s not as cut and dry as you think. Especially when mortgage rates and investment returns can vary significantly over time from the given assumptions.

    • It’s an older post but it still gets its views! I’m not wholly opposed to a 30 year mortgage, especially with rates as low as they have recently been. I’m opposed to using the 30 year mortgage as a crutch to buying more house than you can really afford.

  • We’ve created an economic nightmare in America. Costs are rising disproportionate to income. Houses are flipped as commodities to generate dividends. The question is, how does one take care of senior housing if we don’t buy? Rent will rise “forever” and senior income is likely to decline. At age 61 I’ve lost the thirty years one would spend paying of a mortgage. And I’ve had to rent a lot due to high housing costs. So now I’m starting over in a 15 year mortgage and need to slam it down asap.
    patrick.net is a source, once featured on Nightline, that covers housing and why it’s a bad investment.

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