Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Dan: Hello Brian. It’s obvious to me that paying off your home as fast as possible is good in many ways. It gives you a sense of security knowing that you’ll always have a roof over your head. By paying off a mortgage in 15 years instead of 30, it means you’ll have more money to spend on other things much sooner. In fact, it seems to me that it makes great sense to take out a 15-year mortgage and make extra payments on top of that every month. If you make an extra mortgage payment every month, you could have the mortgage paid off in less than 8 years. I’m a professional structural engineer and the math for a 15-year mortgage seems clear to me. I’m about to buy my first house and I know that almost everyone goes with a 30-year mortgage. There must be something that I’m overlooking. Why don’t most people just choose a 15-year mortgage?
Answer: Hello Dan. Your engineering background is clearly showing. From a pure math point of view, you are correct. However, most people must consider many other variables when deciding how long to finance their homes. For most people, it is a social-economic balancing equation. They must make decisions between how much they can afford to spend on a home compared to how much they have remaining to spend on the lifestyle they want.
Dan, I have a decent engineering background from my time with Boeing Aircraft company, so I appreciate how you boil it down to the simplest equation possible. However, the number of variables that most people are considering is almost endless. Just a few key variables are family size, the type of car they want to drive, the neighborhood they want to live in, the number of hours they want to work, if they want an occasional vacation, and on and on and on…
The mortgage bankers have broken this down into the simplest social-economic equation possible. It’s the debt-to-income ratio. It factors in the endless list of variables to determine how large of a mortgage they qualify for. It turns out that the lowest common denominator tends to be a 30-year mortgage. But that does not mean there are not a lot of other options for paying off a mortgage faster.
First, let’s look at some of the basic math. …….