Borrowers grow more wealth with 15-year mortgage

Future-Proof: Navigate Threats, Seize Opportunities at ICNY 2018 | Jan 22-26 at the Marriott Marquis, Times Square, New York

Q: I can afford the larger payment on a 15-year fixed-rate mortgage, but I plan to take a 30-year anyway, invest the difference in the cash flow, and end up ahead. Is there a flaw in this plan? A: Yes. The flaw is that the investment return required to make the plan work is much too large. You will almost certainly end up poorer than if you take the 15-year mortgage. If 15-year and 30-year loans carried the same rate, say 6 percent--and you earned 6 percent by investing the difference in monthly payments--you would end up in the same place. Your investment return would have to exceed 6 percent to come out ahead on the 30-year loan. Assuming 15-year loans carry a lower rate, which is almost always the case, the required return to break even rises. For example, assume the 30-year rate is 6 percent and the 15-year rate is 5.625 percent, a typical rate difference of 0.375 percent. The break-even rate would then be 7 percent over 15 years, 7.86 percent over 10 years, and 10.49 percent over...