Mortgage Debate: 15 vs. 20 vs. 30 year loan

One of the most frustrating part of the mortgage process has been the sheer amount of paperwork I am bombarded with. Certifications, contracts, slew of documents from the mortgage lender… it never ends.

I finally took some time to comb through the mortgage documents with a fine tooth comb. I was surprised to find that my mortgage was set as a 20 yr loan, which I did not expect since the standard is 30 yr or a 15 yr.  It got me thinking and I started to request the different interest rates and monthly payments from the mortgage lender.

I found that the 20 and 30 year loans have the same interest rate but the 15 yr loan will drop the interest rate by 0.5%, increasing my loan only by <$200 than the 20 year loan. Which loan makes more sense? Doing the math and learning what the interest rates paid would be, it seemed like 15 year loan makes most sense. But I have been feeling the extra stress lately, realizing that my emergency fund is nonexistent thanks to the new condo purchase.

I chose the 30 year loan. This article by Len Penzo made me realize that since my biggest concern is the lack of emergency fund, having the lowest payment allows me to build up my emergency fund much faster (we are talking ~$500/month). Although I am selecting the lowest monthly payments available, I still have the option to make over and/or extra payments.

Other major consideration was our intention of the condo. Our goal was always to live in the space for a few years, take the time to make the upgrades, and then rent it out when we finally move to a single family home in the suburbs. We know that the rental prices of similar units in the area go for about $1700 which is less than the monthly payment for the 30 year loan, about the same as the 20 year loan, and a few hundred dollars less than the 15 year loan. If the economy continues to stall in 2 – 3 years, which I think it might, we may try to refinance then when the upgrades should have improved the appraisal value and the emergency fund should be built up.

I find that when it comes to most of my money debate, I am risk averse and will almost always choose to beef up my emergency fund. Now only if I can put emergency fund over silly purchases…



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