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Comment by maxerickson | Hacker News Reader

This makes me wonder if 30 year mortgages even end up making housing more affordable.

(I guess it would be a prisoners dilemma situation, where individuals benefit by taking them out but the overall situation is made worse)

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>> This makes me wonder if 30 year mortgages even end up making housing more affordable.

Everything the government does to subsidize home-ownership ends up getting capitalized into home prices and so acts as a naked giveaway to incumbent homeowners and either does nothing for or actively hurts non-incumbents. Interventions breed more interventions as the prior ones no longer provide the above general inflation price growth that homeowners demand from their politicians. The 30 year low fixed rate mortgage with no prepayment penalty is just one among many such interventions.

How is a 30 year loan on what is usually the largest purchase of one's life a government intervention? Plenty of banks offer these loans with no backing, support, or encouragement from the government.

And what do prepayment penalties have to do with anything? As a consumer I will absolutely not sign any loan that comes with a prepayment penalty. It would be idiotic to.

The government subsidizes housing through:

- low interest rates (reduces interest payments)

- tax deductions (mortgage interest payments, etc).

Low interest rates, in particular, caused prices to rise dramatically, putting a lot of people in a lot of debt and making house ownership out of reach for many others.

30 year mortgages make the monthly payment smaller, which reduces the monthly cost of housing, BUT you end up paying more interest since you aren't paying principal off as fast which means the total long term cost of the asset is more due to compound interest. A 15yr mortgage takes more out per month, but it's cheaper overall since you're paying off principal faster and interesting isn't accruing or compounding as quickly.

I think it's possible to "game" the system by getting a 30yr mortgage but set it up so any extra payments above and beyond the minimum amount get applied against principal - in effect reducing the amount of money they can leverage interest against. Then you make as many extra payments as possible over the life of the mortgage and pay it off ASAP.

I don't think this works, because 30 year mortgages have a higher rate of interest than 15 year mortgages do.

Perhaps, I haven't fully explored that option and it would make sense since the investor's money will be tied up longer. However, paying down principal quickly reduces total cost of the asset since there's less $$ for the interest to grow/compound against.

Pedantically true, but in practice with interest rates what they are there's only a few thousand difference between in the long term a 4% 30-year that is paid off in 15 years, and an actual 15-year at 3%. (Source; I'm doing this with mine, and ran the numbers)

Yeah, I'm doing this. The nice thing about the 30 year but pay extra every month plan is that if you get slammed by some major unexpected expense you can dial down your mortgage payments until your bank account catches back up. It gives you a buffer so you don't make yourself inadvertently house poor.

The interest rate difference was like 0.15%.

Paying a 30 year note off in 15 years is only marginally more expensive than having the 15 year note to begin with, with the added benefit that if something should happen to your cash flow you have a much lower minimum payment you can fall back to.

Using bankrate.com's advertised rates and mortgage calculators for my zip code and $300k mortgage (which is very nice with some land in my area since with 20% down that is about a $375k house):

  - 30 year fixed rate (lowest):  3.500%
  - 30 year fixed payment: $1,347/mo
  - 30 year fixed total interest paid: $184,968.26

  - 15 year fixed rate (lowest):  2.750%
  - 15 year fixed payment: $2,036/mo
  - 15 year fixed total interest paid: $ 66,455.68

If you make the 15 year payment on the 30 year note you will pay the loan of 14 years early and save $92,302.71 in interest. If you make double payments based on the 30 year note you will pay the loan off in just over 11 years and pay less interest than on the 15 year note with minimum payments.

People scale the principle of the mortgage to the monthly payment they can manage though. So I'm wondering if the bigger effect is upward pressure on home prices. Which probably doesn't make housing more affordable.

Anybody staying in a home would be insulated from the price effect, but anybody buying a first home or moving would feel it.

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