Owning house for 3 years. 15 or 30 year mortgage?

Question

I'm about to move to a new area and will be living there for 3-4 years and then moving to another area (I'm in the military and move every 3-4 years) and I'm thinking that buying a house there is my best bet. I'll probably be selling it when I leave so I only need a mortgage until I sell it and I'll just pay off whatever's left. (I know what you're thinking, it would probably be easier to just rent. I'm going to lose about $65,000 in 3 years to rent a decent place there.)

In the end a 30 year will be about $1100 a month and a 15 year will be about $1700.

It looks like after 3 years (probably when I sell it) this is what I'll be left with, it's the same for both 15 and 30 year mortgage: $25,500 in interest, $230K owed 36 monthly payments: 30 year - $39,600 15 year - $61,200

It looks like I'll save about $21,000 in the end with a 30 year mortgage. Is there something that I'm missing? Is there any reason for me to do a 15 year?

There are transaction fees to consider as well. When you sell your house you typically have to pay 5% of the sale price to the real estate agents. — minou, May 09 '16 at 14:05
I would not recommend buying for less than 5 years, due to the associated costs. Some military folks solve this by keeping the house as rental property others by renting from that same pool. Having said that: a mortgage builds almost no equity in the first few years, and that's worse for a longer mortgage. — keshlam, May 09 '16 at 14:10
If you qualify for a va mortgage, you can get a conventional or hybrid-loan which would be perfect for this particular situation at a far lower rate then is available to civilians. A 5/1 hybrid would stay stable at something like 2.25% (last June it was as low as 1.75% for VA's) currently for 2 years longer then you plan to stay in this house. (source, I build mortgage applications for a VA loan company). If it sounds interesting talk to someone who deals solely with VA loans, Hybrid loans for civi's right now aren't great but for VA's they have much stronger protections and lower rates. — Ryan, May 09 '16 at 19:05
If I were you I would consider buying a house with a 30 year loan and save the difference (or split the 30 year loan,with a revolving credit loan and put the difference into that, which would be more efficient). In 3-4 years time rent out your house (use a rental manager if you need to) and star tenting in you new location. If all goes well you should then be able to look at buying a new house in your new location, with the saved difference/equity. Rinse and repeat. However don't over extend your self, and talk to an accountant to set up a trust etc to isolate your risk etc — DarcyThomas, May 09 '16 at 21:28
one note to consider: What happens if it takes a while to sell at the end - with a mortgage you're on the hook to pay until it sells, even though you now have living costs somewhere else. With a 30 year mortgage those payments aren't as bad. So an option would be a 30 year mortgage but make larger payments to finish in 15 years. You'd be stuck with a higher interest rate, but more flexibility. — Joel, May 10 '16 at 02:44
I have a Bachelor's degree in Real Estate Finance, FWIW, and the rule of thumb is not to buy if you're going to hold the property less than 5 years. More than 5 years, buying looks better. A lot of military people keep their homes and rent them out when they leave, and if you do, you have legitimate business expenses to travel where you may have put down roots. — Aaron Hall, May 10 '16 at 20:23
@JonathanReez, yes, you can, but very few people do this and you still have transaction costs for other fees and in the personal time you will have to spend selling your house. — minou, May 11 '16 at 12:07

score 57 · Answer 1 · edited Apr 13 '17 at 12:25

57

You said that you figured the interest you will have paid over the first 3 years will be the same with the 15- and the 30-year mortgages. That is not quite accurate.

Let's look at the numbers.

From the monthly payment numbers you gave, it looks like you were figuring on a 4.0% rate. That seems quite high, as the current national average mortgage rates are currently 2.86% for a 15-year fixed rate and 3.61% for a 30-year fixed rate. Since you are planning on selling in 3 years, you could potentially get an even better rate by getting an adjustable rate mortgage; the current national average for a 5-year adjustable rate is 2.80%. However, rates can vary locally and with your credit situation, so I'll assume that 4.0% is the best rate you can get for either a 15-year or 30-year mortgage. (If you can get a lower rate, you could save quite a bit, even in only 3 years.)

For a $230K, 15-year mortgage at 4.0%, over the next three years, here is what you would pay:

Monthly payment: $1,701.28 ($61,246.08 over 36 months)
Total interest paid in first 36 months: $25,561.08
Remaining principal after first 36 months: $194,314.92
Equity in house, assuming no change in value: $35,685.08

If, instead, you went with the 30-year mortgage at 4.0%, here is what you are looking at:

Monthly payment: $1098.06 ($39,530.16 over 36 months)
Total interest paid in first 36 months: $26,877.06
Remaining principal after first 36 months: $217,347.07
Equity in house, assuming no change in value: $12,652.93

So the difference in interest paid between the two options in the first three years is a little over $1,300.

Because of the larger payment, the difference in equity after 3 years is much greater: over $23,000. The reason this is important is that, with only 3 years between the time you buy the house and the time you sell it, there is no guarantee that the value of the house will go up in that time. The value could just as easily be less three years from now. With the 30-year mortgage, you are only putting in $13k toward your principal, and if the value of the home drops, you could find yourself upside-down in the mortgage. With the 15-year mortgage, you would be putting in over $35k toward your principal, and could withstand a much larger drop in value before you find yourself underwater.

Having said that, the difference in equity between the 15- and 30-year mortgages is offset by the amount you save in payment each month. Therefore, if you hold on to your extra $600 per month you don't have to pay with the 30-year, your difference between the two options is only the $1,300 interest. If you spend the $600 per month, you could find yourself in trouble.

As for your rental option, there are a few things missing from your comparison:

If you buy, you will need to pay property tax. As a renter, the property taxes are included in the rent.
If you buy, you will need to pay homeowners insurance. As a renter, you only need much less-expensive renters insurance.
If you buy, you are at risk for a downturn in the housing market when you want to sell. As a renter, you simply walk away after 3 years.
If you buy, you are on the hook for any maintenance costs that come up, from a leaky faucet to a leaky roof. As a renter, the landlord is responsible.
Selling a house every 3 years generally means that you will be paying various closing costs (realtor commission, appraisal, title insurance, etc.) every 3 years. This will eat away at any equity you would be gaining in the mortgage. If you are renting, this is not a concern.

edited Apr 13 '17 at 12:25

Community

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answered May 09 '16 at 14:15

Ben Miller

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+1. I saw two problems with the original question: the two loans couldn't have the same interest payment and the same principal payment yet one be for 15 years and one be for 30 years; the other problem was that property tax wasn't being considered. – mhoran_psprep May 09 '16 at 16:08
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Realtor fees when you go to sell. That's going to eat away at your equity quickly.

Arielle Lewis

May 09 '16 at 16:13

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If we assume a property tax to be roughly 0.5% of the value of the house, then we're looking at paying about $3,500 in taxes. Homeowners insurance I'd expect to be between $70-80 a month, while renter's is probably around $20, so $50 a month for 36 months is another $1,800. The 6% commission is roughly $13,800. HSH estimates 1% maintenance per year, for about $6,900. These costs add up to $26,000 to make $38,500 in equity, so a $12,500 profit. (continued) – corsiKa May 09 '16 at 17:49

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You easily could get talked down on selling the house or the market could drop just a tiny fraction and you'll be out money. Plus, when you get sent somewhere else, you might end up having to sell very quickly - what if there aren't many buyers coming into the market, but there are a lot of sellers transferring out with you? This seems like a huge risk for a $12,500 profit over 3 years!! – corsiKa May 09 '16 at 17:50

Whether you rent or buy, property taxes are still property taxes and you will pay them. Landlords don't rent properties at cost, they rent them to have some sort of income stream, and that can include paying for a property manager, a slush fund for repairs, and their margin. That's the one problem I have with this SE's insistence that renting is often so much better then buying. Renting in the same complex I own a property in would cost my wife and I $3-400 more a month then all or our monthly home expenses come to. So in the last 3 years instead of being $50k up in equity, we'd be (cont) – Ryan May 09 '16 at 18:51

(cont.) out $12k more in monthly expenses with nothing to show for it. I'm not saying renting is a horrible option I'm just saying that if you do your research, buying - even for a short period like 3 years - can be a significantly better investment of your money. As an aside I've owned my property for just over 3 years now and am now looking to move and after fees get around $41-42k out of it. – Ryan May 09 '16 at 18:56

@ryan Yes, everyone pays property taxes. However, when you are renting, the property taxes are essentially included in your rent (the property owner is ultimately responsible for them). Therefore, when you are comparing buying vs. renting, you need to consider property taxes. If you don't, you won't get an accurate comparison. In my answer, the section before the line contains the pros of buying (equity), and the section after the line has the pros of renting (risk). Both need to be considered. – Ben Miller May 09 '16 at 19:04

@BenMiller I guess what I'm trying to get at is that in this answer and in many other answers the way it's written makes it sound like property taxes are a negative of buying that doesn't apply to renting. Which is of course inaccurate. It's a monthly expense for both buyers and renters. So I feel like 1, and 4 could be re-written, and 5 could include some of the alternatives, I mean you don't actually have to pay the agents each 3% you can negotiate with them, and while for him for sale by owner probably is a bad option, it's still a possibility for others to avoid the 6%. – Ryan May 09 '16 at 19:13

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@Ryan the taxes don't apply because OP has already researched renting in the area and found that it costs $65k to rent for 3 years. Whatever the taxes are on that property he's found to rent are already factored out. Also, I rent out my second home and it is basically at cost of mortgage, taxes, and a small repairs fund. The "margin" is that I have someone else paying down my mortgage which doesn't help me much day to day but does increase my credit line and will be real nice when I sell that property or leave it to my kids. I know some folks who rent out at a small loss due to down markets. – corsiKa May 09 '16 at 20:22

Hang on a minute, for the interest rates you've compared a 30-year fix against a 15-year fix. Obviously the 30-year fix is more expensive. But the questioner doesn't need a 30-year fix, and is only asking about a 30-year term. I guess this varies between countries, but are 30-year terms with 3- or 5-year fixes (floating thereafter unless you refinance) not available where you are (or, more to the point, where the questioner is)? – Steve Jessop May 09 '16 at 22:01

@SteveJessop Good point. If the OP is going to sell his house in 3 years, he doesn't need the rate fixed for even 15 years; an adjustable rate mortgage would be fine. I'll have to adjust this answer a little bit. – Ben Miller May 09 '16 at 22:53

I've changed the numbers in this answer. As @SteveJessop mentioned, the OP could get an ARM, which would probably equalize the rate between the 15-year and 30-year option. Also, we can only guess what rates are available to the OP, but using the OP's numbers, it looks like he's using 4.0% as a rate, so perhaps that's what's available in his situation. Ultimately, the result is similar: If the OP goes with the 30-year and does not save the difference, his projected equity is likely too low to come out ahead after transaction costs. Even with the 15-year, it's questionable. – Ben Miller May 10 '16 at 03:56

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Don't forget about closing costs. Mortgage bank fee, attorney fees, appraisal fees, home inspection, title insurance, title search, mortgage tax, recording fees, and transfer taxes. Where I am currently buying, the buyer typically pays 2-3% of purchase price, and the seller typically pays 1-2% (not counting the broker commission). – Kris Harper May 10 '16 at 13:54

@KrisHarper Indeed. I've added that to #5. Thanks! – Ben Miller May 10 '16 at 13:58

There's a tricky relation between interest rates and the expected house price development. As interest rates go up, house prices come down because potential buyers have a pretty fixed monthly budget. Assume that the rate goes up, an adjustable rate may force you to sell at a loss in 3 years time because you can't afford a higher mortgage rate. With a fixed rate, you can cash in on lowered interest rates by selling your house at a profit. But if interest rates would go up, there would be more potential renters. – MSalters May 10 '16 at 14:11

score 8 · Answer 2 · answered May 09 '16 at 22:06

As others have noted, you are failing to consider transaction costs.

In my part of the country, realtors typically charge 6 to 7% commission on a sale. Assuming Ben Miller's numbers are accurate -- not saying I doubt him, just that I'm not going to bother doing the calculation if he's already done it -- with a 30-year mortgage, your equity is about $13,500. The realtor's commission on the sale will be about 6% of $230,000 = $13,800. Your entire equity is wiped out at time of sale.

Plus when you buy you typically have to pay loan origination fees, appraisal fees, and various legal fees, typically around $2,000.

And bear in mind, in real life you do not decide to sell a house and the next day count your money. It often takes months to sell a house. Some people find they can't sell for anything like what they paid and have to take a substantial loss. If you live in a house for 20 years and then lose $10,000 on the sale, you might well say, hey, that comes to less than $50 per month that I lived there, no big deal. But if you only lived there 3 years, it's a substantial percentage of your cost. If it takes many months to sell, that's months that you're paying two mortgages. Plus if there's no one living in the house, you have to worry about vandalism, damage from severe weather, etc.

I'd be very cautious about buying if I knew I was going to move away in 3 years.

Here, we sometimes see commissions as like as 3% -- but that's still a significant chunk of change to add to the other closing costs. — keshlam, May 10 '16 at 05:11
Here (Ohio and Michigan), the buyer's realtor and the seller's realtor split the commission, so they each get 3%. Of course realtor's love to be handling both sides so they get the full commission. If where you live the total commission is only 3% ... cool. Well, it may also have a lot to do with housing prices. Around here a typical house costs maybe $100,000. Parts of the country, that's the price for a cardboard box under a bridge. Where housing costs are higher, realtors may accept a lower percentage commission. — Jay, May 10 '16 at 06:47

jkuz · Answer 3 · 2016-05-09T14:36:43.987

The 15 year mortgage will be less expensive. Here is why: The additional cost of the 15 year mortgage is going primarily to equity in the house. This means that when you sell, you will (ideally) get this money back. You are also paying less interest with the 15 year mortgage.

However, look at your numbers! The cash outlay of a 15 year mortgage is about the same as renting.

The 30 year has another problem. You are putting almost no money towards equity in the house in the first 3 years. This means that you are exposing yourself to the risk of a market slump. You may not be able to sell you house for enough to pay the loan balance in 3 years. This is called being upside-down on your mortgage. Since you will be required to move, that would impose a financial burden - forcing you to rent the property or sell for a loss. Consider if you would want to be a long-distance landlord if you buy.

Finally, don't neglect adding in the cost of taxes, insurance, closing/selling costs, and maintenance. These expenses will add significant cost, and may make a rental look like the best choice.

It still may be in your best interest to buy based on the market and your individual situation, but make sure you are comparing apples to apples.

Paulb · Answer 4 · 2016-05-11T10:51:43.880

Retired military here. 4 house deals under my belt, so I speak from experience (3 good ones, one bad one). Here are the three variables:

transaction costs (I was able to minimize these twice by purchasing new construction)
the benefit of mortgage tax deductions (if you are US)
whether the house will appreciate or depreciate in value (rising or falling market)

The last bullet (market value) benefited me once, and hurt me real bad once.

For the short term buyer, here's your simple flow chart:

if I expect housing prices to appreciably go up, I'll purchase
if I expect house prices to go side ways or decline, I'll rent

Regarding 30 or 15 year mortgage: go with the 30, and make extra payments. It gives you the best of both worlds.

Update: If in US, I suggest a VA backed mortgage. They are more economical. Also if you run into problems they are easier to work with.

score 0 · Answer 5 · answered May 10 '16 at 07:27

Lets say you put 5% down hold for 3 years and evaluate 15 vs 30 year mortgage. The 15 year will put more money in your pocket at todays dollar value, but if you factor in opportunity cost of reinvesting the difference (30 yr pymnt/month - 15 yr pymnt/month) x (12*3) and put that amount into a fixed financial vehicle, you may be able to work out a better situation. OR invest the money into say some small cap index fund and buy a double short option of that index expiring in 1+ years to hedge against your investment. This is arguable to investment into property so if you buy yourself a house and take that difference again but add a bathroom, garage etc. depending where you live, the sale price might beat the previous two suggestions. In short, how much are you willing to risk/how much time up front analyzing options? AND are you more of a handyman and more comfortable going that road? AND can you afford to sit on that cash for 3 years if something unexpected happens?

Owning house for 3 years. 15 or 30 year mortgage?

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