Deciding Rationally -- or RealisticallyI don't usually advise clients which mortgage is best for them; that depends on their financial circumstances, time horizon, credit scores, etc.
However, if clients ask, I will serve as a backstop for advice they're getting elsewhere (like from their financial advisors). And I always encourage clients to get a couple, apples-to-apples quotes for whatever mortgage they're contemplating.
So, a client called yesterday to say that he was mulling refinancing options, and that his financial advisor recommended a 30 year mortgage over the 15 year.
His chief arguments?
First, you can always make extra and/or bigger payments on a 30 year mortgage -- making it more like a 15 year.
Second, statistics suggest that if you invest the difference between the (smaller) payment on a 30 year mortgage and a (bigger) 15 year mortgage payment, you'll come out ahead.
Practical Considerations
Both valid points, to be sure.
But just like economists always used to assume -- evidence to the contrary -- that people are rational actors, how many financial advisers consider what their clients are actually likely to do?
I know my client, who doesn't like routine or regimen -- and abhors following the Wall Street roller coaster (who does, outside of Wall Street?).
Given that, the odds that he would: a) make extra payments as circumstances allowed; and b) faithfully invest the extra cash flow freed up by a 30 year mortgage, are somewhere between next-to-none and none.
The clincher was his current age: 50.
The idea of being mortgage-free by 65 was a psychologically important goal for him.
And who could argue?
Once he told me that cash flow was no issue . . . I counseled him to go for the 15 year.
P.S.: the Solomonic solution? Go for a 20 year mortgage.
Cutting to the Bone
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