I don't think it's quite that simple. Your analysis is correct from that specific point of view, but it is based on a number of assumptions:
1. A consistent sequence of returns. Higher average returns = more volatility. That 8% average return over 15 years would probably look something like 12% in year 1, 4% in year 2, 10% in year 3, -15% in year 4, 25% in year 5, etc. Of course, it could also be -25% in year 1. How well would you sleep at night if you took out a large mortgage, invested the proceeds in stocks, and then the market takes a dive? Sure, you'll probably recover it and then some over time -- but that would be quite a few chewed fingernails in the meantime.
I am not sure why the short term would matter in this case? If anything having the savings from your investment account, is better then having money tied up into a house you are not able to use. Even if you lost some in the first year, and an emergency came up you would have the money to use. Also, while there are always risks, the past 10 years, the S&P 500 has only had one year in the red. With the idea that you are always putting that money in when the market is up or down, you will take advantage of the market being down by buying at that time.
S&P 500 Index
2010 15.1%
2011 2.1%
2012 16%
2013 32.4%
2014 13.7%
2015 1.4%
2016 12%
2017 21.8%
2018 -4.4%
2019 31.5%
2020 15.76%
2. Investing the difference. It's one thing to choose the $700/mo 30yr payment over the $1,100/mo 15yr payment, and insist that you're going to invest that $400 difference every month. It's another to actually do it. In my experience, few people have that discipline. It's all too easy to find a dozen other uses for that $400 each month.
I am not sure what the point here is. Someone should not choose the smart option, because they would not be smart with the money? It is pretty easy to set up direct deposit payments from an employer into a separate investment account.
3. Committing to owning the mortgaged home for a number of years. (Granted, you shouldn't own a home in the first place if you aren't planning to stay there a while.) You've reduced your flexibility going forward. Following from point 1 above, let's say you take out a big mortgage ... then the market dips 10% (which is nothing in the long term) ... and that's when you/your spouse gets a dream job offer 500 miles away. If you take it, then you're probably looking at selling the home ... which means the mortgage must be paid off ... which means you have to sell your investments at the worst possible time (plus make up the loss from other assets). Or you could be forced into passing on the dream job because you're locked into your home.
I disagree. IMO you have increased your flexibility. For starters, if anything ever happened to your job, or you got tight on money, you have the flexibility to reduce your monthly spend by $400. Where if you sign up for a 15 year, the bank does not care what your situation is, they expect the payment every month. If anything, I would recommend people take the 30 year, and make a payment based on a 15 year. While you will pay a little more interest, the flexibility and security would be worth the risk.
I am not sure why you would have to sell off your investments if you sold your home. I would assume most people who are looking at a 15 year loan are putting down 10-20% on the house, or in the case of a refi have 20% equity in the house. Outside of the housing market collapsing, you should have no issues selling your home and keeping your investment. You are not paying that much more off in principle in the 1st 1-2 years of a 15 year loan vs 30 year loan.
I'm not disagreeing with you (we actually have done extremely well by using the equity in our home to buy additional real estate). My message is that it's OK to plan to overcome the odds -- just be sure you can survive if the odds overcome you.
I definitely understand what you are saying. Depending on where rates are, I would agree there are definitely times that choosing a 15 year mortgage is the way to go. I think the other thing you have to look at is what other debt do you have today. If that debt % is higher then the 30 year mortgage, take the 30 year vs the 15, and use the savings to pay down higher interest debt.
As I think about it, it does depend on the situation and lens of the buyer.
- If you have no other debt, healthy savings / strong 401k / investment account, then maybe a 15 year could be a smart choice if you are trying to limit additional exposure the the market. But also, if you are in the group, I would tend to think your appetite for risk would be a little higher and you would take the potential higher return.
- if you someone who has limited debt, some savings, not much invested in a 401k or investment accounts, I would totally do the 30 year, it opens up your cash flow to pay down other debts, and or, starting to invest in a 401k or open more investment accounts.
- If you someone who has higher debt, lives closer to pay check to pay check, you definitely would want to take the 30 year, and avoid the financial strain the additional $400 would cause month over month.