Is this comparison of a 15-year vs. a 30-year mortgage reasonable?
"I think your analysis is very clear, it's a sensible approach, and the numbers sound about right to me. A few other things you might want to think about: Tax In some jurisdictions you can deduct mortgage interest against your income tax. I see from your profile that you're in Texas, but I don't know the exact situation there and I think it's better to keep this answer general anyway. If that's the case for you, then you should re-run your numbers taking that into account. You may also be able to make your investments tax-advantaged, for example if you save them in a retirement account. You'll need to apply the appropriate limits for your specific situation and take an educated guess as to how that might change over the next 30 years. Liquidity The money you're not spending on your mortgage is money that's available to you for other spending or emergencies - i.e. even though your default assumption is to invest it and that's a sensible way to compare with the mortgage, you might still place some extra value on having more free access to it. Overpayments Would you have the option to pay extra on the mortgage? That's another way of ""investing"" your money that gets you a guaranteed return of the mortgage rate. You might want to consider if you'd want to send some of your excess money that way."
The best way to look at it is this: I would suspect most people would say no.  Most people do not have the time, skill, or risk tolerance to be able to leverage capital as large as the value of their own home. Remember that a 15-year fixed has a slightly lower interest rate than a 30-year fixed (difference of 0.5–1%).  If you won't have the discipline to invest every cent left in your pocket, then you are better off with the 15-year and the lower rate. It seems like you are asking two different questions, one is, how do I know if I can afford a house? The other is, how do I know what type of mortage to get? The first question is fairly simple to answer, there's plenty of calculators out there that will tell you what you can afford, but rule of thumb is 30% of income can goto housing. Now what type of mortgage to get can be much more confusing, because the mortgage industry makes money off of these confusing products. The best thing to do in my opionion in situations like this is to keep it simple. You need to be careful buying a house. So much money is changing hands and there are so many parasites involved in the transaction I would be extremely wary of anybody who is going to tell you what mortgage to get. I've never heard of a fee only independent mortgage broker, and if I found one that claimed to be I wouldn't believe him. I would just ignore all the exotic non-conforming products and just answer one simple question. Are you the type of person that buys an insurance policy or that likes to self insure? If you like insurance, get a 30 year fixed mortgage. If you like to self insure, get a 7 year ARM. The average lenghth someone owns a house is 7 years, plus in 7 years time, it might not adjust up, and even if it does, you can just accelerate your payments and pay it off quickly (this is the self insurance part of it). If you're like me, I'm willing to pay an extra .5% for the 30 year so that my payment never changes and I'm never forced to move (which is admitedly extremely unlikely, but I like the safety). I don't like 15 year term loans because rates are so low, you can get way better returns in the stock market right now, so why pay off sooner then you need to. Heck, if I had a paid off house right now I'd refi into a 30 year and invest the money. In summary, pick 30 year or ARM, then just shop around to find the lowest rate (which is extremely easy). "Consider the ""opportunity cost"" of the extra repayment on a 15 year loan.  If you owe money at 30% p.a. and money at 4% p.a. then it is a no brainer that the 30% loan gets paid down first. Consider too that if the mortgage is not tax deductable and you pay income tax, that you do not pay tax on money you ""save"". (i.e. in the extreme $1 saved is $2 earned). Forward thinking is key, if you are paying for someone's college now, then you would want to pay out of an education plan for which contributions are tax deductable, money in, money out. In my country most mortgages, be they 15,25,30 years tend to last 6-8 years for the lender. People move or flip or re-finance.  I would take the 15 for the interest rate but only if I could sustain the payments without hardship. Maybe a more modest home ?   If you cannot afford the higher repayments you are probably sailing a bit close to the wind anyway.   Another thing to consider is that tax benefits can be altered with the stroke of a pen, but you may still have to meet repayments." I'll compare it to a situation that is different, but will involve the same cash flow.  Imagine the buyer agrees that you buy only 70% of the house right now, and the remaining 30% in 7 years time.  It would be obviously fair to pay 70% of today's value today, pay 30% of a reasonable rent for 7 years (because 30% of the house isn't owned by you), then pay 30% of the value that the house has in 7 years time. 30% of the value in 7 years is the same as 30% of the value today, plus 30% of whatever the house gained in value.  Instead you pay 70% of today's value, you pay no rent for the 30% that you don't own, then in 7 years time you pay 30% of today's value, plus 50% of whatever the house gained in value. So you are basically exchanging 30% of seven years rent, plus interest, for 20% of the gain in value over 7 years. Which might be zero. Or might be very little. Or a lot, in which case you are still better off.   Obviously you need to set up a bullet proof contract. A lawyer will also tell you what to put into the contract in case the house burns down and can't be rebuilt, or you add an extension to the home which increases the value.  And keep in mind that this is a good deal if the house doesn't increase in value, but if the house increases in value a lot, you benefit anyway. A paradoxical situation, where the worse the deal turns out to be after 7 years, the better the result for you. In addition, the relative carries the risk of non-payment, which the bank obviously is not willing to do. Here is something that should help your decision: Currently you are 57, suppose that means that you will still work for 10 years, and then be retired for another 20 before you sell the house. Your retirement account is nearly flat, so you will have to support yourself with your own income.  If there are no surprises, you and your wife could expect to earn 1.16 million over the  next 10 years. There will be interest on your savings, but also inflation, so to simplify I will ignore both. That means you will have an average of 40k (gross?) per year available to live from during the next 30 years. If you get a mortgage where you only pay nett 3% interest (no payback of the loan), that would cost you 6k per year on interest (based on 350k-150k), if you also want to pay back the 200k difference within 30 years, it would totally be close to 13k in annual interest+payback. Now consider whether you would rather live on 40k per year in your current place, or on a lower amount in a bigger place. Personally I would not choose to make a 200k investment at this point, perhaps after trying to live on a budget for a while. (This has the additional benefit that you can even build some cash reserve before buying anything.) There are banks that will do 5-year fixed. Alternatively, if you pay off a 15-year mortgage as if it were a five-year fixed, with the extra money going to pay down principal, the cost isn't very different and you have more safety buffer. Talk to banks about options, or find a mortgage broker who'd be willing to research this for you. Just to point out an alternative: refinancing at lower rate but without shortening the duration would lower your payments; investing the difference, even quite conservatively, is likely to produce more income than the loan would be costing you at today's rates. This is arguably the safest leveraged investment you'll ever have the opportunity to make. (I compromised: I cut my term from 20 years to 15ish, lowered the interest rate to 3.5ish, and am continuing to let the loaned money sit in my investments and grow.) "If I were you, I would rent.  Wait to buy a home.  Here is why: When you say that renting is equal in cost to a 30-year mortgage, you are failing to consider several aspects.  See this recent answer for a list of things that need to be considered when comparing buying and renting. You have no down payment.  Between the two of you, you have $14,000, but this money is needed for both your emergency fund and your fiancée's schooling. In your words: ""we can’t reeaallllly afford a home.""  A home is a big financial commitment.  If you buy a home before you are financially ready, it will be continuous trouble.   If you need a cosigner, you aren't ready to buy a home.  I would absolutely advise whoever you are thinking about cosigning for you not to do so.  It puts them legally on the hook for a house that you can't yet afford. You aren't married yet.  You should never buy something as big as a home with someone you aren't married to; there are just too many things that can go wrong.  (See comments for more explanation.)  Wait until you are married before you buy. Your income is low right now.  And that is okay for now; you've been able to avoid the credit card debt that so many people fall into. However, you do have student loans to pay, and taking on a huge new debt right now would be potentially disastrous for you.  Your family income will eventually increase when your fiancée gets her degree and gets a job, and at that time, you will be in a much better situation to consider buying a house. You need to move ""ASAP."" Buying a house when you are in a hurry is a generally a bad idea. When you look for a home, you need to take some time looking so you aren't rushed into a bad deal that you will regret. Even if you decide you want to buy, you should first find a place to rent; then you can take your time finding the right house.  To answer your question about escrow: When you own a house, two of the required expenses that you will have besides the mortgage payment are property taxes and homeowner's insurance.  These are large payments that are only due once a year.  The bank holding the mortgage wants to make sure that they get paid.  So to help you budget for these expenses and to ensure that these expenses are paid, the bank will add these to your monthly mortgage payment, and set them aside in a savings account (called an escrow account).  Then when these bills come due once a year, they are paid for out of the escrow account." There is no simple way to calculate how much house any given person can afford. In the answer keshlam gave, several handy rules of thumb are mentioned that are used as common screening devices to reject loans, but in every case further review is required to approve any loan.  The 28% rule is the gold standard for estimating how much you can afford, but it is only an estimate; all the details (that you don't want to provide) are required to give you anything better than an estimate. In the spirit of JoeTaxpayer's answer I'm going to give you a number that you can multiply your gross income by for a good estimate, but my estimate is based on a 15 year mortgage. Assuming a 15 year mortgage with a 3% interest rate, it will cost $690.58 per $100,000 borrowed. So to take those numbers and wrap it up in a bow, you can multiply your income by 3.38 and have the amount of mortgage that most people can afford. If you have a down-payment saved add it to the number above for the total price of the home you can buy after closing costs are added in. Property taxes and insurance rates vary widely, and those are often rolled into the mortgage payment to be paid from an escrow account, banks may consider all of these factors in their calculators but they may not be transparent. If you can't afford to pay it in 15 years, you really can't afford it. Compare the same $100k loan: In 30 years at 4% you pay about $477/month with a total of about $72k in interest over the life of the loan. In 15 years at 3% you pay about $691/month but the total interest is only $24k, and you are out of the loan in half of the time. The equity earned in the first 5 years is also signficantly different with 28.5% for the 15 year loan vs. 9.5% on the 30 year loan.  Without straying too far into general economics, 15 year loans would also have averted the mortgage crisis of 2008, because more people would have had enough equity that they wouldn't have walked out on their homes when there was a price correction. The rules of thumb are there for a reason. In this case, they reflect good banking and common sense by the buyer. When we bought our house 15 years ago it cost 2.5 times our salary and we put 20% down, putting the mortgage at exactly 2X our income. My wife thought we were stretching ourselves, getting too big a house compared to our income. You are proposing buying a house valued at 7X your income. Granted, rates have dropped in these 15 years, so pushing 3X may be okay, the 26% rule still needs to be followed. You are proposing to put nearly 75% of your income to the mortgage? Right? The regular payment plus the 25K/yr saved to pay that interest free loan? Wow.  You are over reaching by double, unless the rental market is so tight that you can actually rent two rooms out to cover over half the mortgage.  Consider talking to a friendly local banker, he (or she) will likely give you the same advice we are. These ratios don't change too much by country, interest rate and mortgages aren't that different. I wish you well, welcome to SE. "This doesn't say the whole story (like the length of the HELOC). if you have 15 years left on a mortgage and ""refinance"" into a 30 year HELOC then yes, your payments maybe 20% lower, but you add 15 years to pay it off.  Just remember that interest occurs daily on what you owe. If you move 100K of debt from 5% mortgage to 6% HELOC you'll be paying more to the banks no matter how you slice it." I'm calculating that to about a 7% apr, which given loan rates available today seems a bit high.   I wouldn't get too caught up on what that equates to over the life of the loan.  There are a lot of forces in play over a 30 year period, namely the time value of money.  30 years from now a dollar will be less valuable in real terms due to the forces of inflation.  At 2% per year in inflation today's $1 will be worth about $0.55 in 30 years. "Yes.  It does cost the same to pay off a ""15 year in 15"" year versus a ""30 year in 15 year"" mortgage.  After all, the 30 year amortization period is only used by the lender to calculate the monthly payment he'll expect, while, unbeknownst to him, you are using a 15 year amortization and the same rate to calculate the payments you'll really make. One factor:  Can you make extra payments at the level you want, without incurring penalties from the lender?  Most mortgages have prepayment limits.  After all. he's seeing his nice steady 30 years of cash flow suddenly shortened.  He has to go out and find someone else to lend the unexpected payments to... EDIT:  Closed mortgages, with pre-payment charges are the norm here in Canada;  open mortgages predominate in the US  http://www.cmhc-schl.gc.ca/en/corp/nero/jufa/jufa_018.cfm" Different bonds (and securitized mortgages are bonds) that have similar average lives tend to have similar yields (or at least trade at predictable yield spreads from one another). So, why does a 30 year mortgage not trade in lock-step with 30-year Treasuries? First a little introduction: Mortgages are pooled together into bundles and securitized by the Federal Agencies: Fannie Mae, Freddie Mac, and Ginnie Mae. Investors make assumptions about the prepayments expected for the mortgages in those pools. As explained below: those assumptions show that mortgages tend to have an average life similar to 10-year Treasury Notes.  100% PSA, a so-called average rate of prepayment, means that the prepayment increases linearly from 0% to 6% over the first 30 months of the mortgage. After the first 30 months, mortgages are assumed to prepay at 6% per year. This assumption comes from the fact that people are relatively unlikely to prepay their mortgage in the first 2 1/2 years of the mortgage's life. See the graph below.  The faster the repayments the shorter the average life of the mortgage. With 150% PSA a mortgage has an average life of nine years. On average your investment will be returned within 9 years. Some of it will be returned earlier, and some of it later. This return of interest and principal is shown in the graph below:  The typical investor in a mortgage receives 100% of this investment back within approximately 10 years, therefore mortgages trade in step with 10 year Treasury Notes. Average life is defined here: The length of time the principal of a debt issue is expected to be   outstanding. Average life is an average period before a debt is repaid   through amortization or sinking fund payments. To calculate the   average life, multiply the date of each payment (expressed as a   fraction of years or months) by the percentage of total principal that   has been paid by that date, summing the results and dividing by the   total issue size. One will find that the fixed 30 year mortgage rate is tightly correlated to the 10 year treasury. An adder of 2-2.5% or so, changing slightly with the rest of the economy, as money can get tight or loose independent of the rate itself. In 2011 we are witnessing low rates yet tough loan standards, this is the phenomenon I am referencing. "The reason to put more money down or accept a shorter maximum term is because the bank sweetens the deal (or fails to sour it in some fashion).  For example, typically, if there is less than 20% down, you have to pay an premium called ""Private Mortgage Insurance"", which makes it bad deal. But I see banks offering the same rate for a 15%-year mortgage as for a 30-year one, and I think: fools and their money.  Take the 30-year and, if you feel like it pay more every month.  Although why you would feel like it, I don't know, since it's very difficult to get that money back if you need it."