Mortgage math.
15 vs 30 year, points, and when to refinance.

Section 1 · How a mortgage works

A mortgage is a loan where the house serves as collateral. If you stop paying, the lender can foreclose and take the house.

The amortization schedule

• Every payment is split between principal (reducing the loan balance) and interest (the lender's fee).
• In the early years, most of each payment is interest.
• In the later years, most is principal.

The house must appreciate significantly to justify that interest cost, or you need to hold long enough that principal reduction and appreciation combine favorably.

Section 2 · 15 vs 30 year

On the same $400,000 loan:

• 30-year at 7%: payment approximately $2,661/month. Total interest approximately $558,000.
• 15-year at 6.5% (typically a lower rate): payment approximately $3,484/month. Total interest approximately $227,000. Interest savings vs 30-year: approximately $331,000.

The case for 30-year

• Lower required payment gives more cash-flow flexibility.
• You can invest the payment difference. If investments return more than your mortgage rate, you come out ahead.
• The mortgage interest deduction (only useful if you itemize, which the SALTState and local tax (SALT)State and local taxes (income or sales tax, plus property tax) that itemizers can deduct on their federal return, up to a cap: $40,400 for 2026, rising 1% a year through 2029, then back to $10,000 in 2030. In 2026 the cap shrinks toward $10,000 once modified adjusted gross income passes $505,000.Full definition cap and standard deduction make less common) makes the effective rate slightly lower.

The case for 15-year

• Forced equity building.
• Substantially lower total interest paid.
• Paid off 15 years earlier.
• Lower interest rate.

The honest math

The 30-year-and-invest-the-difference strategy wins IF you invest the difference AND your investments return more than your after-tax mortgage rate. Most people do not invest the difference; they spend it. If behavioral discipline is a concern, the 15-year forced-equity approach may produce better real outcomes.

Section 3 · Mortgage points

A mortgage point is 1% of the loan amount paid upfront to reduce the interest rate.

If you plan to stay in the home longer than the break-even period, buying points makes financial sense. If you might sell or refinance before break-even, skip the points.

Rule of thumb: if break-even is over 5 years, points are a risky bet on rate stability. Get specific point-to-rate trade-offs from your lender before committing.

Section 4 · Refinancing math

When to refinance: your break-even period is shorter than your expected remaining time in the home.

Break-even calculation

• Refinancing costs: typically 2 to 5% of the loan amount ($8,000 to $20,000 on a $400,000 loan).
• Monthly savings from lower payment: $Y.
• Break-even: refinancing costs divided by $Y = months.

Cash-out refinance

Borrow more than you owe. Take out equity as cash. Higher rate than rate-and-term refinance.

• Makes sense: when you have high-interest debt to pay off (credit cards at approximately 21% APRAnnual Percentage Rate (APR)The yearly cost of borrowing money, shown as a percentage.Full definition vs mortgage at 7%) or a specific capital need (renovation that adds value).
• Does not make sense: for consumption or for investment in volatile assets where the borrowed-money risk amplifies the potential downside.

verify×DON'T TRUST, VERIFYClaim: Mortgage refinancing typically costs 2 to 5% of the loan amount.Verify at: CFPB Owning a Home guide ↗ Source 1 in the list belowClosing-cost ranges vary by state and lender. CFPB documents typical components.

Section 5 · The 5% rule: rent vs buy on apples-to-apples math

The standard rent-vs-buy comparison is wrong. People compare a mortgage payment to rent, conclude that buying is "cheaper," and stop there. A mortgage payment is not an unrecoverable cost. Most of an early-year payment is interest, but the principal portion goes to building equity. Comparing the full mortgage payment to rent overstates the cost of owning relative to renting.

The right comparison is total unrecoverable costsUnrecoverable costsHousing costs you never get back: for a renter, all of the rent. For an owner, the 5% rule counts property tax (about 1% of home value a year), maintenance (1%) and cost of capital (3%): mortgage interest plus what the down payment could earn in stocks beyond the home's price growth. On a $350,000 home: $17,500 a year. of owning vs total unrecoverable costs of renting. Rent is fully unrecoverable. The unrecoverable costs of owning are property tax, maintenance, and the opportunity costopportunity costWhat you silently give up when you pick one option over another. Spending $100 today on dinner means giving up whatever that $100 could have grown into if you had invested it instead.Full definition of capital tied up in the home.

The three unrecoverable costs of owning

• Property tax: roughly 1% of home value per year. Varies by state and county (Texas and New Jersey run higher; Hawaii and Alabama lower) but ~1% is a reasonable national anchor.
• Maintenance: roughly 1% of home value per year, on average. Includes roof replacement, HVACHeating, Ventilation, and Air Conditioning (HVAC)The system that controls temperature and air quality in a building, also a skilled trade career path., water heater, paint, repairs. Highly lumpy in any single year, but averages out.
• Cost of capital: roughly 3% of home value per year. This is the opportunity cost of the down payment plus equity. The money tied up in your home could otherwise be invested in stocks at a higher expected return. The cost of debt (mortgage interest) and the cost of equity (foregone stock returns) are both real economic costs.

The reverse calculation

If you are renting at a known monthly cost, you can solve for the equivalent home price. Multiply rent by 12, divide by 5%:

• $3,000/month rent × 12 / 0.05 = $720,000 equivalent home value
• $2,500/month rent × 12 / 0.05 = $600,000 equivalent home value

Renting for $3,000/month is financially equivalent to owning a $720,000 home in terms of unrecoverable costs. If similar homes in the same neighborhood are selling for more than $720,000, the rent is the better deal financially.

When the rule needs adjustment

• More conservative portfolio: if your investment alternative is bonds rather than 100% stocks, the cost of equity capital drops, lowering the rule to roughly 4%.
• Tax-advantaged investing capacity exhausted: if you have already maxed your 401(k), Roth IRAIndividual Retirement Account (IRA)A retirement account with tax advantages and eligibility rules. Traditional IRA contributions may be deductible; taxable withdrawals generally enter income. Roth contributions use after-tax money, and qualified Roth withdrawals are tax-free.Full definition, and HSAHealth Savings Account (HSA)A health savings account available only when eligibility requirements are met. Federal tax benefits depend on contribution limits and qualified medical expenses. Health coverage, other coverage and Medicare enrollment can affect eligibility; state tax treatment can differ.Full definition, additional stock investments are taxed annually, reducing the after-tax cost of equity. The rule shifts toward 4-4.5%.
• High property tax states: in NJ, IL, NH, TX, the property tax piece can be 2% rather than 1%, pushing the total closer to 6%.
• Older homes or HOAsHomeowners Association (HOA)An organization in some residential communities that sets rules and charges monthly fees for shared maintenance.: maintenance and condo/HOA fees can push the maintenance piece above 1%.

What the rule does not account for

• Forced savings: mortgage principal is forced equity-building. A renter who fails to invest the difference loses the comparison automatically.
• Hedging: owning hedges you against rent inflationinflationA general increase in prices over time, meaning each dollar buys less than it did before.Full definition in your specific area. If you want to stay in one city, owning protects you from being priced out.
• Transaction costs: buying and selling a home costs 8-10% of the value (closing, inspection, agent commissions, transfer taxes, moving). Short holding periods make owning much worse.
• Mortgage interest deduction: for households that itemizeitemizeListing specific tax-deductible expenses (charity, mortgage interest, state taxes, big medical bills) on your tax return one by one, instead of taking the flat lump-sum deduction the IRS gives everyone by default. Only worth the paperwork if your list adds up to more than the lump sum., the deduction reduces effective unrecoverable cost. Most filers take the standard deductionstandard deductionA fixed dollar amount that reduces your taxable income without itemizing. Most people claim this instead of listing individual deductions.Full definition post-2017 TCJATax Cuts and Jobs Act (TCJA)The 2017 federal tax law that nearly doubled the standard deduction, capped the state and local tax (SALT) deduction at $10,000, and cut individual and corporate tax rates. In July 2025 the One Big Beautiful Bill Act made most of its personal cuts permanent and raised most filers' SALT cap to at least $40,000 through 2029.Full definition, eliminating this benefit.

The rule is an approximation, not a verdict. It is the right starting point for the financial comparison. The full decision also weighs lifestyle, geographic stability, and the behavioral fact that most renters do not invest the cash flowcash flowMoney coming in minus money going out over a month or year. A positive number means you earn more than you spend; negative means the opposite.Full definition difference. See Mortgage vs Rent calculator for a per-situation projection.

Stress-test an adjustable-rate payment

For an adjustable-rate mortgage, read the index plus margin, initial fixed period, reset frequency, first-adjustment cap, periodic cap and lifetime cap. Ask the lender to show the highest permitted payment and when it could apply. A teaser payment or disclosed APR does not describe the maximum future payment.^[2]

Stress illustration: with $300,000 remaining and 25 years left, a fully amortizing monthly principal-and-interest payment is $1,753.77 at 5% and $2,726.10 at 10%. This compares the same balance and term, not a forecast of the first reset. Actual adjustments follow the contract’s index, margin, caps and dates.

Add property taxes, insurance, mortgage insurance, association charges, maintenance and other debts. Compare the full cost with stable after-tax income after essential household spending. Test a higher reset rate, rising insurance costs and a period of reduced income. Do not assume refinancing will be available: your income, property value, credit or market rates may change.^[2][3]

Rate, APR and all-in cost

The note interest rate determines scheduled interest and principal payments. Mortgage APR includes the rate plus applicable finance charges such as points and broker fees; not every closing cost is an APR finance charge. Compare Loan Estimate page 1 (rate and payment), page 2 (itemized costs) and page 3 (APR and comparisons). An ARM’s APR is not its maximum future rate.^[3][4]

Same-term fee comparison

Illustration, not a lender quote: two $100,000, 30-year fixed loans at a 6.000% note rate, monthly payments at month-end, no other costs. A has no finance charge; B has a $1,500 prepaid finance charge paid in cash. Both payments are $599.55. A’s APR is 6.000%; B’s illustrative APR is 6.142%, calculated from $98,500 net credit proceeds and the same 360 payments. This is a simplified cash-flow APR, not a substitute for the lender’s statutory disclosure.

Totals use unrounded payments and exclude taxes, insurance and other closing costs. For an early sale or refinance, compare upfront costs plus payments made plus remaining principal on the same exit date. A lower payment from a longer term is not automatically cheaper; an APR comparison alone cannot decide unequal holding periods.