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Message
First Mortgage Question - 15yr vs 30yr vs. Investing "Extra Payments"
Posted on 10/10/17 at 8:18 pm
Posted on 10/10/17 at 8:18 pm
I'm looking to buy my first house and I'm looking for some advice. I have enough saved to cover the 20% down payment, plus additional for closing costs, HOA fees, appliances, furniture Etc.
I'm looking at the long term strategy, and to see what others have done in the past.
(Rough Numbers for this Exercise)
$300,000 Home, $60,000 Down Payment, Loan Amount $240,000
15 year mortgage ~ 3.375% $1,701/month (Interest 66,000)
30 year mortgage ~ 4% $1,145/month (Interest $172,000)
30 Year mortgage ~ 4% 1,701/month (Interest $84,759 Payoff 15 Years 10 months Approximate)
30 Year Mortgage, but investing the Difference from the 15 year monthly Payment ($556/month, or 6,672/year assuming a 6% ROI For 30 years
$527,476 Balance After 30 YRs
$200,160 Total Contributions
$327,316 Gains
$278,218 after 15% Capital Gains
$478,378 Balance After Taxes + Contributions
$172,000 Mortgage Interest
$306,378 Total Savings over course of Loan assuming my math is correct
*Figures based on using a brokerage account for tax purposes rather than a Roth IRA to show worst case scenario.
With the Extra $6,672 my strategy would be to take $5,500 to continue funding my Roth IRA, and the remaining $1,172 would be additional funds to my HSA, 529, brokerage account, or 401k.
Is my math correct above? If so, then investing seems like a no brainer.
Is there anything that I am missing? Has anyone tried this approach? For those with mortgages, would what advice would you share with someone who is about that purchase their first home?
Any advice would be greatly appreciate.
I'm looking at the long term strategy, and to see what others have done in the past.
(Rough Numbers for this Exercise)
$300,000 Home, $60,000 Down Payment, Loan Amount $240,000
15 year mortgage ~ 3.375% $1,701/month (Interest 66,000)
30 year mortgage ~ 4% $1,145/month (Interest $172,000)
30 Year mortgage ~ 4% 1,701/month (Interest $84,759 Payoff 15 Years 10 months Approximate)
30 Year Mortgage, but investing the Difference from the 15 year monthly Payment ($556/month, or 6,672/year assuming a 6% ROI For 30 years
$527,476 Balance After 30 YRs
$200,160 Total Contributions
$327,316 Gains
$278,218 after 15% Capital Gains
$478,378 Balance After Taxes + Contributions
$172,000 Mortgage Interest
$306,378 Total Savings over course of Loan assuming my math is correct
*Figures based on using a brokerage account for tax purposes rather than a Roth IRA to show worst case scenario.
With the Extra $6,672 my strategy would be to take $5,500 to continue funding my Roth IRA, and the remaining $1,172 would be additional funds to my HSA, 529, brokerage account, or 401k.
Is my math correct above? If so, then investing seems like a no brainer.
Is there anything that I am missing? Has anyone tried this approach? For those with mortgages, would what advice would you share with someone who is about that purchase their first home?
Any advice would be greatly appreciate.
12
Posted on 10/10/17 at 8:35 pm to HardHat
quote:
Is there anything that I am missing?
Without running your numbers, no you have at least the general idea right. You are excluding one HUGE variable though, life. Are you disciplined enough to actually put all of that money into accounts? Your life will assuredly change over a 15 or 30 year time frime.
I'm not trying to persuade you one way or another. You just have to think about that. How important is the cash flow to you, can you reasonable expectation to actually follow that plan for 30 years, ect, ect. Those are questions no one can answer for you.
Posted on 10/10/17 at 8:35 pm to HardHat
by similar math it may be better to take an interest only loan. I think its all about what you are comfortable with.
Somebody sent me this link a while back, it gets to what you are getting at
Somebody sent me this link a while back, it gets to what you are getting at
Posted on 10/10/17 at 9:17 pm to HardHat
You forgot to look at what investing the $1701 per month for years 16-30 would yield (after having paid off mortgage in year 15).
Posted on 10/10/17 at 9:18 pm to Mingo Was His NameO
quote:
You are excluding one HUGE variable though, life. Are you disciplined enough to actually put all of that money into accounts? Your life will assuredly change over a 15 or 30 year time frime.
I agree, there is no telling what life will bring my way over the next 30 years. I'm young (26 Years old), so I have a lot that will be coming my way.
I'm very disciplined with finances, I'm currently Maxing out my ROTH IRA, HSA, and 401K. Our 4 year old has a nice nest egg for college, I have a relatively new vehicle (2 1/2 years old) that is paid off.
After running some projections with my current contributions along with some scaled back options (worst case scenario) to make sure that this plan is followed. I also took a look at some options if I had to withdraw, or stop extra contributions for a period of time, and I still think I would come out ahead.
I like the idea of having the liquidity of investing the extra. I'm looking at inflation over the course of the mortgage, and expenses in that 10-15 year range. I can deduct the interest payments for taxes, and fund a ROTH IRA to help with taxes during retirement, while having the option to withdraw some of those contributions if needed.
Posted on 10/10/17 at 9:23 pm to HardHat
Honestly man if you are 26 you seem to have a really good handle on things if you are doing all the things you just described. If your income is stable, I would do whatever you feel most comfortable with. You are ahead of 99% of people your age, and retirement should be no trouble if you continue doing what you are doing.
You can look at numbers all day, but you just never know what is going to happen in years to come so with that said just do whatever you feel is best for you. You will be fine either way if you keep your current attitude.
You can look at numbers all day, but you just never know what is going to happen in years to come so with that said just do whatever you feel is best for you. You will be fine either way if you keep your current attitude.
Posted on 10/10/17 at 9:43 pm to dragginass
quote:
You forgot to look at what investing the $1701 per month for years 16-30 would yield (after having paid off mortgage in year 15).
$1,701/Month or $20,412/ year invest for 15 years assuming %6 ROI
$475,109 Balance
$306,180 Contributions
$168,929 Gains
$143,589 after 15% Capital Gains
$449,769 Balance after Taxes + Contributions
$66,000 Interest
$383,769 Total Savings @ year 30. 15 year loan, then continuing to invest payments years 16-30.
$306,378 Total Savings @ Year 30, Making Standard 30yr mortgage payments.
By taking that approach, one would come out $77,391 ahead at year 30.
You would also have $0 at year 15, compared to $155,297 (Before taxes) with the 30 year approach.
*Assuming my math is still correct
Posted on 10/10/17 at 10:00 pm to HardHat
If you don't plant on staying in it forever, then go with the plan that keeps the most money in your pocket each month. Keep saving. No need to try and pay this thing off if you are actually only in it for 8-10 years. Pick a house that will build equity for you and keep putting money away for "life".
Posted on 10/10/17 at 10:25 pm to HardHat
quote:
You would also have $0 at year 15, compared to $155,297 (Before taxes) with the 30 year approach.
You're failing to take equity into account.
Posted on 10/10/17 at 10:47 pm to dragginass
quote:
You're failing to take equity into account.
15 year approach @ year 15
$300,000 Equity in the house, Paid off. $0 Cash Savings
30 year approach @ year 15
$145,098 Equity ($85,908 Principal, $60,000 Down Payment) $155,297 Savings *Assuming 6% ROI.
$300,395 Equity + Investments
As far as total dollars, It is very close. I have the option to pay off the loan anytime after 15 years. I just have the freedom to have that much money available, without having to sell my home.
Posted on 10/11/17 at 5:43 am to HardHat
We purchased a 130000 home in 2010 with a 30 year mortgage. Made double payments each month plus extra with husbands bonus at end of the year and paid it off in 7 years.
We then moved into a bigger home and now rent that home gaining 1500 a month in rent payments. Didn't really know just how beneficial it was at the time, but I'm so glad I did that.
We then moved into a bigger home and now rent that home gaining 1500 a month in rent payments. Didn't really know just how beneficial it was at the time, but I'm so glad I did that.
Posted on 10/11/17 at 9:05 am to HardHat
quote:
15yr vs 30yr vs. Investing "Extra Payments"
You know what the single greatest thing is about a 15 year mortgage vs. a 30 year mortgage?
In 15 years, your loan is paid off every single time.
Posted on 10/11/17 at 9:31 am to HardHat
15 year is forced saving. 30 is not (comparatively). If you have the discipline (for 30 years) then borrowing money at 4% lends the opportunity to put yourself in a better position. All up to you.
Posted on 10/11/17 at 11:03 am to HardHat
You need to convert everything to present value and make sure you use the same time horizons for everything. For example, the other poster mentioned that you did not include the 15 years of investing potential for $1,701 per month.
Posted on 10/11/17 at 12:21 pm to jimbeam
quote:
then borrowing money at 4% lends
Potentially less than 4% if you qualify for mortgage interest deductions
Posted on 10/11/17 at 5:55 pm to HardHat
Lock in the low payments with the 30 yr.
If you can throw the extra money to principal do it. You can still pay it off in 15 years if you want to, but don’t lock yourself into high monthly payments. Life tends to happen.
If you can throw the extra money to principal do it. You can still pay it off in 15 years if you want to, but don’t lock yourself into high monthly payments. Life tends to happen.
Posted on 10/11/17 at 6:02 pm to pwejr88
quote:
don’t lock yourself into high monthly payments.
I agree in principle, but there is nothing to say that a 15year mortgage payment has to be "high". Purchase conservatively and your 15yr payment won't be a burden.
Posted on 10/11/17 at 6:21 pm to dragginass
quote:
Purchase conservatively and your 15yr payment won't be a burden.
I agree with you, but is the 15 year the smart play?
Is it better to have all your money tied up in equity at year 15, or have half of the money in equity and the other half in a separate account that you have control over?
Posted on 10/11/17 at 8:20 pm to HardHat
Did you take into account the mortgage interest deduction coupled with your tax rate? It generally lowers the effective interest rate you're paying.
It may not come into play pending trumps tax plan.
It may not come into play pending trumps tax plan.
Posted on 10/11/17 at 8:41 pm to Croacka
quote:
Did you take into account the mortgage interest deduction coupled with your tax rate? It generally lowers the effective interest rate you're paying.
The higher interest rate of the mortgage would offset some taxes paid. cant rule out changes in tax law either.
I think if you pay off your house in 15 years on the dot and invest your mortgage payment for the next fifteen years, or pay the 30 year mortgage and invest the difference in monthly payments, you will be in excellent shape.
I would shy toward the 30 year and investing the difference myself because I think having a liquid bankroll and low monthly payments would be a huge help in an emergency. your mortgage company wont excuse a few payments or comp you for some of your home equity in a tough time because you agreed to a shorter term.
Also, is this the last home you will ever buy? consider the length of stay in your calculations, a lower interest rate on an adjustable rate might show the best numbers.
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