Investing the difference on a 30yr mortgage

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have decided to do a 30 year mortgage and invest the difference

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Good call.

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Obviously needs to earn more than 4%

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Nope. Needs to earn the same after-tax rate, yes. But you get to deduct mortgage interest, so your cost of capital is more like 3%. So all you have to do is beat inflation and you're fine.

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If I pay 5000 in interest, and then deduct that from taxes. ( Lets say I'm in the 25% tax bracket). Then aren't I really only "getting back" $1250?

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hence why your return only needs to be 3% vs 4% when trying to decide whether to pay down principle or invest elsewhere.

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hence why your return only needs to be 3% vs 4%

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Exactly so.

What you use the money for is a separate decision, if you turn around and buy a $50K car that isn't terribly smart but has nothing to do with how you got the money in the first place.

The bottom line is that if you can borrow at the long-term rate of inflation you are being handed money to use as you wish at zero real cost. That is a wonderful thing, don't prepay it. Hell, if I could borrow for 100 years at that rate I'd do it.

I am happy to see others who understand.

It's great you are responsible with your money and thinking ahead. But there are a couple other considerations.

1. By investing the difference you do assume some risk. The housing market could have another large correction and housing values could decrease significantly. Without the extra equity you could be upside down and unable to move when you want (without writing a check). This is probably not going to happen in LA but I'm sure people in Vegas never pictured it either.

2. Your investment could tank with a severe market correction. Long term you would be fine, but short term this could limit your options.

Not saying your doing the wrong thing, just saying its more than just interest rate and rate of return.

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Not saying your doing the wrong thing, just saying its more than just interest rate and rate of return.

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And I get beat up on here when I advocate 15-year mortgages - any debt you don't hold is debt that cannot hurt you. I know that people who are good with money can think of it as a 'business' - leveraging the equity in their home, to make money with investments - I completely get that.

My point is, always, what if you had the P&I payments to invest every month? If you lived free you would both NOT have the nut to pay every month, PLUS the money you were paying for housing to invest, improve the home, whatever. I understand that squeezing these nickels to make pennies pop out is a viable strategy and does make sense under certain circumstances.

I'm still going with 15-year mortgages, though.

You must consider your opportunity cost calculation on the dollars you send to the bank in accelerated mortgage payment versus keeping those dollars in an earning capacity in the whole discussion of paying the mortgage off. Alwys include what the tax code offers you in a discounted tax payment when calculating your opportunity cost.

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1. By investing the difference you do assume some risk. The housing market could have another large correction and housing values could decrease significantly. Without the extra equity you could be upside down and unable to move when you want (without writing a check)

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In this scenario, the people who do hedge real estate with other investments by taking cheap money long term are doing themselves a favor not pouring a heavier % cash into a depreciating investment. You simply write the check from hedged investment you hope did better, or you were damned if you did or didn't.

I will agree that their is a large % of population that should consider 15 year mortgages. The irony is this often puts them in a less desirable area based on what they can then afford, and if corrections happen, that location location location kicks them in the arse the hardest. But they are free and clear in an area that no one wants to live.

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You 30-year mortgage people are going to have to make up your mind - is real estate going up or is it going down? If it's going up, sure - why not borrow for 30 years? If it's going down, why should I pay interest upon interest upon interest (and, to be fair, I've had a mortgage above 7% APR, so maybe I was traumatized ) on a depreciating asset?

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In my market, real estate has nowhere to go but up. We have the lowest inventory on record in Williamson Co. , less than 40 single family homes under 275k in Franklin alone.

Overall data shows real estate is going up, still down from 2006 prices, but with materials cost way up.

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This isn't true - money I don't borrow is money that CANNOT hurt me - if I picked badly in the real estate market, it hurts me at closing when I get out, but I'm not stuck, making payments for 3 decades.

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Again, this scenario is just so unlikely, where zombies come 200x but you only have 7 years left so you can ride off into sunset, whereas I owed 22 years so I just ride it out. All or nothing scenarios are just too rare to even debate with conviction.

Again, if 25k meant you took a 30 vs 15 by buying in Williamson County vs Davidson County here in TN, you took about a 10% hit in Williamson vs 25-30% hit in Davidon after the crash. You also paid less property taxes in WC and got a private school education at a public school price. And you could sell in 3 month average vs 9 month average if you had to bail. Maybe I'm like you on the 7% when I see what happened in my market, sometimes in neighborhoods where half was Davidson, half was Williamson, and the same house in Davidson bought at 10% less during peak sold 30% decrease after the crash, and took extra 6 months to do so. This was not the case of all Davidson Co. of course, but in enough to warrant concern and advise future buyers of this in these select markets.

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I still don't see why I'm an "idiot" for holding a 15-year mortgage, that I will pay off in 12.

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Know thy self is the most aspect of life, I wouldn't call anyone an idiot for doing what they think works best for them. If peace of mind makes more sense than max ROI, by all means choose the first.

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We are on a 15 year 2.75% mortgage on our place here in Austin, and in year 1 around 60% goes to principal. We're more or less just putting money into equity instead of our pockets... it's forced discipline.

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Yes, it's "tying up" money by prepaying housing costs you were going to incur anyway. 0% is the best rate there is - and you get that when you live in a "paid for" house.

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And when my baby daughter turns 15, we'll have about $2k/month more to spend on her. ;)

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That's the part I don't get about the 30-year people - they assume there is only 1 option when you pay off a mortgage - trade up. And I don't deny that you can build wealth that way - but you can "trade up" more often if you go with 15-years - and that, alone, can make up for the opportunity costs (again, I'm not losing money on interest I'm not paying on money I don't owe - it is NOT apples-to-apples for me in considering borrowing money to purchase an income producing property or business - that is a different calculus and I do understand the basics of leverage).