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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 10/11/17 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 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 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 9:23 pm to HardHat
I was I facing the same decision at your age. We went with a 30yr mtg and then paid extra with a goal of paying it off early, The economy was shaky at the time, so I wanted the peace of mind of being able to drop to the minimum payment of the 30year if one of us lost our job or the like.
Rates dropped down the road, we refinanced to a 15, and paid it all off in a total of about 13. It worked well, especially since we stayed in the house. As someone else said, if you plan to move on or up in a few years, don’t bust your arse on payments,
Rates dropped down the road, we refinanced to a 15, and paid it all off in a total of about 13. It worked well, especially since we stayed in the house. As someone else said, if you plan to move on or up in a few years, don’t bust your arse on payments,
Posted on 10/11/17 at 10:14 pm to HardHat
There are two major factors you're forgetting:
1) With a mortgage you're probably going to be able to itemize deductions. This means your interest payments reduce your tax burden, which means your true interest rate could be substantially lower than you think.
This shrinks the difference between the 15 and 30 year options.
2) Long term rate of inflation is (typically) around 2% or so. So it is a mistake to focus on monthly payment amounts alone because $1000/month in year 30 isn't nearly as valuable as $1000/month today.
1) With a mortgage you're probably going to be able to itemize deductions. This means your interest payments reduce your tax burden, which means your true interest rate could be substantially lower than you think.
This shrinks the difference between the 15 and 30 year options.
2) Long term rate of inflation is (typically) around 2% or so. So it is a mistake to focus on monthly payment amounts alone because $1000/month in year 30 isn't nearly as valuable as $1000/month today.
Posted on 10/12/17 at 11:01 am to HardHat
Financial freedom has a price. What is it worth to you?
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