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re: 30,20 or 15 year mortage?
Posted on 2/3/10 at 7:52 am to meauxjeaux2
Posted on 2/3/10 at 7:52 am to meauxjeaux2
Interest payments would only be about 4K your first year, and less every year thereafter (less than the standard deduction). If you don't have alot of other itemized things, the tax "break" is essentially nothing.
0
Posted on 2/3/10 at 8:11 am to lynxcat
I don't have all the numbers, but if you did the 30 year mortage but paid the 15 year note how long would it take you pay it off and how much money would you save?
Posted on 2/3/10 at 8:18 am to JWS3
quote:
If your house was paid for, would you get a mortgage on it so you could invest the money?
Understand that the whole scenario assumes you will live long enough for it to play out for 30 years. If you're 80 years old the time for such plays has passed.
But if you're 30, I would do it in a heartbeat.
The difference is not so much whether the house is paid for but your time horizon. People with paid-off houses tend to have shorter horizons.
Posted on 2/3/10 at 8:20 am to slinger1317
quote:
15 yr: $30,875 interest over life of loan
30 yr: $74,624 interest over life of loan
Now, include the increased earnings that result from getting a 30 yr loan and investing the proceeds in a 401(k). I bet it's a lot more than $44K.
Posted on 2/3/10 at 8:32 am to foshizzle
To everyone who thinks the 15 year payoff is better because it "saves interest payments", think of it this way. Let's assume you have a 5% note and that you are in the 25% tax bracket.
By paying it off early, you are only getting a 3.75% (5% times .75) return on your investment. This is where your "savings" comes from - reduction of future monthly interest.
On the other hand, if you invest in a 401(k), the earnings plus tax savings should come in at well over 3.75% per year.
Put it another way - suppose you have a spare thousand. If you use it to pay your mortgage, first off you only have $750 to invest after paying taxes. You will earn 5% on the $750 to pay the mortgage early, or $37.50 per year.
If you put it in your 401(k) in, say, a 30 Treasury bond then you are earning (at today's rates) a 4.6% guaranteed yield on the full $1000. That's $46.00 per year. Already you are ahead of the mortgage prepayment, and keep in mind that a lot of people don't think Treasuries are all that good an investment. If you can take advantage of a company match you are even further ahead.
So yes, get the 30 year mortgage and stretch it as long as you can. And yes, if your closing costs aren't too high taking out an additional mortgage is probably not a bad idea either.
You earn a little extra by prepaying the mortgage, sure, but that is not anywhere near your best investment choice.
By paying it off early, you are only getting a 3.75% (5% times .75) return on your investment. This is where your "savings" comes from - reduction of future monthly interest.
On the other hand, if you invest in a 401(k), the earnings plus tax savings should come in at well over 3.75% per year.
Put it another way - suppose you have a spare thousand. If you use it to pay your mortgage, first off you only have $750 to invest after paying taxes. You will earn 5% on the $750 to pay the mortgage early, or $37.50 per year.
If you put it in your 401(k) in, say, a 30 Treasury bond then you are earning (at today's rates) a 4.6% guaranteed yield on the full $1000. That's $46.00 per year. Already you are ahead of the mortgage prepayment, and keep in mind that a lot of people don't think Treasuries are all that good an investment. If you can take advantage of a company match you are even further ahead.
So yes, get the 30 year mortgage and stretch it as long as you can. And yes, if your closing costs aren't too high taking out an additional mortgage is probably not a bad idea either.
You earn a little extra by prepaying the mortgage, sure, but that is not anywhere near your best investment choice.
Posted on 2/3/10 at 8:55 am to foshizzle
quote:THIS!
To everyone who thinks the 15 year payoff is better because it "saves interest payments", think of it this way. Let's assume you have a 5% note and that you are in the 25% tax bracket.
By paying it off early, you are only getting a 3.75% (5% times .75) return on your investment. This is where your "savings" comes from - reduction of future monthly interest.
On the other hand, if you invest in a 401(k), the earnings plus tax savings should come in at well over 3.75% per year.
Put it another way - suppose you have a spare thousand. If you use it to pay your mortgage, first off you only have $750 to invest after paying taxes. You will earn 5% on the $750 to pay the mortgage early, or $37.50 per year.
If you put it in your 401(k) in, say, a 30 Treasury bond then you are earning (at today's rates) a 4.6% guaranteed yield on the full $1000. That's $46.00 per year. Already you are ahead of the mortgage prepayment, and keep in mind that a lot of people don't think Treasuries are all that good an investment. If you can take advantage of a company match you are even further ahead.
So yes, get the 30 year mortgage and stretch it as long as you can. And yes, if your closing costs aren't too high taking out an additional mortgage is probably not a bad idea either.
You earn a little extra by prepaying the mortgage, sure, but that is not anywhere near your best investment choic
...unless there is a huge difference in either closing costs or the loan interest rates.
Put another way, if you can afford a 15 but aren't sure. Get a 30, then pay extra per month ad hoc as you desire. Has most of the advantages without the monthly commitment. Then if in 2-3 years you come across investment opportunities returning 10-15% you can take advantage of them instead of being committed to a house note saving <1%/yr.
Posted on 2/3/10 at 9:10 am to NC_Tigah
Exactly. There's nothing at all wrong with paying off debt, but it's even better to keep the debt provided one uses the proceeds to earn a better return.
Investing in a tax-advantaged investment vehicle such as a 401(k) helps a lot with this. If you've maxed your 401(k) and have to invest in something that has no tax benefits this IMO becomes a much closer call, a 3.75% return that is guaranteed is actually fairly good.
Investing in a tax-advantaged investment vehicle such as a 401(k) helps a lot with this. If you've maxed your 401(k) and have to invest in something that has no tax benefits this IMO becomes a much closer call, a 3.75% return that is guaranteed is actually fairly good.
Posted on 2/3/10 at 9:16 am to LSURussian
quote::baller:
Unless you're in the 100%+ tax bracket, the answer is 'yes.'
Y'all have done a great job with the math here, but those calculations really don't take into account the benefit of having money to "waste" on impractical shite. If having to make the higher payments on the 15 year mortgage means passing up LSU tickets and skipping Jazzfest take the 30 year instead.
I understand that the money board is all about delayed gratification, but at some point it's not worth living like a miser.
Posted on 2/3/10 at 9:44 am to Cold Cous Cous
quote:
But if you're 30, I would do it in a heartbeat.
People that are 30 years old have not lived long enough to understand the value of a paid for house is something that involves more than math. Try to find someone in there 50s with a paid for house that wishes they had a mortgage. Get the 15 year, and pay it off in 12 if possible.
Posted on 2/3/10 at 9:49 am to Cold Cous Cous
quote:
Y'all have done a great job with the math here, but those calculations really don't take into account the benefit of having money to "waste" on impractical shite.
no we did the calculations that explained the smart financial move..... not the i'm a dumbass who can't understand my finances move.
Posted on 2/3/10 at 9:50 am to Cold Cous Cous
quote:
I understand that the money board is all about delayed gratification, but at some point it's not worth living like a miser.
have fun working your whole life.
Posted on 2/3/10 at 10:27 am to JWS3
quote:
Try to find someone in there 50s with a paid for house that wishes they had a mortgage
I personally know a 51 year old who did exactly that. He realizes that when he is 70, he will owe $1000/month on a mortgage and earn $1500/month extra on his 401. This is a good deal for him. Bankers do the same thing, by the way. They borrow as much as they can at low rates and lend it at higher rates.
Tell you what. Since you don't like owing on a mortgage at today's rates, surely you'd be willing to take the other side of the deal and lend the money instead? My credit rating is over 750, perhaps we can work a deal. I'd be very happy to pay you at below-market mortgage rates for 50 years or more.
Posted on 2/3/10 at 10:52 am to JWS3
quote:
People that are 30 years old have not lived long enough to understand the value of a paid for house is something that involves more than math. Try to find someone in there 50s with a paid for house that wishes they had a mortgage. Get the 15 year, and pay it off in 12 if possible.
Every finance professor I ever had bragged about having their house financed as much as they could (b/c money is/was cheap at the time) so they could better use that cheaply borrowed money elsewhere. I would think having PHDs in finance would mean they know a little bit more than you do about the subject.
Their reasoning was simple,,, if they could afford it, why not?
They run their personal finances like a business (as they should). A business that is debt free is going to be cash starved and not utilizing their borrowing power to make money. Their goal isn't to be debt free, it is to make money.
Posted on 2/3/10 at 11:12 am to MikeBRLA
quote:
Their goal isn't to be debt free, it is to make money.
this.
Posted on 2/3/10 at 2:06 pm to bryso
Yep.
That said, I don't want to give people who want to be debt free too hard a time. It's also a good idea to only invest in things you understand.
If you don't understand why and how it can pay to borrow money, better to leave it alone.
That said, I don't want to give people who want to be debt free too hard a time. It's also a good idea to only invest in things you understand.
If you don't understand why and how it can pay to borrow money, better to leave it alone.
Posted on 2/3/10 at 6:03 pm to foshizzle
quote:
Every finance professor I ever had bragged about having their house financed as much as they could (b/c money is/was cheap at the time) so they could better use that cheaply borrowed money elsewhere. I would think having PHDs in finance would mean they know a little bit more than you do about the subject.
I am sure I have more experience running an actual business than any finance professor. When I got my MBA, it was pretty clear that the PhDs had little real experience, or success at building significant net worth.
Posted on 2/3/10 at 6:16 pm to JWS3
damn this thread confused the frick out of me. I've been trying to pay off my house as quickly as possible. I was happy getting the 4% savings by paying it off early.
Posted on 2/3/10 at 6:24 pm to bryso
quote:
have fun working your whole life.
Have fun eating plain rice and beans 3 meals a day and driving a 20 year old car. But hey, you'll have a big bank account.
Posted on 2/3/10 at 6:45 pm to Cold Cous Cous
quote:
Have fun eating plain rice and beans 3 meals a day and driving a 20 year old car. But hey, you'll have a big bank account.
Hey, my cars are only 10 and 12 years old, virtually brand new, and I like noodles with my beans.
Posted on 2/3/10 at 9:48 pm to C
quote:
I was happy getting the 4% savings by paying it off early.
4% on a pre-tax investment (contributing to a 401) beats hell out of 4% on a post-tax investment (paying off a mortgage).
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