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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: Which scenario makes more sense Date: 10/2/2001 11:27 PM
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[craigdoc asks]

<<<<<Pleez help - I need advice on which scenario makes more sense

Total cost of a house is $280,000. I am 35. I intend to put down 70,000 and after keeping a fair amount of cash for emergencies I have 40,000 to invest.

Scenario one
Take a 30-year mortgage and invest the 40K in the stock market. After 30 years I will have paid off the house and will have had the 40K growing in the stock market

Scenario two
Take a 15-year mortgage which I cannot afford unless I use 5000 a year from the 40,000. After 15 years. I will have paid off the house but will then have none of the 40K left – however I will then have the next 15 years to save and invest as I will have no mortgage. The house and mortgage will also have cost me a lot less

Thanks in anticipation>>>>

"I took Scenario 3. I continued to rent a cheap apartment, put all my money in the stock market, and retired in 1994 at age 38. <grin>

As far as scenario 1 or 2, it depends on if the stock market grows faster than the interest rate on your mortgage. If you look at the one hundred 30-year holding periods between 1871 and 2001, the best grew at an average of 13.40% per annum, the worst was 5.13% per annum, the median was 9.37% per annum."


I think it slightly more complicated.

In scenario 2, the 40k runs out somewhere after year 8 but before year 15 (probably before year 10, but I am too lazy to run numbes now), so how is the mortgage timely paid thereafter?

Also, it also involves the risk of market returns in first 15 years vcersus second 15 years when entire house payment could be invested, and volatility is greater when periods are shorter. I suspect we could construct a scenario that returned more by 15-year loan without violating reasonablebounds, but probability would I suspect be low (assuming other income to pay mortgage for 30 years).

For Rayvt (I know that you disagree) about almost ever paying the house off early (even using 15 year mortgge instead of 30 year mortgage); some argue that mortgage is generally least expensive money available for LT borrowing and therefore maximize loan for as long as possible.

Regards, JAFO




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