Hi guys,I have the chance to go for a 15-yr FRM at 3.125% ( or at 2.875% with points, but the difference in monthly payments is nothing), or 30-yr at around 4%. Maybe 3.8%. The 30-yr has much lower monthly payments for me, maybe 70% of the 15-yr payment. If I can afford the 15-yr FRM, is there any reason not to take it over the 30-yr? We may not stay in the house beyond 4-5 more years, that is one factor, but even so, I would have paid off more of my loan with a 15-yr than a 30-yr, right? The choice seems obvious but I want to make sure I'm not missing anything.thanks,Evan
Hi Evan,If I can afford the 15-yr FRM, is there any reason not to take it over the 30-yr? Oh, heck yes! The costs of the heavier amortization, and the risks & costs of reliquidation, for starters.Every dollar you are forced to more rapidly bury into your real estate equity is a dollar that cannot be employed in alternative, safer growth compounding accounts. Mortgage rates are so low, that outperforming them in equivalently safe and equivalently timeframed account strategies is extremely easy.Every dollar you are forced to more rapidly bury into your real estate equity is a dollar that you would be required to re-qualify for, and pay another transaction round for, should you either need it for urgent reasons, or merely prefer to rebalance it out of your real estate accounts and into more advantaged accounts.The nominal rate discount (especially if you get mortgage interest tax deductions) fails significantly against your alternative ouside growth options, and the costs you'd incur for liquidity (as well as the risks of even being ABLE to access if needed after paying into your real estate equity.)Hope that opens the view a bit.Dave DonhoffLeverage Planner
..may not stay in the house beyond 4-5 more years,.....I'm not missing anything...Variable rate loans if you will really be staying there a short time.I refianance last year with PenFeds no closing cost 5/5 ARM that is now at 2.75% and it will be locked for five years.https://www.penfed.org/55-Adjustable-Rate-Mortgage/You might also consider if there is any chance that you might want to keep the house as a rental when you move. If so the longer loans might give you good positive cash flow.
Might want to look at PenFed.org with their 5/5 ARM at 2.75% where they pay up to $10,000 of the closing costs. Compare it with the 15-year 3.125% loan you are considering. I'm going to assume $100,000 loan.15-year loan is $696.61/month.5/5 loan starts at $408.24/month. Apply the difference of $288 to your loan each month as extra principle payments.Starting year 6 of the loan, assume worst case that interest goes to 4.75%. Your monthly payment will increase to $504.53/month. Apply the difference (from $696.61) of $188 to your loan each month as extra principle.Starting year 11 of the loan, assume worst case that interest goes to 6.75%. Your monthly payment will increase to %593.64/month. Since this is still lower than your 15-year payment, apply the difference of $88 to your loan each month.Starting year 16 of the loan, assume worst case that the interest tops out at 7.75%. Your monthly payment will increase to $631.46/month. Apply the difference of $60 to your loan each month.The loan will be paid off in 196 months (17.3 years)--only slightly longer than your 15-year mortgage. However, if you get into trouble, you don't have to make the extra payments, and you still end up with a payment that is lower than what you are considering with the 15-year mortgage, although it goes for longer.Or you could put the difference into a special savings account each month, to be used if you needed to buy down the loan, sell quickly, etc.The longer payment period (at a lower initial rate and significantly lower monthly payment) can provide a lot more options DEPENDING ON YOUR PARTICULAR SITUATION.Have fun with the calculations!Kathleen
Thanks for all the advice everyone. I'm quite surprised that everyone suggests more current flexibility. If you pay off the loan sooner, then doesn't that also give you more flexibility, but later down the line? Hmmm.. I can see that making less payments now might make sense esp if invested in good options that return more than the real estate, and more than the interest rate. Even if in 5-6% income funds or something like that. Savings accounts are not giving any returns, so I'm not too sure about that.The other part of it is that the 3% of interest is paid on a relatively large sum, whereas the monthly $ that I could save with a longer maturity option (say 30-year at 4%), even if I collect more interest or return on it, it will take a really long time, if ever, to catch up with the extra interest that is charged. For example, in the first year, say with a $200,000 loan, 4% ~ $8000. 3% ~ $6000, so you have an extra ~$2000 in interest to make up. Now, you may save say $1500 in monthly payments (just making up that #). You can't really say you are saving it though, because you will have to make more payments later. And, investing that $1500, you would need more than 100% return to earn $2000 back.Sorry if this seems slightly incoherent.
I'm quite surprised that everyone suggests more current flexibility.This is the clue that your thinking is [probably] wrong. If you pay off the loan sooner, then doesn't that also give you more flexibility, but later down the line? The long term is great, but you first must survive the short-term. If you die in the short-term then you never get to reap the benefits of the long term. W/R/T 3% vs. 4% rate --- you are focussing on minutia. You are also focussing on the near-term (next 2-3 years) differences when the appropriate length to focus on is 25-30 years.
If you take the 30 yr. mortgage, you still give yourself the option to make additional principal payments - then at least you have a cushion - - if you can afford it, put extra towards principal, if a month occurs that you can't, at least your required mortgage payment isn't in jeopardy. If you go this route, just make sure there are no prepayment penalties.We made extra payments on ours, tracked it with an amort. spreadsheet – it was motivational, as far as entering in the extra amount monthly and seeing the ‘last payment date’ move up closer… Of course, we are easily amused…
Current example of flexibility issue....Could pay down $100K on house and probably be able to refinance it, saving $1000/month. However, then we would need to borrow money for the next three years to pay for college--by fourth year we would have saved up enough from the lower monthly payments to make 1.5 years of college payments. Borrowing for college is 6-9% with no grace period, and no interest deduction.You have to run the numbers for yourself and your situation to know what makes the most sense for you. Spreadsheets are a wonderful tool!!!!Kathleen
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