10 year mortgage?

[ScrimpAndSave]

Most of you know that I have perpetual housing fever even though I won't be buying for about another 2 years (if I know what is good for me!).

I was originally planning to budget for a $300,000 house on our $110,000 income...but I am starting to think of how cool it would be if we went with a more modest home and go with a 10 year mortgage.

That means we would have our home paid off by the time we are 40!

I'm thinking of maybe something in the ballpark of $225,000 with a $45,000 downpayment...but I am not sure if we could swing a $2200 PITI. Our gross income would be $110,000...no CC debt, but we will have his law school student loan debt of $120,000 (monthly payment estimated at $800-$900).

There are plenty of houses here that are around 1,200-1,500 sq. ft. We don't want to have kids so I think that is plenty big...

Just something to think about. It would free up money while we are young!

[gamecock43]

1,200-1,500 sq ft but yeah- 10 yr mortgages are great. I myself plan on a 30 yr mortgage to be able to get the house I really want.

[noppenbd]

I think when the time comes to buy the house you will have to see what the interest rate savings would be for a 10-yr mortgage vs a 15-yr vs a 30-yr. If you are not getting much of a reduction in rate then you might be better off just paying extra in principal each month but keeping the loan term longer (i.e. get a 15 but pay it like it's a 10). Then if you needed the extra liquidity for some reason you could just go back to paying the regular payment temporarily.

[ScrimpAndSave]

Noppenbd...that is a good idea. As of right now, I do not see a large difference in interest rates...we will have to see what they are like then.

[noppenbd]

Currently, Bankrate.com shows 30 yr mortgages at 6%, 15 yr at 5.65%, and 10 yr at 5.75%. It looks the current situation is kind of anomaly though, and you would usually save about 0.10% by going with a 10yr. Not worth it in my book. Saving 0.35% with a 15yr is probably a good deal if you are comfortable with the higher payment.

[MiikeB]

Originally Posted by noppenbd

I think when the time comes to buy the house you will have to see what the interest rate savings would be for a 10-yr mortgage vs a 15-yr vs a 30-yr. If you are not getting much of a reduction in rate then you might be better off just paying extra in principal each month but keeping the loan term longer (i.e. get a 15 but pay it like it's a 10). Then if you needed the extra liquidity for some reason you could just go back to paying the regular payment temporarily.

It is a bit more complicated than that though due to ammoritization. You are paying that extra 5 years of interest during the first 10 years.

[FrugalFish]

We have a 30 year mortgage that should be paid in about 10. We added extra principal regularly- mainly to get MIP removed from the loan as early as possible.

Earlier this year I had some misgivings about the economy and decided that a bird in the hand was worth 2 in the bush, so started keeping more money on hand, rather than prepay the mortgage. I'm happier with this arrangement, even though we will lose a little more to interest over the long run. I feel better knowing that there's quite of bit of money on hand should we have an emergency, but when things get better and that account balance meets the mortgage principal, we will have the option of paying the mortgage off in one shot.

[MonkeyMama]

I agree with noppenpd.

The mortgage on our first home was a 15-year loan, which was fine and dandy because we both worked.

But we refied to a 30-year when we bought our current home, in anticipation of living on one income.

We have recently talked about going back to a 15-year-note if we could save interest. Now that we are on better financial footing.

The interest savings is not substantial, and we have come rather accustomed to the 30-year-term. If you ever have a job loss or hardhsip, you would appreciate the flexibility to pay it longer. BUT while times are good you should always be able to pay down extra. That is the perspective you tend to gain with age. Particularly with these interest rates!

We will probably pay off our mortgage 20 years from our first home purchase date. That is our goal for now. But I prefer the 30-year option. In case we hit a bump in the road. You are young too so I'd say that plays into why I'd feel this way. If you take 30 years it would still be paid before retirement...

[noppenbd]

Originally Posted by MiikeB

It is a bit more complicated than that though due to ammoritization. You are paying that extra 5 years of interest during the first 10 years.

I don't think that's true. The mortgage company will recalculate your amortization schedule each time you send in extra principal payments. For instance, payments on a $200K, 6%, 10 yr mortgage are $2220 a month (1000 interest, 1220 principal the first month). On a $200K, 6%, 15 yr mortgage, it is 1687 a month (1000 interest, 687 principal). If you pay 533 extra on the 15 yr, you will pay it off in exactly 10 yrs, and the amortization schedule will look identical to the 10 yr.

Try it for yourself on this calculator:
Mortgage Prepayment Calculator: Extra Monthly Payments

[Joan.of.the.Arch]

This may take your thoughts off in a different direction, but if I were buying in your area, one of the things that would weigh heavily on my mind would be buying a house that I could afford to heat in winter. I think heating costs are going to be horrible in the next few years. That might mean a smaller house, but it might mean a new house with the top most insulation, efficient furnace, doors and windows. It might mean a smaller older house that could be insulated to the max--something which is near impossible to do with certain older homes (like mine, urrgh!)

When we bought our house, we did ask first to see utility bills. I think that would be all the more important nowadays. By the way, for sale by owner homes were always prepared with their utility bills (and lots of other proof of repairs, maintenance, & updates such as the roofing, furnace, electrical, a/c) before I even asked. I never asked to look at them for homes represented by a real estate agent, until the one I eventually bought.

[MonkeyMama]

Excellent point Joan.

We have a fairly large home but since it is new and very energy efficient, our bill is nowhere what it used to be to heat our last apartment on the nights and weekends. (We now keep the house comfortable 24/7 for a fraction of the cost).

Quality of construction will generally matter more than size. Because the cost savings comes from better insulation than anything.

[kork13]

Originally Posted by noppenbd

I don't think that's true. The mortgage company will recalculate your amortization schedule each time you send in extra principal payments. For instance, payments on a $200K, 6%, 10 yr mortgage are $2220 a month (1000 interest, 1220 principal the first month). On a $200K, 6%, 15 yr mortgage, it is 1687 a month (1000 interest, 687 principal). If you pay 533 extra on the 15 yr, you will pay it off in exactly 10 yrs, and the amortization schedule will look identical to the 10 yr.

Do I understand this correctly to mean that if I have a loan and I want to repay it early, you actually gain very little advantage? That you still pay just about the same interest anyway, because they just make you pay all of the planned interest earlier than originally planned? ....somehow i've become confusticated...

[noppenbd]

Originally Posted by kork13

Do I understand this correctly to mean that if I have a loan and I want to repay it early, you actually gain very little advantage? That you still pay just about the same interest anyway, because they just make you pay all of the planned interest earlier than originally planned? ....somehow i've become confusticated...

Depends on the loan, I believe. But for mortgages, as I understand it, you gain an advantage by repaying it early. The mortgage company recalculates your amortization table so your interest is reduced for the remainder of the loan.

[jIM_Ohio]

You will be better off going with a 30 yr fixed, then making the 10 year payment.

You can download ammortization tables (I downloaded mine from microsoft) and play with the numbers.

If I remember correctly your income will be high real soon, you may find you want the mortgage because it is one of the few tax deductions not phased out by income.

Might sound silly, but my mortgage allows me to contribute to a Roth at 15% tax bracket when my gross income is approaching the 28% tax bracket. Deductions rule.

If a person is in 10% or 15% bracket, the deduction does not save them much ($10 for every $100 spent or $15 for every $100 spent depending on bracket). Plus these brackets have numerous other deductions (child credits, dependant credits). Most of these are phased out if AGI approached 120k. Mortgage interest does not. It can make a huge difference while you start investing.

I am not suggesting keeping the mortgage for 30 years, but I am suggesting you might want to realize that getting some tax advice before you make a debt decision might be wise. Not that many people here deal with the level of income I think you will be making, and I know of only 1 or 2 accountant/ tax types which post here on occasion (meaning go somewhere else for tax advice or wait for me to finish taking my tax course- LOL).

[ScrimpAndSave]

Jim...thank you for the info. I will check it out. I am going from $50,000-$85,000 in 5 years...and will be marrying in a year and he is a lawyer starting out at $42,000 - then who knows what...


I hope we do ok.

It's just the $120,000 in law school loans that I don't know if we should let die a slow death or kill off early. I think the interest rate will be around 7% (half are private loans and half are federal).

Thanks!

[jIM_Ohio]

Scrimp- have you ever prepared a tax return? if so have you ever filled out a long form (1040, not the 1040A or the 1040 EZ)?

My suggestion is you start to learn about taxes as you prepare.

For example, put in numbers with you being single (50k now) and see what taxed you owe. Check for deductions which apply to you beiong single.

Then put in numbers with you being married (50k now +42k now) and see what the tax is. Also check to see what deductions apply to you being married.

If you have the ammortization table handy- estimate what 12 months of mortgage interest are (add up the interest paid on first 12 payments). Estimate property taxes. If you are eligible for the moving deductions, count those in too.

You might find it surprising you owe less on the second return with the married status. Regardless of the deductions.

Then bump the income up to 120k combined on the married return. Look what the tax is. Then also look to see if any of the deductions get removed.

Bump it up to 130k and do same thing. You could get an old copy of turbo tax, run through this at turbo tax online, or do the form by hand.

You should start to look for the following- what gross income is the Roth IRA phased out for you? If you up 401k, can you get back under the limit?

In my tax class we do all the forms by hand so we know what each line is for on the 1040. Then a computer calculates the returns for us with clients.

I point this out because the first 3-10 years of your marriage are important financial years. It will be your lowest income, so you will be eligible for the Roth, for example. Once you earn more and are phased out, you can't go back and some simple planning could probably take 8 years of being eligible and extend them to 12 years, for example.

[ScrimpAndSave]

Jim, thank you for bringing this up.

I have never prepared my taxes before. My dad does it for me and I believe I am in the 25% tax bracket? I earn an extra $4,000 over the summer and I have also worked part time jobs here and there.

I didn't even think about being phased out for a Roth. I guess I didn't really think that our income level would be considered high?

I will really have to look into this.

[jIM_Ohio]

Originally Posted by ScrimpAndSave

Jim, thank you for bringing this up.

I have never prepared my taxes before. My dad does it for me and I believe I am in the 25% tax bracket? I earn an extra $4,000 over the summer and I have also worked part time jobs here and there.

I will really have to look into this.

Here's a good place to do some learning. Taxes. Not sure of your fathers education/ background and what he knows or does not know. I would make sure you can do your taxes (form 1040- don't use the EZ) before you get married and definitely before you move. It's OK to use turbo tax to learn (I did) but then look over the 1040 it creates for you so you know what credits and deductions you qualified for.

I paid $130 to attend an HR block course and it is amazing the amount of little things I did not know (which add up to some really big things). I can possibly work for HR Block during tax season, and I hope to clear 5k or so in about 2 months.

[ScrimpAndSave]

I should take the course with my Dad! I bet that would be fun...(I'm SUCH a nerd!).