Home loan discussion

**jla85** · 06-05-2012, 02:22 PM

by the numbers

$184,000 home @ 15 yrs and 2.7% total interest paid (assuming only the minimum is paid each month)= $39,972
monthly payment (just mortgage no insurance or taxes) = 1244.29

$184,000 home @ 30 yrs and 3.6% paid in 15 yrs total interest paid = $54,399
monthly payment (also no insurance or taxes) = 1324.44
required payment only = $836.55 @ 30 yrs

If your friend has the ability to pay $1244.29 based on the figures I calculate she will save about $14,427 by just selecting the 15 year upfront and not taking the 30 year to pay in 15. The pro to this strategy is upfront the total savings your friend will see. Because if she elects to take the 30 year and pay in 30 years it will be $117,156 in total interest not to mention taxes, insurance, etc. Also the 15 year option requires less to achieve the same result in terms of monthly cashflow.

So which option is better. Some might say that if your finances get difficult by selecting the 30 year option your monthly required payment is lower and you can handle the mortgage more easily, so if you are cash poor this maybe a better option.

If you have a solid savings and can handle the payment then go for the 15 year and get all around savings.

Still if you can afford the 15 year payment, you may elect to get the 30 year and pay it in 30 years and take the difference and invest it in Life insurance. This strategy is not for everyone and should be consulted with a licensed professional, but this strategy can give you a great cash flow and build equity within a tax advantaged life insurance policy. For those wondering why life insurance...briefly life insurance can build cash value to be used in life by a policy holder. For more information look up a concept called "banking on yourself" or also google doug andrews "missed fortune" Both show how your policy can not only pay off your mortgage but can leave some tax advantage growth. Again this is not for everyone.

Hopefully this answers the question the best choice will depend on the cashflow goals of the purchaser.

**MonkeyMama** · 06-05-2012, 02:25 PM

15 year loan = $1244/month, $40,000 over life of loan

30 year loan = $837/month. Add $492/month to pay off in 15 years. $1328/month total. Interest would be $54,000 over 15 years.

{Assuming 0% down - did not know how much loan would be for}.

With interest lates these low, there really isn't much of a difference. Not enough for a great debate...

Advantages to the 15-year are obviously a lower interest rate and a faster payoff. This is a good route to go if you wouldn't have the discipline to pay off rapidly, otherwise.

Advantage to the 30-year is more flexibility. You could always make bigger payments, but pull them back in times of unemployment, disability, etc.

In our 20s, we had a 15-year-loan, but we also had 2 incomes. As a 30-something with 2 kids and a long-term unemployed spouse, I have come to much prefer the 30-year (though we plan to pay off early).

Interest rates are getting low enough that it's kind of moot. You can pay off your house in 15 years, these days, without committing a lot of resources. So, why not?

**YLTL_Dan** · 06-05-2012, 05:34 PM

Originally posted by MonkeyMama View Post

Advantages to the 15-year are obviously a lower interest rate and a faster payoff. This is a good route to go if you wouldn't have the discipline to pay off rapidly, otherwise.

Another thing to think about is the average American moves every 7 years. If you're on the 15 year loan, you're paying more principal up front, and you'll have more equity built up at year 7.

**disneysteve** · 06-06-2012, 05:05 AM

Originally posted by jla85 View Post

you may elect to get the 30 year and pay it in 30 years and take the difference and invest it in Life insurance.

I'm surprised nobody jumped on this comment yet.

NO, NO, NO!

Whole life insurance is an outrageous rip-off. It is completely inappropriate for 99.9% of the population. And NEVER should "invest" and "life insurance" be used in the same sentence. In fact, several major life insurance companies have previously been sued and lost for selling whole life policies as an investment. They are NOT investments.

If you nee insurance, buy term coverage. If someone tries to sell you whole life, run away as fast as you can and find a new broker or adviser because that one does not have your best interests in mind.

**jpg7n16** · 06-08-2012, 06:03 PM

Originally posted by musicrocks0304 View Post

Scenario: My friend can not choose between a 15 and 30 year mortgage. The 15 year mortgage has an interest rate of 2.7%. The 30 year mortgage has an interest rate of 3.6%. If my friend got a 30 year mortgage and paid it off in the time of a 15 year mortgage, how much in additional interest will she end up paying as opposed to just getting the 15 year mortgage up front? The price of the house is $184,000. Also, what are the benefits/disadvantages of each?

Thanks for your help!

Calculating based on the full purchase price ($184k) jlas math is right, over the same 15 year period, you would obv pay more in interest on the loan with the higher rate. ($39,972.32 15-yr vs $54,398.88 30-yr). The figures would be different if they put 20% down, etc.

This would require the standard $1,244.29/month payment on the 15 year, and would require $1,324.44/month on the accelerated 30 year. If she paid the higher payment on the 15 year (paying $1,324.44/month on the 15 year loan) they would save an additional $3,091.86 in interest ($36,880.46) - and be done a year earlier.

These figures also do not include the effects of the mortgage tax deduction. She'd likely get back about 25% of those interest amounts in deductions.

Which is better depends on what your friend is looking to do.

Does she want to lock in a low rate for 30 years to take advantage of investing her excess funds each month? Go with the 30 year
Does she want a smaller payment to reduce the potential outlay of a layoff/change in financial situation? Go with the 30 year (has a smaller required payment each month, which would be beneficial if the income situation changed)
Does she want to get out of debt as quickly as possible, while paying the least interest to do so? Go with the 15 year loan -- and pay extra

Based on her goals, the answer would be different.

FWIW - I would lock in the 30 year rate, and invest any amount above and beyond the required payment.

**Petunia 100** · 06-08-2012, 10:42 PM

Originally posted by jla85 View Post

$184,000 home @ 15 yrs and 2.7% total interest paid (assuming only the minimum is paid each month)= $39,972
monthly payment (just mortgage no insurance or taxes) = 1244.29

$184,000 home @ 30 yrs and 3.6% paid in 15 yrs total interest paid = $54,399
monthly payment (also no insurance or taxes) = 1324.44
required payment only = $836.55 @ 30 yrs

If your friend has the ability to pay $1244.29 based on the figures I calculate she will save about $14,427 by just selecting the 15 year upfront and not taking the 30 year to pay in 15. The pro to this strategy is upfront the total savings your friend will see. Because if she elects to take the 30 year and pay in 30 years it will be $117,156 in total interest not to mention taxes, insurance, etc. Also the 15 year option requires less to achieve the same result in terms of monthly cashflow.

So which option is better. Some might say that if your finances get difficult by selecting the 30 year option your monthly required payment is lower and you can handle the mortgage more easily, so if you are cash poor this maybe a better option.

If you have a solid savings and can handle the payment then go for the 15 year and get all around savings.

Still if you can afford the 15 year payment, you may elect to get the 30 year and pay it in 30 years and take the difference and invest it in Life insurance. This strategy is not for everyone and should be consulted with a licensed professional, but this strategy can give you a great cash flow and build equity within a tax advantaged life insurance policy. For those wondering why life insurance...briefly life insurance can build cash value to be used in life by a policy holder. For more information look up a concept called "banking on yourself" or also google doug andrews "missed fortune" Both show how your policy can not only pay off your mortgage but can leave some tax advantage growth. Again this is not for everyone.

Hopefully this answers the question the best choice will depend on the cashflow goals of the purchaser.

You left out the best reason of all! You should buy whole life insurance because it takes your money and turns it into the life insurance salesperson's money! Isn't that a great "advantage"?

**jpg7n16** · 06-09-2012, 08:48 AM

Originally posted by jpg7n16 View Post

FWIW - I would lock in the 30 year rate, and invest any amount above and beyond the required payment.

I guess it would help to explain why I said this huh?

Here's some more calculations to consider

15 year mortgage ($184k @ 2.7%) = $1,244.29/month
30 year mortgage ($184k @ 3.6%) = $836.55/month

Scenario A: take the 15 year, pay off debt and invest the full amount over the next 15 years
Yrs1-15: $1,244.29/month to mortgage, $0 to investments yielding 7%+
Yrs16-30: $0 to mortgage, $1,244.29/month to investments yielding 7%+
At end of year 30, you will have a paid for home, $9,993.08 cash from mortgage tax refunds, and at least $368,829.89 in your portfolio (after 15% LTCG tax on gains)
Total Net Worth: Home + $378,822.97

Scenario B: take the 30 year, pay mortgage and invest the difference in payment each month for 30 years
Yrs1-30: $836.55/month to mortgage, $407.74/month to investments yielding 7%+
At end of year 30, you will have a paid for home, $29,289.27 cash from mortgage tax refunds, and at least $444,837.81 in your portfolio (after 15% LTCG tax on gains)
Total Net Worth: Home + $474,127.08

So if you believe as I do that the markets will still return 7-11% long term, Scenario B would win by at least $95,304.11. (If investments return 11%, B wins by $498,813.00)

Hence why I said, I'd take the 30 year and invest the difference.

Home loan discussion