is there somewhere that explains that concept a little clearer then wikipedia? also it looks like the numbers are a little off as i had made a type o on the interest rate of the 20 year.Don't know if it will be clearer, but see below for a different way to look at it. Won't change the answer of which is better, but different people see things better in different ways.
right now a 20 year mortgage will cost us 980 a month(3.635% interest) for P&I 30y is 798 (4.0%int)The financed amount is $167,050 - close enough?
Loan amount | 167050 | =B1 |
Annual interest rate | 0.03635 | 0.04 |
Loan period in years | 20 | 30 |
Number of payments per year | 12 | =B4 |
Scheduled payment | =PMT(B2/B4,B3*B4,-B1) | =PMT(C2/C4,C3*C4,-C1) |
Payment difference | =B5-C5 | |
Number of years invested | =C3-B3 | =C3 |
Market return | 0.05 | =B8 |
Investment balance at end | =FV(B8/12,B7*12,-B5) | =FV(C8/12,C7*12,-B6) |
Advantage of the first choice | =B9-C9 |
is there somewhere that explains that concept a little clearer then wikipedia? also it looks like the numbers are a little off as i had made a type o on the interest rate of the 20 year.
I personally go for the lowest interest rate and pay extra principal to shrink the loan to 10 years. First I save the almost 4% that would be going towards interest and whatever principal is paid off grows (albeit theoretically) as the price of the property goes up.
The house you live in is a large expense and one not needed when going through retirement eating up retirement funds.
Using just a savings account 20 years is better
*At 7% growth Average a 30 year is better
fully-amortizing [i.e., not paying off early] a loan is better than paying the same loan off early unless the stock market return is less than the loan interest rate.Yes.
30-year still wins for any assumption of stock market returns 4.7% or greater4.7% is essentially the same as 5% when we are talking about guessing Compound Annual Growth Rates over the next 30 years, so this is more from academic curiosity: the short spreadsheet table shown above (http://forum.mrmoneymustache.com/real-estate-and-landlording/20-year-or-30-year-mortgage/msg1256267/#msg1256267) gets 5% for the OP's choice - how did you arrive at 4.7%?
how did you arrive at 4.7%?
Mortgage Principal | P | 167,000 | $ |
Mortgage length, option 1 | n1 | 30 | yr |
Mortgage length, option 2 | n2 | 20 | yr |
Mortgage interest rate, option 1 | i1 | 4.0% | |
Mortgage interest rate, option 2 | i2 | 3.635% | |
Investment interest rate | r | 5.0% | |
Number of payments per year | Pmt/yr | 12 | /yr |
Mortgage payment, option 1 | Pmt1 | 797 | $/mo |
Mortgage payment, option 2 | Pmt2 | 980 | $/mo |
Results from investing the difference in mortgage payments for n1 years | FV1 | 152,199 | $ |
Results from investing the option 2 payment for (n1 - n2) years | FV2 | 152,201 | $ |
Advantage of option 1 | FV1 - FV2 | -3 | $ |
I'm a firm believer in short term mortgages.
Saving a few bucks by going with a longer mortgage and investing that money instead sounds good, but truthfully most are not disciplined enough to contently do this. the extra $$ will get blown on other things. Your age is important too. How old will you be in 30 years, and do you still want to be paying for this house at that age? Taking the longer term mortgage and rationalizing that you have the option to pay it off early sounds good too, but most won't do this. A short term mortgage forces you to pay it off in a timely fashion.
IMO, until everyone understands the math and the psychology, responses such as fishindude's are reasonably appropriate. I don't happen to agree with him, but if it motivates others to examine their options, I support this kind of discussion. This shit really should be taught in school.I'm a firm believer in short term mortgages.
Saving a few bucks by going with a longer mortgage and investing that money instead sounds good, but truthfully most are not disciplined enough to contently do this. the extra $$ will get blown on other things. Your age is important too. How old will you be in 30 years, and do you still want to be paying for this house at that age? Taking the longer term mortgage and rationalizing that you have the option to pay it off early sounds good too, but most won't do this. A short term mortgage forces you to pay it off in a timely fashion.
Do we have to have this "math vs. psychology" debate in every thread? In this one, the OP clearly asked about the math, not the psychology.
Loan amount 167050 =B1 Annual interest rate 0.03635 0.04 Loan period in years 20 30 Number of payments per year 12 =B4 Scheduled payment =PMT(B2/B4,B3*B4,-B1) =PMT(C2/C4,C3*C4,-C1) Payment difference =B5-C5 Number of years invested =C3-B3 =C3 Market return 0.05 =B8 Investment balance at end =FV(B8/12,B7*12,-B5) =FV(C8/12,C7*12,-B6) Advantage of the first choice =B9-C9
Loan amount 167050 =B1 Annual interest rate 0.03635 0.04 Loan period in years 20 30 Number of payments per year 12 =B4 Scheduled payment =PMT(B2/B4,B3*B4,-B1) =PMT(C2/C4,C3*C4,-C1) Payment difference =B5-C5 Number of years invested =C3-B3 =C3 Market return 0.05 =B8 Investment balance at end =FV(B8/12,B7*12,-B5) =FV(C8/12,C7*12,-B6) Advantage of the first choice =B9-C9
Question: the calc for Investment balance at end for the 20 year is based on the equivalent of investing that higher loan payment between years 20 and 30. Shouldn't it actually be from investing the lower amount over that period? Because that lower amount is the opportunity gain that would have otherwise been the payment between years 20-30...
With the longer term loan, Pmt1 is used for loan payments throughout that term while (Pmt2 - Pmt1) is available for investing each year.
Does that make sense?
...what do you believe the real estate market will do in the same time? The latter, in some markets, could easily out perform even the 7% investment scenario.Yes, it could. That doesn't mean it will.
I don't know how your mortgage will work, but when we had one, it was of a type where I could make extra payments when I wanted to. Any time when we had a good amount of excess money, I would make an extra payment on the mortgage and I asked the bank to let me pay the same amount as before and shorten the length of the mortgage. The alternative would have been to pay less to the bank every month. Eventually when you have the mortgage over a shorter time, you pay less rent in total.