Mortgage Math... and questions!

[Lis]

I'm in the process of buying my first place (we negotiated, inspected, waiting on one more tiny detail, but I'm hoping to sign the contract next week). I'm very excited for multiple reasons, but one of the most important is that I'll be able to save ~$400-$500 more a month. Rent is absolutely ridiculous in my town, while ownership is much cheaper. I'm excited to bulk up my savings, invest more, and make more definite plans for FIRE.

I know this has been discussed to death here, but please forgive me as my brain is super jumbled and can barely process what 2+2 is.

The loan amount will be $60,800. I've shopped around, and the best mortgage rates I've been given are 4.0% for a 30 year and a 3.25% for a 15 year. Monthly payments will either be ~$300 (I think the exact is $306 but I don't have the papers in front of me) or ~$450 (again, not exact, but close enough for the time being). Assuming no additional payments towards principal, the total cost of the loan will either be ~$108,000 (30 year) or ~$78,000 (15 year). Let's say for sake of argument, I can put $700 a month towards my mortgage. What is the best course of action?

Whether or not paying down your mortgage at an accelerated rate has been discussed ad nauseum. Personally, I paid off my student loans completely a year ago and have loved the feeling of being debt free. But, logically I understand that if I invest my extra money know, I'll most likely get a better rate or return than the 3.25% or 4.0%.

Blargh. I've run the numbers a million and one times. I'm fairly certain I know what I'm going to do, but I'd love to start a discussion to see what I'm missing.

[GrowingTheGreen]

I ran the numbers excluding taxes and ins. Here's what I got:

30 year
Monthly Min Payment: $290
Additional Payment: $700
Accelerated Payoff Time: 5.75 years
Interest Paid: $7,340

15 year
Monthly Min Payment: $427
Additional Payment: $563
Accelerated Payoff Time: 5.67 years
Interest Paid: $5,786

I decreased the extra payment for the 15 year because you'll have a higher minimum payment.

[GuitarBrian]

With mortgages, if you are planning on paying more than the payment (in both cases 30yr & 15yr) you will always come out ahead with a lower interest.

If you are planning on paying the amount of a 15yr mortgage, on a 30yr, you will still come out ahead on the 15yr, since it is lower interest.

It does get tricky, you can get a 30yr and pay off fast or slow, but the 15yr, or 10yr etc... assuming lower interest rate, will beat the 30yr at every step. People end up with 30yr since the payment is lower, so if something happens, they have a lower payment vs an always high one.

With a stable job, and a little money in the bank, I would say go with the 15yr. You save $1,400ish. You can still cover the payments for almost a year with 5k...

[Mermaid3011]

I can only speak from my POV and to me

1) being mortgage free is the first big goal, it must feel amazing.
2) I rather have 3.25% return guaranteed than a potential 6.5% return (minus 30% tax) that is not guaranteed.
3) the quicker I pay my mortgage off the sooner I can start saving/investing in the market. But until then I'll stick to pension savings (RPP and RRSP in Canada) that are invested in the market and watch and learn.


All the best for your new home! Whatever you decide to do - it'll be right for you!

[Altons Bobs]

I agree with PPs. Take the 15-year, pay it off first.

[Lis]

Thank you guys! Choosing the 15 year mortgage is what I wanted to do, so I'm glad to get the confirmation that it's probably best for me.

[nereo]

Thank you guys! Choosing the 15 year mortgage is what I wanted to do, so I'm glad to get the confirmation that it's probably best for me.

I think what we may be "missing" in this discussion is any indication what the rest of your savings looks like.  For example, are you maxing out your IRA?  Do you have (And are you contributing to ) an employer-matched 401(k)?  Do you have additional savings that could pay for an expensive home repair (e.g. a new roof?).

Paying down a mortgage faster than necessary is a hot topic here.  At the very least I would strongly advise against paying down a mortgage faster than necessary (or taking this 15y vs 30y) if you are not at least taking advantage of your tax-advantaged accounts first.

[Thegoblinchief]

+1 to nereo, you absolutely need to be maxing your tax advantaged accounts first. Otherwise using post-tax dollars to pay mortgage is quite inefficient.

[Exflyboy]

I can only speak from my POV and to me

1) being mortgage free is the first big goal, it must feel amazing.
2) I rather have 3.25% return guaranteed than a potential 6.5% return (minus 30% tax) that is not guaranteed.
3) the quicker I pay my mortgage off the sooner I can start saving/investing in the market. But until then I'll stick to pension savings (RPP and RRSP in Canada) that are invested in the market and watch and learn.


All the best for your new home! Whatever you decide to do - it'll be right for you!

It DOES feel amazing... I paid my 30 year one off in 6 years and 3 months.. By making double payments.

The euphoria lasted about a week in my case..:)

[Mermaid3011]

I can only speak from my POV and to me

1) being mortgage free is the first big goal, it must feel amazing.
2) I rather have 3.25% return guaranteed than a potential 6.5% return (minus 30% tax) that is not guaranteed.
3) the quicker I pay my mortgage off the sooner I can start saving/investing in the market. But until then I'll stick to pension savings (RPP and RRSP in Canada) that are invested in the market and watch and learn.


All the best for your new home! Whatever you decide to do - it'll be right for you!

It DOES feel amazing... I paid my 30 year one off in 6 years and 3 months.. By making double payments.

The euphoria lasted about a week in my case..:)

HAHA - well at least a week of a drug free high! Congratulations for making it so quickly!

I am aiming for 12 yrs instead of 25... hoping though to cut it down to 9-10.
I have to say: Canada doesn't give a tax credit for interest occurred, unless the mortgage is for a rental property.
 Once I am more experienced I may arrange a so called "smith manoever" but that's down the road.

[Exflyboy]

I can only speak from my POV and to me

1) being mortgage free is the first big goal, it must feel amazing.
2) I rather have 3.25% return guaranteed than a potential 6.5% return (minus 30% tax) that is not guaranteed.
3) the quicker I pay my mortgage off the sooner I can start saving/investing in the market. But until then I'll stick to pension savings (RPP and RRSP in Canada) that are invested in the market and watch and learn.


All the best for your new home! Whatever you decide to do - it'll be right for you!

It DOES feel amazing... I paid my 30 year one off in 6 years and 3 months.. By making double payments.

The euphoria lasted about a week in my case..:)

HAHA - well at least a week of a drug free high! Congratulations for making it so quickly!

I am aiming for 12 yrs instead of 25... hoping though to cut it down to 9-10.
I have to say: Canada doesn't give a tax credit for interest occurred, unless the mortgage is for a rental property.
 Once I am more experienced I may arrange a so called "smith manoever" but that's down the road.

Yes its highly debatable whether paying off the mortgage is the right thing to do.. I did and I'm glad I did. The savings rate then goes through the roof of course. I used the money I made from the rentals (all part of the same property) to make the double payments.

Then of course once it was paid those double payments went straight into investments when they compounded at a pretty impressive rate.

[mountainstache7]

+1 on paying off the mortgage early. I'm 5 months away from it and the freedom of choices is quite overwhelming with changing careers/extended vacations/surviving rainy days. As already referenced, maxing out 401k/HSA(other tax advantaged accounts) and ensuring you have a solid emergency fund while paying down the mortgage is a great way to go if you can. I guess in this example it's a hybrid plan where you're straddling both sides of the argument for paying off the mortgage early and/or investing extra cash.

[Lis]

You raise some excellent points. I am currently NOT maxing my 401k, though contributing enough to get my employer match. I fully funded a Roth IRA last year and can do so again this year. I was also just told I'm going to be promoted as of 2/1 (YAY!) and that should come with a pay increase, though I don't know the amount yet. I also want to bulk up my efund - been straddling on 3-4 months while renting, definitely want a solid 6-8.

Things are definitely going in the right direction, but I just feel like I was carrying a stack of organized papers and I threw them all up in the air. Trying to figure out everything is hard when things are 'uncertain' - I'm hesitant to use those words because it's all positive things, but I can't formulate an exact plan when I don't have the exact numbers.

I feel a journal coming on...

In the meantime, I'm off to find a decent take-home pay calendar. I don't like Fidelity's.

[nereo]

You raise some excellent points. I am currently NOT maxing my 401k, though contributing enough to get my employer match. I fully funded a Roth IRA last year and can do so again this year. I was also just told I'm going to be promoted as of 2/1 (YAY!) and that should come with a pay increase, though I don't know the amount yet. I also want to bulk up my efund - been straddling on 3-4 months while renting, definitely want a solid 6-8.

Well you've hit all the marks I'd recommend before considering an aggressive paydown of your mortgage (IRA, 401(k) match, E-fund).  At this point it's your call about whether you want to favor a shorter mortgage or more savings.
G'luck... i'd love to hear periodic updates.