Specific Question(s): Our interest rate on our mortgage is great, at 3.75%. I believe common advice is if your interest is under 4%, you are better off investing your extra money rather than overpaying the mortgage. However, refinancing to a 15 year mortgage from a 30 year mortgage would save us about 100K in interest even if we get the same interest rate (and my understanding is we'd probably be able to get one a bit lower). It also lines up conveniently with the timing of our entry into stopping retirement/gaining more flexibility in life.
All assume a $200k mortgage @ 3.75%Never have seen a case of 3.75% beating 4.0%. How did that happen?
Only a 4% return will be surpased by the 15 yr mortgage, and only at year 29.
sorry, it's in the details I didn't explain thoroughly enough.All assume a $200k mortgage @ 3.75%Never have seen a case of 3.75% beating 4.0%. How did that happen?
Only a 4% return will be surpased by the 15 yr mortgage, and only at year 29.
This is all super helpful. I knew the math said no, but I didn't know it was quite so clear! We probably should focus more on reducing taxes anyway, at our income levels - we are not yet maxing out our space. I am occasionally swayed by the idea of being debt-free at 45, but we can also just sell the house to accomplish that, so NBD.exactly - this was the most simple of projections, if you are able to invest in tax-advantaged accounts that will continue to favor keeping the 30yr mortgage. If you believe we will see more than 4% growth not adjusted for inflation then it favors keeping the 30yr. FWIW, the worst 30 year period returned 3.2% after inflation (almost 6% pre-inflation - same as the green line on the graph).
even though the 15yr mortgage is able to put more than double the amount towards investments after15 years, it never catches upTry as it might, it just never does catch up at all. As long as the investment interest rate is greater than the mortgage interest rate, investing always wins.to all but the most conservative projections.
P | 200000 | Mortgage Principal |
i | 0.0375 | Mortgage interest rate |
r | 0.04 | Investment interest rate |
n1 | 30 | Mortgage length, option 1, yr |
n2 | 15 | Mortgage length, option 2, yr |
Pmt/yr | 12 | Number of payments per year |
Pmt1 | =PMT(B2/B6,B4*B6,-B1) | Mortgage payment, option 1 |
Pmt2 | =PMT(B2/B6,B5*B6,-B1) | Mortgage payment, option 2 |
FV1 | =FV(B3/B6,B4*B6,-(B8-B7)) | Results from investing the difference in mortgage payments for n1 years |
FV2 | =FV(B3/B6,(B4-B5)*B6,-B8) | Results from investing the option 2 payment for (n1 - n2) years |
hmmm... i think the differences lie in that I was 'lazier' and just calculated contributions and returns annually. your method is more exact.even though the 15yr mortgage is able to put more than double the amount towards investments after15 years, it never catches upTry as it might, it just never does catch up at all. As long as the investment interest rate is greater than the mortgage interest rate, investing always wins.to all but the most conservative projections.
[MDM's methodology]