Author Topic: 15 YR vs 30 YR mortgage  (Read 12397 times)

noblewolf

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15 YR vs 30 YR mortgage
« on: May 31, 2014, 06:11:42 AM »

Hello everyone.  I'm about to buy a house in CA and I want to ask which loan is better, 15 YR @ 3% or 30 YR @ 4%?  I have cash for a 20% down payment but because I'm in the US Navy, I qualify for a zero down VA loan.  I'm leaning towards a 15 YR because the monthly payments would go mostly to the principal which is the opposite of the 30 YR.  Also, the reason I want a zero down is because I can invest that money to the stock market which is a much better investment than as an equity in my house.   All extra income that I don't spend would go directly to the mortgage so I can be mortgage free hopefully in 4 years before I collect the 50% retirement from the Navy after 20 years of faithful service.  This retirement plus investment income is more than enough to support me and my family in a mustachian way of life.  I'm 34, married with two kids.   

Jack

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Re: 15 YR vs 30 YR mortgage
« Reply #1 on: May 31, 2014, 06:47:40 AM »
You say you want to use a 0% down VA loan because you can get a better return in the market, but then you say that extra income would go to the mortgage to pay it off in four years. This does not make sense. If you want to be debt-free ASAP then do the 15 year, but use the largest down payment you can. If you want to use leverage/arbitrage to maximize your investment returns, then get a 0% down 30-year mortgage and do not pay extra on it.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #2 on: May 31, 2014, 07:06:30 AM »
Jack, thank you for your reply and advice.   I know little on leverage/arbitrage, please explain.  Also, the down payment invested in stocks I believe would appreciate more than sitting in home equity.  A risk I'm willing to take.  I will draw this investment to pay off the mortgage when I retire from the service in four years.   

johnintaiwan

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Re: 15 YR vs 30 YR mortgage
« Reply #3 on: May 31, 2014, 08:54:34 AM »
I think his point is that if you think the stock market is a better investment, you should be funneling extra cash into investments and paying off the mortgage as slowly as possible. If the 20% down payment will pay off better in the stock market, then so will the extra money you would be paying toward the mortgage.

If having no dent is more important to you than getting better returns, you should put down as much as you can and put all extra money toward the mortgage. putting 0 down and then paying as fast as you can doesn't make much sense.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #4 on: May 31, 2014, 12:24:50 PM »
John and Jack, appreciate the help.

Jack

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Re: 15 YR vs 30 YR mortgage
« Reply #5 on: May 31, 2014, 02:34:29 PM »
I know little on leverage/arbitrage, please explain.

In investing, "leverage" means borrowing in order to invest in order to magnify your gains (or losses). For example, say you had $100 to invest, and the market goes up 50%. You end up with $150. That's without leverage. So then instead, you still have $100 but then you borrow another $100. The market still goes up 50%, but you have $300 now so instead of a 50% return you get a 200% return. (Of course, all this ignores costs -- you would be charged interest on the loan, reducing your actual return.)

So what's the catch? Well, assume that the market goes down 50% instead. In that case, in the first example your $100 becomes $50. In the second case, however, your ($100 + $100 borrowed) becomes $100, then the lender forces you to spend your original $100 to pay back the loan in full (this is called a "margin call") and you're left with $0. The market only went down 50%, but you lost 100% of your investment.

How does this apply to a house? Say you have $100,000 and want a $100,000 house. You could just pay cash, and have an asset worth $100,000. Or you could put 20% down and get a mortgage, which means your $100,000 would buy you a $100,000 house and $80,000 worth of stock. The risk, of course, is that in a 2008-style recession the stock might go to $40,000 and the house might go to $50,000, while you still owe $100,000 and thus you end up with negative equity. (Of course, that only matters if you sell -- mortgages don't have "margin calls," only foreclosures if you can't make the payments. If you can wait until the recovery, you're fine.)

"Arbitrage" means profiting off a difference in interest rates (or prices between markets), which is another way of thinking about investing while holding a mortgage. If you assume that your 30-year mortgage costs 4% but the market returns (on average) 7%, then by investing while holding a mortgage you make 3% profit without doing any work. It's not really arbitrage because what that 3% profit is actually doing is paying you for the "2008 risk" in the example above, but it's perhaps useful to think of it that way.

clifp

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Re: 15 YR vs 30 YR mortgage
« Reply #6 on: May 31, 2014, 03:45:40 PM »

Hello everyone.  I'm about to buy a house in CA and I want to ask which loan is better, 15 YR @ 3% or 30 YR @ 4%?  I have cash for a 20% down payment but because I'm in the US Navy, I qualify for a zero down VA loan.  I'm leaning towards a 15 YR because the monthly payments would go mostly to the principal which is the opposite of the 30 YR.  Also, the reason I want a zero down is because I can invest that money to the stock market which is a much better investment than as an equity in my house.   All extra income that I don't spend would go directly to the mortgage so I can be mortgage free hopefully in 4 years before I collect the 50% retirement from the Navy after 20 years of faithful service.  This retirement plus investment income is more than enough to support me and my family in a mustachian way of life.  I'm 34, married with two kids.

At 4% for 30 years loan vs 3% for 15 years loan, I definitely go for the lower interest rate of the 15.  If the interest rate difference was smaller say 3.75% vs 4%, I'd go for the 30 years because of the flexibility and the ability to invest the difference between the smaller 30 year mortgage payment into the market and probably (but by no means certainly) earn more than 4%.
The numbers below represent the total amount of interest paid per $100,000 borrowed (so if the house is 500K multiply by 5) for the 4% 30 year and 3% 15 year loans. As you can see it is significant amount being twice as much at the end of the 15 years when the payments stops.

5 years $19,694.83   $13,131.54
10 years $36,336.41 $21,398.37
15  years $49,608.30 $ 24,304.70

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #7 on: June 01, 2014, 12:00:06 AM »
Jack, thanks for the enlightenment in regards to arbitrage/leverage.  Knowing what I know now, I will pursue a 30 YR VA with 3.5% with Navy Federal Credit Union.  Less mortgage means I have more to invest in well established companies that pays a generous dividend.  I'm in a very low tax bracket at the moment and I assume I would get most of the mortgage interest back. 

What are your thoughts on cashing in on gains while I'm still on a lower tax bracket?   

fixer-upper

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Re: 15 YR vs 30 YR mortgage
« Reply #8 on: June 01, 2014, 12:53:53 AM »
Jack, thanks for the enlightenment in regards to arbitrage/leverage.  Knowing what I know now, I will pursue a 30 YR VA with 3.5% with Navy Federal Credit Union.  Less mortgage means I have more to invest in well established companies that pays a generous dividend.  I'm in a very low tax bracket at the moment and I assume I would get most of the mortgage interest back. 

What are your thoughts on cashing in on gains while I'm still on a lower tax bracket?   

You won't get the interest back, just a tax write off for the amount paid.  If you were in a 20% bracket, you'd only get back 1/5 of your interest, and may not get anything if your standard deduction would be higher than itemizing.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #9 on: June 01, 2014, 01:50:59 AM »


You won't get the interest back, just a tax write off for the amount paid.  If you were in a 20% bracket, you'd only get back 1/5 of your interest, and may not get anything if your standard deduction would be higher than itemizing.

Fixer, I will definitely start keeping my receipts.  More than likely, I will have to itemize since my standard deduction will be almost as much as the interest that I will be paying.  Thank you for your response. 

Zette

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Re: 15 YR vs 30 YR mortgage
« Reply #10 on: June 01, 2014, 08:09:15 AM »
With the 0% down loan, will you have to pay PMI until your equity reaches 20%?  This is just money down the drain, so I would recommend the 20% downpayment regardless.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #11 on: June 01, 2014, 08:19:24 AM »
With the 0% down loan, will you have to pay PMI until your equity reaches 20%?  This is just money down the drain, so I would recommend the 20% downpayment regardless.

Zette, VA loans don't require you to pay PMI, but 2% is added to the loan to get this benefit. 

SDREMNGR

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Re: 15 YR vs 30 YR mortgage
« Reply #12 on: June 02, 2014, 07:46:56 PM »
Assuming the average price for a home in SD at $400k, and a 2% fee to get 0% down, that is $8k.  So a 20% down payment of $80k would save you $8k, which is an assured 10% return.  You cannot get guaranteed return like that from the stock market.  Also, if you go 20% down, you can get better rates for the loan I would think.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #13 on: June 03, 2014, 08:19:00 AM »
Assuming the average price for a home in SD at $400k, and a 2% fee to get 0% down, that is $8k.  So a 20% down payment of $80k would save you $8k, which is an assured 10% return.  You cannot get guaranteed return like that from the stock market.  Also, if you go 20% down, you can get better rates for the loan I would think.

With 20% down, your money is tied down in equity making only the mortgage interest earning not the 10%.   If you invest the down payment which let say is $80K, in stocks and it returned 8% averaged in four years, which is pretty conservative comparison to the annual return of stock market which is 10%, I would have earned 28K in interest.  Making up that 8K in  VA loan in less than two years.

SDREMNGR

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Re: 15 YR vs 30 YR mortgage
« Reply #14 on: June 03, 2014, 09:11:15 AM »
True ONLY if the stock market did return that.  You have no guarantees.  I understand that the return will be only for the first year then just the loan interest rate afterwards.  But a guaranteed return vs. Expected return is what you have to consider.   Reading the forums here, you'd think that you are guaranteed a 10% return on stocks consistently which just isn't the case.  It's your risk vs reward call.  I don't know what your cash flow situation is like, but having breathing room is worth the peace of mind.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #15 on: June 03, 2014, 11:23:46 AM »
It's TRUE that in any investment there is NO guarantee but I am willing to go by historical returns in the stock market which is more than 10% historically. I am currently investing in good companies that pays dividend and also appreciates in share prices.  A better bet than gauranteed 3.5% in interest in mortgage.The dividend itself pays a generous 2 to 2.5%.  But like you said, you have to risk to harvest the reward.

Fishingmn

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Re: 15 YR vs 30 YR mortgage
« Reply #16 on: June 04, 2014, 11:01:37 AM »
Personally, I'd do about the opposite of what you're planning (and did at your age).

I'd get the 15 year loan with 20% down.

Reasoning -

- Pay much less interest over time
- Get in at a lower interest rate
- No extra 2% with the larger down payment
- Stock market is at record high so I think it's a perfect time to use cash as down payment vs. ride the market
- Less risk I believe as you have more equity locked into the house

Once you have loan locked in then put in as much as you can over time into the stock market vs. paying down mortgage early. You've locked in a 3% loan and by putting money into the market over time you are dollar cost averaging over a long period which should be a better bet at getting more historical returns.

Jack

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Re: 15 YR vs 30 YR mortgage
« Reply #17 on: June 04, 2014, 11:51:22 AM »
- Stock market is at record high so I think it's a perfect time to use cash as down payment vs. ride the market

What usually happens after the stock market hits a record high? It goes higher.

For every "record high" you can point to that marked the beginning of a bear market, I can point to a bunch more "record highs" that were at or near the beginning of a bull market.

Sure, this record high could be like 1/3/2000 or 1/3/2008, but it could also be like 1/3/1996.

All we really know is that the market always goes up, so if you can stomach the volatility (i.e., if you have a long investing horizon and you can resist the urge to panic-sell) then you're always mathematically better off shoveling as much money in as you can, as soon as possible.

Fishingmn

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Re: 15 YR vs 30 YR mortgage
« Reply #18 on: June 04, 2014, 12:59:33 PM »
Even if you take out my comment about market timing I like the idea of being a bit more risk averse by putting more down in a shorter term, lower interest loan and then regularly adding money to the stock market.

As you say, everyone's own risk tolerance is really the important thing to understand as what's right for me may not be best for noble.

JoyBlogette

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Re: 15 YR vs 30 YR mortgage
« Reply #19 on: June 04, 2014, 01:13:12 PM »
Personally, I'd do about the opposite of what you're planning (and did at your age).

I'd get the 15 year loan with 20% down.

Reasoning -

- Pay much less interest over time
- Get in at a lower interest rate
- No extra 2% with the larger down payment
- Stock market is at record high so I think it's a perfect time to use cash as down payment vs. ride the market
- Less risk I believe as you have more equity locked into the house

Once you have loan locked in then put in as much as you can over time into the stock market vs. paying down mortgage early. You've locked in a 3% loan and by putting money into the market over time you are dollar cost averaging over a long period which should be a better bet at getting more historical returns.

This is what I would do as well.

Poorman

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Re: 15 YR vs 30 YR mortgage
« Reply #20 on: June 04, 2014, 05:38:54 PM »
It's TRUE that in any investment there is NO guarantee but I am willing to go by historical returns in the stock market which is more than 10% historically. I am currently investing in good companies that pays dividend and also appreciates in share prices.  A better bet than gauranteed 3.5% in interest in mortgage.The dividend itself pays a generous 2 to 2.5%.  But like you said, you have to risk to harvest the reward.

If you want to go by historical returns, then you need to realize that stocks have returned less than 10%, including dividends, over the long run. 

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

According to this site, the compounded annual growth rate from 1928-2013 was 9.55%.  You have to use the geometric average to get compounded growth rate.  The problem is that many financial articles simply "average" the yearly returns of the market and come up with a totally unrealistic expectation of what can be earned in the market.  Many articles say 11-12%.  This is using the arithmetic average and it's not the way to measure compounded annual growth rate or to gauge future expected returns.

- Stock market is at record high so I think it's a perfect time to use cash as down payment vs. ride the market

What usually happens after the stock market hits a record high? It goes higher.

For every "record high" you can point to that marked the beginning of a bear market, I can point to a bunch more "record highs" that were at or near the beginning of a bull market.

Sure, this record high could be like 1/3/2000 or 1/3/2008, but it could also be like 1/3/1996.

All we really know is that the market always goes up, so if you can stomach the volatility (i.e., if you have a long investing horizon and you can resist the urge to panic-sell) then you're always mathematically better off shoveling as much money in as you can, as soon as possible.

Stocks don't always go up.  The years from 2000-2012 showed no growth whatsoever.  Bonds outperformed stocks over that time.  Similarly, paying down the mortgage also outperformed stocks.

1996 was the beginning of the worst bubble in US stock market history, so using that as a comparison point is incredibly reckless.

Mathematically, you are better off buying stocks when they are good value (2009) and shunning them when they are not such a good value (2000, 2007).  The Shiller CAPE measure of value, shows that we are in one of the most expensive times in stock market history, so it would be prudent to think that stocks may have low returns, or possibly negative returns for the next decade.

Here's is an article with some good food for thought:  http://www.businessinsider.com/stocks-crash-2014-1

Left

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Re: 15 YR vs 30 YR mortgage
« Reply #21 on: June 04, 2014, 06:00:58 PM »
hm didn't see this part mentioned but why not take the 30 year mortgage then make payments like it is 15 years? But if you find you dont have the money for that high you can always go back to the 30 year rates and not risk losing the house?

SDREMNGR

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Re: 15 YR vs 30 YR mortgage
« Reply #22 on: June 04, 2014, 07:30:04 PM »
His post seems to indicate that he would be able to deal with the higher cash needs of the 15 year loan.  And the difference between a 3% loan and 4% loan is a 33% higher interest rate.  That's a huge deal. 

There is merit to what you are saying as far as being able to make cashflow (since that is what got most of the people who lost their homes in trouble) but that's mostly because those people were in floating rate loans.  Most people who get in fixed loans are able to handle the debt load.

train_writer

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Re: 15 YR vs 30 YR mortgage
« Reply #23 on: June 05, 2014, 09:41:28 AM »
hm didn't see this part mentioned but why not take the 30 year mortgage then make payments like it is 15 years? But if you find you dont have the money for that high you can always go back to the 30 year rates and not risk losing the house?


This is what I am currently doing! I am in my 2nd year of paying the 15-year-mortgage-rate, but when i'll have a rainy day, i just return to the low 30-rate-payment

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Re: 15 YR vs 30 YR mortgage
« Reply #24 on: June 05, 2014, 10:39:51 AM »
His post seems to indicate that he would be able to deal with the higher cash needs of the 15 year loan.  And the difference between a 3% loan and 4% loan is a 33% higher interest rate.  That's a huge deal. 
from my understanding the interest rates make no difference. The difference is negated on the 30 year loan if paid off in 15 years since they only have half the time to collect it. Same with the 15 years being paid off in less than 15 years. But still, if he plans to pay it off that early, the 1% difference on the interest becomes smaller

Dollarbill49

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Re: 15 YR vs 30 YR mortgage
« Reply #25 on: June 05, 2014, 12:25:23 PM »
If you have a four year horizon (you said you'd like the mortgage to be paid off in that time), then you should not be investing in the "market" funds that  you need to use to pay off a liability.  Too short of a time period, too much risk.

Hamster

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Re: 15 YR vs 30 YR mortgage
« Reply #26 on: June 06, 2014, 10:10:51 AM »
His post seems to indicate that he would be able to deal with the higher cash needs of the 15 year loan.  And the difference between a 3% loan and 4% loan is a 33% higher interest rate.  That's a huge deal. 
from my understanding the interest rates make no difference. The difference is negated on the 30 year loan if paid off in 15 years since they only have half the time to collect it. Same with the 15 years being paid off in less than 15 years. But still, if he plans to pay it off that early, the 1% difference on the interest becomes smaller
The interest rate still makes a meaningful difference. 3%x 15 years is clearly higher than 4%x 15 years (of a 30 year mortgage).

 When I do the math, if you have a 15 year mortgage at 3% on $100k, zero down, you pay $690 per month x 15 years. Total interest paid is $24k.

If you have a 30 year mortgage at 4% that gives a payment of $477. If you pay an extra $213 a month as a prepay (same monthly payment as the 15 year above), you end up paying for about 16.5 years and total interest paid is about $37k. That's an extra 50% in interest charges over the 15 year at 3%.

Please confirm the math.

RaymondG

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Re: 15 YR vs 30 YR mortgage
« Reply #27 on: June 06, 2014, 11:03:03 AM »
His post seems to indicate that he would be able to deal with the higher cash needs of the 15 year loan.  And the difference between a 3% loan and 4% loan is a 33% higher interest rate.  That's a huge deal. 
from my understanding the interest rates make no difference. The difference is negated on the 30 year loan if paid off in 15 years since they only have half the time to collect it. Same with the 15 years being paid off in less than 15 years. But still, if he plans to pay it off that early, the 1% difference on the interest becomes smaller
The interest rate still makes a meaningful difference. 3%x 15 years is clearly higher than 4%x 15 years (of a 30 year mortgage).

 When I do the math, if you have a 15 year mortgage at 3% on $100k, zero down, you pay $690 per month x 15 years. Total interest paid is $24k.

If you have a 30 year mortgage at 4% that gives a payment of $477. If you pay an extra $213 a month as a prepay (same monthly payment as the 15 year above), you end up paying for about 16.5 years and total interest paid is about $37k. That's an extra 50% in interest charges over the 15 year at 3%.

Please confirm the math.

Not so simple. You are making it too simple by suming the face value of payments without considering interest rate (or discount rate, which could be set to your portfolio long-term return rate.) Use Excel Spreadsheet to calculate PV (present value), using a cash flow roughtly with total closing cost including down payment, all monthly payments, and assume a discount rate such as 5% for long-term return. The PV is the present value to own the house fully. Depending on the discount rate (assumption of your attainable overall return) you choose, the conclusion to using which loan option may be different. If you can earn much more than the mortgage rate, then use longer term mortgage if maxmizing investment gain is high priority.
« Last Edit: June 06, 2014, 11:20:22 AM by RaymondG »

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #28 on: June 06, 2014, 09:38:50 PM »
Personally, I'd do about the opposite of what you're planning (and did at your age).

I'd get the 15 year loan with 20% down.

Reasoning -

- Pay much less interest over time
- Get in at a lower interest rate
- No extra 2% with the larger down payment
- Stock market is at record high so I think it's a perfect time to use cash as down payment vs. ride the market
- Less risk I believe as you have more equity locked into the house

Once you have loan locked in then put in as much as you can over time into the stock market vs. paying down mortgage early. You've locked in a 3% loan and by putting money into the market over time you are dollar cost averaging over a long period which should be a better bet at getting more historical returns.


Fishingmn, I'm planning on doing everything you mentioned exept the dp.  I really believe that I will get the best return in the stocks even if I have to pay the 2% fee. 

 
If you have a four year horizon (you said you'd like the mortgage to be paid off in that time), then you should not be investing in the "market" funds that  you need to use to pay off a liability.  Too short of a time period, too much risk.

I thought about this for quite a bit.  I have to purchase a fixer upper order to pay it off in four years.  Knowing what  I know now, I'm planning on a move-in-ready property due to the upcoming 8-9 month deployment.  Don't want to leave my family in a fixer upper. If time was not a problem, then this could have been a reality.  Still planning on paying it off faster, but closer to 15. 

There are alot of great advices here.  I want to thank all of you for taking the time to share your thoughts. 

We finally arrived here in the US from being stationed overseas.  Looking forward to house hunting! 

escolegrove

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Re: 15 YR vs 30 YR mortgage
« Reply #29 on: June 08, 2014, 09:24:26 AM »
My husband is also in the US Navy. We learned the hard way to only do 30 year loans. 15 year loans create higher monthly payments so it is harder to qualify for a loan later. We personally put as little money down into our houses. We like to save the money for later houses or other investment possibilities. This is especially true is you want to rent the house out later. You will have a large downpayment tied up. Just my two sense, especially being military.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #30 on: June 09, 2014, 09:35:20 AM »
My husband is also in the US Navy. We learned the hard way to only do 30 year loans. 15 year loans create higher monthly payments so it is harder to qualify for a loan later. We personally put as little money down into our houses. We like to save the money for later houses or other investment possibilities. This is especially true is you want to rent the house out later. You will have a large downpayment tied up. Just my two sense, especially being military.

Thank you for responding.   We are about to talk to lenders about loans on a 250K house.  The difference between a 15 yr @ 2.875 and 30 yr @ 3.875 in interest on the life of the loan in huge!  I only pay 58K in interest in the 15 yr vice 175K in the 30 yr.  That's a about 117K difference.  I know that the payments are smaller on a 30 yr and you can invest it if you want, but the thought of my payments going mostly to interest rather than the principal does not sit well with me.  Thank you for your husbands service and yours as well.

okashira

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Re: 15 YR vs 30 YR mortgage
« Reply #31 on: June 09, 2014, 02:07:43 PM »
I made this calc just for you.

https://www.dropbox.com/s/eod2qqzl8oceafr/15yr%20vs%2030yr.xlsx

3% vs 4% 15 yr vs 30 yr.

You can play with the investing return and interest rates.

If you got a 5.4% tax free investing return, and invested the extra from the slightly lower 30 yr payment, your net worth would be the same.


TLDR: 3% 15 yr 4% 30 yr equivalent to 5.4% investing return if you choose 15 year.
If you know you will get better then 5.4%, by all means choose the 30 year.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #32 on: June 09, 2014, 02:26:25 PM »
I made this calc just for you.

https://www.dropbox.com/s/eod2qqzl8oceafr/15yr%20vs%2030yr.xlsx

3% vs 4% 15 yr vs 30 yr.

You can play with the investing return and interest rates.

If you got a 5.4% tax free investing return, and invested the extra from the slightly lower 30 yr payment, your net worth would be the same.


TLDR: 3% 15 yr 4% 30 yr equivalent to 5.4% investing return if you choose 15 year.
If you know you will get better then 5.4%, by all means choose the 30 year.


Great spreadsheet okashira!  This will definitely be useful to me.  Thank you so much!

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Re: 15 YR vs 30 YR mortgage
« Reply #33 on: June 09, 2014, 09:10:07 PM »
noblewolf, there is no for sure right answer about it.  Statistically, stocks will do better than the house on average, however this is an average; if you go the stock route, keep in mind you will have to keep your cool and not sell them if the market crashes.  For example, if you invested 80k in stocks today and next year it was only worth 40k would you still hold on and shovel more money in? 

The other option is to forget stocks and throw everything you have to paying down the house.  This route is more straight-forward and simple but statistically will probably not benefit you as much in terms of gains.  Since stocks vary in returns vary greatly each year, only years later from now will you be able to look back and figure out which option pays off better.


okashira

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Re: 15 YR vs 30 YR mortgage
« Reply #34 on: June 10, 2014, 06:14:34 PM »
Since he wants to pay it off in 4 years, the choice is clear from my spreadsheet: take the 15 year.

He'd need like 15%++ stock market returns to come out ahead in just 4 years to choose the 30 over the 15.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #35 on: June 11, 2014, 08:37:31 AM »
We finally found a house!  We are in a time sensitive situation so we had to make a quick decision sbut the house is perfect, except we wanted one story vice two.  Brand new house, 1800 sf, 4/3/2 with 8500 sf lot.  It's a hybrid home, easy to cool and heat due too awesome insulation. 16 SEER HVAC, tankless water heater, and it comes with a pre-paid 20 yr 2K solar system that will definitely lower down the electric bill.  Ther are throwing in free window treatments, landscaping w/springklers both back and front, SS appliances to inlude fridge and washer and dryer.

As far as the loan, I'm still debating.  15 yr is doable but it will be little bit tight on budget, but I have enough money on liquid investments to augment the payments if needed.  30 yr gives me the flexibility but with higher interest even if I pay extra every month equal to a 15 yr loan.  Paying it off in 4 yrs will not be feasible unless I cash in all my investments after 4 years to pay the rest off.

Also, the builder is paying all closing cost if I use their preferred lender which is quoting me 3.5 for 15 and 3.875 for 30.  Not a big difference at all, so i'm leaning towards 30 and just keep investing in stocks.   I wanted to use another bank but they are quoting me only a little bit lower than the builders preferred lender.  I think it's a no brainer to use their lender to save 10K.

Well, I'll keep you guys posted as these unfolds.  Thanks again.

Poorman

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Re: 15 YR vs 30 YR mortgage
« Reply #36 on: June 11, 2014, 11:28:24 AM »
Make sure and check the APR% for both mortgage options, not just the raw interest rate.  The fees and points get added to the APR% so it gives you a truer picture of what you'll be paying.  The reason I say this is because 3.875 seems exceedingly low for a 30 year right now, so I'm guessing some up front points are tacked on.  If your plan is to pay off the mortgage in 4 years, you want to pay as few up front points as possible (preferably none) because the benefit of "buying" a cheaper rate through points is completely lost when you pay the mortgage off early.  You'd be better off socking the points money into your investments and then using it to help pay off the loan when the time comes.

okashira

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Re: 15 YR vs 30 YR mortgage
« Reply #37 on: June 11, 2014, 12:16:45 PM »
Make sure and check the APR% for both mortgage options, not just the raw interest rate.  The fees and points get added to the APR% so it gives you a truer picture of what you'll be paying.  The reason I say this is because 3.875 seems exceedingly low for a 30 year right now, so I'm guessing some up front points are tacked on.  If your plan is to pay off the mortgage in 4 years, you want to pay as few up front points as possible (preferably none) because the benefit of "buying" a cheaper rate through points is completely lost when you pay the mortgage off early.  You'd be better off socking the points money into your investments and then using it to help pay off the loan when the time comes.

I don't reccomend looking at APR since there is no standard to calculate it. Different banks calculate APR in fifferent ways.

Just post up the base interest rates and all closing costs and we can evaluate from there.

noblewolf

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Re: 15 YR vs 30 YR mortgage
« Reply #38 on: June 12, 2014, 07:48:50 AM »
Make sure and check the APR% for both mortgage options, not just the raw interest rate.  The fees and points get added to the APR% so it gives you a truer picture of what you'll be paying.  The reason I say this is because 3.875 seems exceedingly low for a 30 year right now, so I'm guessing some up front points are tacked on.  If your plan is to pay off the mortgage in 4 years, you want to pay as few up front points as possible (preferably none) because the benefit of "buying" a cheaper rate through points is completely lost when you pay the mortgage off early.  You'd be better off socking the points money into your investments and then using it to help pay off the loan when the time comes.

The builders preffered lender go by APR which is 3.875 with no points tacked on.  I'm not buying any points to lower the interest.  I just locked in this rate yesterday and since this is the preffered lender of the builder, they are paying up to $7050 in closing cost.  Since this is a 30 yr VA, It will be ZERO down and no PMI but I have to close in June 30 to get all the incentives, it a quarterly thing that the company wants to hit.

Poorman

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Re: 15 YR vs 30 YR mortgage
« Reply #39 on: June 12, 2014, 12:27:10 PM »
Sorry, forgot it was a VA loan.  Those do go for lower rates due to the VA insurance backing.

sol

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Re: 15 YR vs 30 YR mortgage
« Reply #40 on: June 12, 2014, 07:00:29 PM »
The general rule of thumb that I've always heard is that you should only do a 15 year mortgage if the rate is more than 1% below the 30 year rate.  I have no idea what math that rule is based on.

We recently opted for a 15 year at 3.25% rather than a 30 year at 4.5%.  Whether or not that was a wise decision is hard to know just yet.

The numbers quoted here for a 15 year VA loan are not great.  The 30 at 3.875 is good, but just because you can't see any points doesn't really mean anything.  Lots of times they hide them, by rolling them into the payments and not telling you, or taking them out of the lender's closing costs, or having the builder prepay them, or overcharging for appraisal or something.  Lenders have a ton of tricks up their sleeves to produce whatever number the buyer seems to be focusing on, so the only way to really tell if you're getting a good deal is to get four or more GFEs and then spend a few hours reading them all really carefully.  Almost nobody actually does this.

Remember that as the buyer you are the source of ALL funds in this transaction.  Everyone else except is making money off of this deal, and the only source of that money is your checking account.  All the shenanigans about who pays what are just BS smokescreen to get you to sign over that big fat check, from which they will all take a piece.