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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: JackFrost on February 27, 2017, 03:14:12 PM

Title: Can a 30 year 4% down mortgage beat a 15 year 20% down?
Post by: JackFrost on February 27, 2017, 03:14:12 PM
My wife and I are starting the process of buying our first home and after speaking to a banker while getting pre-approvals he recommended we read the below article after we said we wanted a 15 year mortgage:

http://www.edelmanfinancial.com/education-center/articles/1/11-great-reasons-to-carry-a-big-long-mortgage

The rough summary of the article is that if you skimp on the down payment (put only 4% down) and you get the 30 year mortgage so you have lower monthly payments and then take the "savings" combined with money gained by larger tax deductions on the 30 year mortgage and invest them you will come out ahead of someone that gets a 15 year mortgage to reduce the total amount of interest paid as well as putting 20% down in order to avoid pmi and make the total loan even smaller.  This worries me because we were planning to do exactly the latter.  For a $500k home we would pay around $110k in interest over the lifetime of the loan vs $330k in interest for the 30 year loan and we have the money to comfortably put in a 20% down payment.

My gut is screaming at me "Debt is bad, minimize debt at all times" but I don't want to dismiss this suggestion completely without due diligence.  It seems very VERY un-Mustachian though.  What are your thoughts?
Title: Re: Can a 30 year 4% down mortgage beat a 15 year 20% down?
Post by: dandarc on February 27, 2017, 03:22:21 PM
I read that as 4% interest rate, and didn't see any mention of PMI.  The example was comparing 100% down to 20% down.  Math says low-interest fixed rate, long term debt + investing in something with a much higher expected return = high probability of success.

You'd have to run the numbers to know for sure on the PMI if 5% or less down is better than 20% down.
Title: Re: Can a 30 year 4% down mortgage beat a 15 year 20% down?
Post by: Proud Foot on February 27, 2017, 03:38:51 PM
Definitely run the numbers and you obviously have to include all the variables.  For a $500k house and staying the full 30 years you would need a return of 10.7% to come out even doing the 30 year vs the 15 year.  Anything less and the 15 year wins out (this assumes you invest your full payment once the mortgage is paid off and not investing the down payment difference).  If you invest the difference in the downpayment then you would only need a 5% return. This obviously does not include anything for PMI or net tax so your monthly invested amount for the 30 year would be less than what I calculated.  Also if you have the cash to be able to do the 20% down then you're in a better place than if you had to have PMI. This is using rates of 4.29%/30 yr and 3.48%/15 yr.

Title: Re: Can a 30 year 4% down mortgage beat a 15 year 20% down?
Post by: okobrien on February 27, 2017, 03:46:11 PM
I can't tell you which is better for you, too many unknowns. One thing is clear, however. The banker will earn a bigger commission on the 4% down option. This is the same situation as the car dealer telling you that financing it is the better option.

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