Author Topic: Evaluating mortgage choices and down payments for a primary residence  (Read 689 times)

QuestionableGoatee

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Hey hive mind!

I've been a regular blog reader and occasional commenter since nearly the beginning (mid 2011), but so far I've only browsed the forums and never posted.  I assume this has been covered, but my normally productive searching skills have thus far failed, so I'm breaking my pattern as a lurker.  Can someone please point me to a site/calculator that allows you to plug in all the important bits to evaluate different mortgages over, say, a 10 year time frame?  I'm specifically trying to sort out which mortgage choice (between various interest rates, fixed vs ARM structures, down payment amounts, point options, etc.) would be most advantageous for net worth by the time I sell the house, assuming I'll only live there for X years (likely 7-10) and assuming I'll invest all the difference (pretty accurate for me).  I'm not looking to compare renting vs buying - I'm trying to quantify and thereby minimize the losses that I predict throwing such a vast amount of money into a single piece of real estate (primary residence) will incur vs. my typical index fund investing.  As a broad/simplified example question: if I sell the house after 10 years, would I be better off with a lower interest rate 15 year fixed mortgage or a higher interest rate 30 year mortgage, assuming I invest the difference?  I believe the answer to this one is the 30 year - but by how much?  This magical calculator that I believe exists would answer this question with numbers (assuming I provide lots of numerical input up front), and then by comparing different scenarios and mortgages, I'll feel better about making such a large decision.

Does this exist?  Or am I pretending that something complicated can be simplified into a public calculator?  Thanks in advance!
« Last Edit: March 14, 2019, 03:11:17 PM by QuestionableGoatee »

QuestionableGoatee

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Re: Evaluating mortgage choices and down payments for a primary residence
« Reply #1 on: March 13, 2019, 07:16:58 AM »
I'd be interested in learning how to run all these calculations myself, but I figured asking for a calculator would get a faster hit than asking for finance lessons :)  I could be very wrong about that, though, since it's such a lofty calculator and the MMM forum knowledge base is so vast.

With that in mind, there are two specific scenarios/calculations I'd like to run that sound very doable to my optimistic self.  If someone could explain the proper way to handle these, I'd appreciate it.  I spend a lot of time in Excel but rarely with the finance-specific functions (which may not even be required?).

1) Compare net worth after 8 years between a 15-year fixed rate mortgage for $224k at 3.875% interest and a 30-year fixed rate mortgage for $224k at 4.250% interest.  This is based on a hypothetical $280k home and a 20% down payment.  I'd be investing all the additional available money from taking the 30-year option.  Assume inflation at 2% (if it matters - same for both), home appreciation at inflation + 1%, and stock market at inflation + 7%, for a difference in gains of 6%.  Property taxes and fees would also be the same for both.  Are those reasonable numbers, and does that cover all the required input for this calculation?  I tried to do this in a very manual way last night, but I assume there's a better (and likely more accurate) method.  For the sake of this calculation, I'll also assume I'm taking the standard deduction on my federal income taxes to remove that component - unless others feel strongly against that and want to factor it in.

2) Compare net worth after 8 years between a 15-year fixed rate mortgage for $224k at 3.875% interest with 20% down and a 15-year fixed rate mortgage for $210k at 3.750% interest with 25% down.  All other values and assumptions same as above (same $280k home).

affordablehousing

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Re: Evaluating mortgage choices and down payments for a primary residence
« Reply #2 on: March 13, 2019, 01:27:58 PM »
I would suggest making some amortization tables in excel and noodle to your heart's content. At that small a difference in rate from 15 to 30 year, you're saving, what, $829 a year in interest? It seems fairly trivial and more should be driven by whether you'd like to buy more property, stay there longer potentially, etc. Have other things you'd need cashflow for. We were in a similar point on a house with a similar price point and we only looked into refinancing when we could drop the rate 1%. All the loan situations you present sound reasonable.

foggyzhenya

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Re: Evaluating mortgage choices and down payments for a primary residence
« Reply #3 on: March 14, 2019, 09:28:36 AM »
I, too, have been lurking for a while, but none the wiser, apparently, as I haven't been able to figure out the answer to this very question.

If we only expect to stay 5-7 years, does it make more sense to take 180K out at 3.5% with a 7/1 ARM or at 4% for 30 years? Is it worth putting down another 20% to get the monthly payment down by $200 (for the ARM option)?

I'd like to also reliably max out a solo 401K and an IRA every year, so I hesitate to tie up 40K in the mortgage. The extra 40K down could also be a downpayment on at least one investment property in one of our home states in the Midwest. Is it true that having a 15-year mortgage will make it hard to get mortgages on investment properties?

Any advice and wisdom would be much appreciated!

ilsy

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Re: Evaluating mortgage choices and down payments for a primary residence
« Reply #4 on: March 14, 2019, 11:20:56 PM »
I, too, have been lurking for a while, but none the wiser, apparently, as I haven't been able to figure out the answer to this very question.

If we only expect to stay 5-7 years, does it make more sense to take 180K out at 3.5% with a 7/1 ARM or at 4% for 30 years? Is it worth putting down another 20% to get the monthly payment down by $200 (for the ARM option)?

I'd like to also reliably max out a solo 401K and an IRA every year, so I hesitate to tie up 40K in the mortgage. The extra 40K down could also be a downpayment on at least one investment property in one of our home states in the Midwest. Is it true that having a 15-year mortgage will make it hard to get mortgages on investment properties?

Any advice and wisdom would be much appreciated!
ok, there is such a thing as debt to income ratio that makes you qualify for a mortgage and that thing is pretty, well, how should I put it, retarded. So, if your income is pretty high, you shouldn't worry about your D/I ratio, but if it's, let's say, average or low, then your 15 year mortgage might not allow you to get another loan on an investment property, since you will have a higher D/I ratio compared to a 30 year mortgage.
I can bring an example from my situation. I have about $200k of equity in my primary residence, so I could qualify for at least $150k HELOC (theoretically). That's not all, I own a few rental properties (free and clear), but since I do total rehabs on them and I write off all those expenses, my on paper income from rentals is about 4k/property/year (not impressive). Guess what I have discovered recently? I DO NOT qualify for a $80k HELOC on my personal property because of my D/I ratio. In other words, my income is too low. Well, it's enough for me to support my 3 dependents and purchase rentals every year. But who am I to tell the bank what's enough and what's not. So, no more mortgages for me. Cash only...and... CCs, which I have been using anyways.
« Last Edit: March 14, 2019, 11:26:33 PM by ilsy »

Finances_With_Purpose

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Re: Evaluating mortgage choices and down payments for a primary residence
« Reply #5 on: March 15, 2019, 04:14:22 AM »
I would lean towards 15-year.

You're talking about taking large, concrete actions over the short term (7-10 years).  Over that timeframe, your assumptions may fly out the window: interest rates and market returns especially.  You can't assume the market will return 7-10% over any seven-year period, and I think many would tell you particularly over this seven-to-ten-year period, while valuations are very high going in. 

Spreadsheets and projections like you're doing work well over a 20-30 year horizon, which is how most folks here do their long-term planning.  They don't work nearly as well over a 10-year or shorter horizon, especially when the main thing you're look at to compare is market returns. 

Given that, you're really comparing a much higher-risk market investment strategy with paying down your house a lot more.  (E.g., you could come out net negative on investments over that timeframe, but that's virtually impossible over a 20-30 year timeframe.)  For many reasons, paying down the house more on a 15-year note makes more sense if you plan to sell the house anyway in 7-10 years, so you have enough equity built up. 

You don't even need the spreadsheets for that.  You didn't get into this, but my larger question would be why buy a house at all with a planned turnaround of only 7-10 years... 

You're paying the transaction costs both times, which drops any return you could see.  And to get a return assumes your particular market will go up pretty quickly.  (All of these are reasons to do the 15-year, by the way.) 

foggyzhenya

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Re: Evaluating mortgage choices and down payments for a primary residence
« Reply #6 on: March 15, 2019, 07:13:57 AM »
Your question is probably for the author of the original post, but in my case, the reason to buy, even though I expect to sell in 5-7 years, is that our rent in NYC is $3K/month. Mortgage on a coop apartment, with monthly maintenance (half of which is taxes), will be around $2200 with 20% down. Given these numbers, I think we would break even by buying vs. renting after about one year, two if you preemptively factor in the costs associated with selling.