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15 year mortgage vs 30 year mortgage and how to fund returns

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hash_function
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15 year mortgage vs 30 year mortgage and how to fund returns  Reply with quote  

Hi:

I live in Boston and currently have a 30 year mortgage with a blended APR of 5.415%
with a monthly payment of $3783.78. I am trying to refinance the house and these
are my options:

1) a new 30 year mortgage for 4.035% with a monthly payment of $3177.90, leading
to a monthly saving of $1119.33 dollars and total savings in 5 years of $30,970
2) a 15 year mortgage with interest of 3.311% with a monthly pmt of $4296.00 with a 5 year savings of $55K.

We were looking at the second option and how to fund the remaining $500 increase in
the monthly payment.

These are the options:
1) reducing my 401K to the amount my employer would match yearly ($4000)
2) reducing my contributions to the employee share program (I get a 15% discount
on ESPP).

Its not clear to me that doing the 15 year mortgage is the best thing to do, given
the variability in the housing market. Any advice would be appreciated (especially
with regard to ESPP or reducing 401K contributions if we go the 15 year route).
Post Fri Nov 02, 2012 2:59 pm
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coaster
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Your age and your current retirement assets might factor in to the decision...

~Tim~
Post Fri Nov 02, 2012 3:55 pm
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gamma234
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One option to consider: go with the 30-year mortgage and use the $1k you 'save' each month to prepay the principal on your new mortgage. How long until you pay off the loan? Get out your calculator!

The advantage here is financial flexibility - you prepay only as you are able. The disadvantage is that you need the money management skills and financial discipline to implement the prepayment strategy rather than squandering the $1k/month on other things.

Back when I had a mortgage, I aggressively prepaid it, and never regretted doing so.

If you decide to go this route, do some googling to make sure you are fully informed on how to make principal prepayments. Don't contract with some financial intermediary / scammer who will do the prepayments for you for a hefty fee.

Good luck! Smile
Post Mon Nov 05, 2012 3:37 am
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Wino
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I put your figures into a spreadsheet, and they just don't work. Even assuming your old mortgage amount and your new mortgage amounts will be different, the numbers just don't work for the second two loans. What information are you leaving out? I can do a spreadsheet so you can "play" with the numbers to determine for yourself which way is better.

Using your payments and your interest rates, I did a spreadsheet which you can find here: https://dl.dropbox.com/u/104508282/MortgageRefinance.xlsx

If you can open it, you'll see that to get your payments at the interest rates you quoted, I needed different loan amounts. That just doesn't make sense. What factors did I not include? Closing costs? Escrow? Insurance? PMI?
Post Mon Nov 05, 2012 7:45 am
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oldguy
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quote:
monthly payment of $3783.78. I am trying to refinance the house and these
are my options:

1) a new 30 year mortgage for 4.035% with a monthly payment of $3177.90, leading
to a monthly saving of $1119.33 dollars and total savings in 5 years of $30,970
2) a 15 year mortgage with interest of 3.311% with a monthly pmt of $4296.00 with a 5 year savings of $55K.


IMO, you have the wrong goal - ie, you are trying to save money on interest & principal. Instead, use the extra cashflowe to make money, ie build wealth for your family. I would take the 4%, 30-yr, fixed rate loan. And invest the extra $606/m into an 11%/yr index fund for 30 years. That would be $1,600,000 (and the house would be paid off, all for your current $3784/m outlay. (An extra $1.6M will be more valuable to your family than saving $31k or $55k).

A US mortgage is almost the cheapest capital in the world, the other 191 nations require ARMs, rate resets every 10 yrs, etc. Only in the US can an Average Joe go into a bank and ask for a $300k or $400k loan - and get it - for 4% fixed, locked for 30 yrs. Use it to your advantage. Very Happy
Post Mon Nov 05, 2012 3:30 pm
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gamma234
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quote:
Originally posted by oldguy
I would take the 4%, 30-yr, fixed rate loan. And invest the extra $606/m into an 11%/yr index fund for 30 years.


The availability of an 11%/yr index fund is based upon the assumption that 21st-century investment returns will be similar to 20th-century investment returns. Maybe true, maybe false. My opinion is false, but who cares? You can find plenty of other people with the opposite opinion.

The decision when/if to pay down (or off) a mortgage is partly a financial decision and partly an emotional decision. People can give you advice on the financial aspects, but only you can handle the emotional component.
Post Mon Nov 05, 2012 4:05 pm
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littleroc02us
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quote:
The availability of an 11%/yr index fund is based upon the assumption that 21st-century investment returns will be similar to 20th-century investment returns.


Exactly no one can predict what type of returns you get on investments. Past performance don't guarentee the same on future returns. Since the housing market appears to be at it's bottom it pretty much can go no where but up, I would get the 15 year mortgage only if you can afford to make the payments without touching retirement accounts. Maybe your house is to much for your income????

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Nov 05, 2012 4:20 pm
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gamma234
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quote:
Originally posted by gamma234
If you decide to go this route, do some googling to make sure you are fully informed on how to make principal prepayments. Don't contract with some financial intermediary / scammer who will do the prepayments for you for a hefty fee.


-- Disclaimer : the info below is about 20 years old, but AFAIK it is still valid --

Some hints on prepaying your mortgage:

(1) Write two checks each month to your mortgage servicer. Check #1 is the usual payment of interest and repayment of principal. Check #2 is earmarked specifically for principal reduction. You need to make sure that the bean-counter at your mortgager servicer who processes your mortgage payments knows exactly what you are trying to do. If you only send her one check, she might get confused.

(2) Examine the financial statements provided by your mortgage servicer to ensure that your principal prepayments are being credited properly. This is fairly straightforward with a fixed-rate loan - just learn how to create an amortization schedule using your favorite spreadsheet program. If you aren't too handy with spreadsheets, maybe you can find a geek to help you.

Good luck! Cool
Post Fri Nov 09, 2012 11:28 pm
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oldguy
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quote:
The availability of an 11%/yr index fund is based upon the assumption that 21st-century investment returns will be similar to 20th-century investment returns. Maybe true, maybe false. My opinion is false, but who cares?


If you try 11%/yr and get only 8% for 30 yrs, that is still a success. But if you say that it won't work so you won't try, it is a mathematical certainty that you will fail.

Wayne Gretsky, The Great One, once said that he missed 100% of the shots that he didn't take. Very Happy
Post Sat Nov 10, 2012 2:24 am
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