<p>We are going to buy a place and I am thinking of putting down as much as possible and taking out a mortgage for as short a time frame as 15 or even 10 years. I like the idea that I can own the place outright sooner. The place is going to be rented out and by adjusting the down payment we can make the cash flow break even with the mortgage and other expenses even with a short time frame. </p>
<p>My husband favors putting down less money (minimum required) and a 30 year mortgage and paying it down when we have extra funds. That way he said we can keep more cash around right now. I don’t see the point of paying extra interest over the longer amortization period. He said we can pay down the mortgage every year if we want. </p>
<p>I don’t understand his way of thinking at all. </p>
<p>I like your thinking better but only if you have a very predicatble income to make the mortgage payments or if you know that you have or will easily find a renter and they have a very predictable income.<br>
A year ago I wouldn’t even have questioned your way. Today I would proceed with caution. YMMV</p>
<p>Run an amortization schedule both ways and show him the difference.</p>
<p>If I read your post correctly, you are saying that you want to get a 10 or 15 yr mortgage to pay less interest. Your husband is saying to get a 30 yr and pay it down yourselves for the same purpose. If that’s the only difference, I’d say that depends on your personalities. I know people who put extra towards their mortgage, but now many. It takes a lot of discipline.</p>
<p>^We have tremendous discipline, but the husband has it more. Managed to pay off a few mortgages in the past doing it his way. Between you and I, that sucked out a lot of “fun” aka luxuries in our lives. The thought of divorce cross my mind now and then when I really want, say some nice upgrades in our house or something expensive like summer school abroad for the kids. ;)</p>
<p>ETA: We did slip up one time and that was costly. Instead of owning our home outright, we left a sum in “cash”. During the dot.com boom we cannot resist the fantastic profits and put out our money. We lost all of it. Luckily for us, fortune smiled upon us, because then the house value appreciated tremendously and covered up our loss in the Nasdaq. I learned from that lesson and that’s one reason I want to put the money into the house now. </p>
<p>What I don’t get is, for his way, we have to put aside whatever sums of money in some bank account - that’s the only way to guarantee the principal which means we are only paid a nominal rate of return - whatever it is. </p>
<p>I had never seen a interest rate on a saving account higher than a mortgage rate. The only exception I can see is a scenario where the mortgage is fixed for the next 30 years at 4.5% and somehow the interest rate on savings goes up to more than 4.5% during the high inflation times we are expecting sometime in the future.</p>
<p>This is what I think: Get a 30 year mortgage (his way), but pay it off in 10 or 12 years by making high principle-only extra payments each month (your way). That way, you have the security of only HAVING to pay a lower monthly mortgage each month if you run into a problem, but you can have the benefit of paying it off quickly. Agree on a set amount of cash that you’re going to need, so he can address his need for security, fill your bank account with that first, and then get aggressive with the mortgage.</p>
<p>The disadvantage of getting the longer mortgage is the higher interest rate (I don’t think that we have an inverted yield curve right now). You can pay it off at your own pace but you pay a small interest bump for the privilege. I personally think that the flexibility is nice. One other option would be to find a cheaper place that you could comfortably pay off in 15 years. Some play around with 7-year balloon mortgages too. It’s risky as you’re betting that rates won’t rocket up in 7-years.</p>
<p>The rule of thumb is if you pay 1 extra mtg payment a yr than you will pay it off in 21 yrs. Follow your hubbies thought, b/c if the AC goes how will you pay for it? People too many times make themselves house poor. </p>
<p>Also mtg companies allow you to apply every month money to the principal, so you can send in that extra money anytime you want.</p>
<p>Another option is to do a bi-monthly mtg, because the pmt is 2x a month the principal gets paid down faster, but then again it is landsup being like if you pay 1 extra pmt on your own. Read the fine print of any mtg you take because sometimes there are penalties for paying off your mtg too early!</p>
You could find interest rates on CDs above 4.5% just a few years ago. 4.5% on mortgage is even less if you take tax deductions into account. For me 15-year mortgage (as opposite to extra payments for 30-year one) makes sense only if it has significantly lower rate.</p>
<p>My suggestion would be to do a 30 and pay off additional principal. I think you need to be cautious in this economy. I have a friend right now that did the 15 year on her condo and she is single. Her employer cut her hours and she is now struggling every month to make the payments. If she had a 30 year then she could just forgo the additional payments until she is back on her feet financially.</p>
<p>The way I look at it is no matter how much you pay on a monthly basis, your gain on your house would be the same, therefore why pay more to have the same gain (not even return).</p>
<p>If you bought your house for 100,000 today, and if you were to sell it 10 years from now you could sell it for say 150,000. Your gain would be 50,000. Whether you were paying 1000 (30 yrs fixed) or 1500 (10-15 fixed). Assuming the extra 500 is to pay down the principle, therefore you are paying for less interest. But that 500 is used to pay down principle that has interest rate of 3-4% (after tax deduction). The money may be better used to pay for things like college tuition, car, funiture(if you had t borrow, interest on those loans would not bd tax deductible) or even just other form of investment where you could get a higher return.</p>
<p>Mortgage is our cheapest form of borrowing. Unless you have paid off all of your debt, have no need for future borrowing, or does not invest in anything, then it would make sense to not even pay 3-4% interest. But if you have any other debt outstanding, I am sure it’s more expensive than mortgage, then I would take out a longer term mortgage and pay off other debt first.</p>
<p>My vote is to take the 30-year. I had a 15-year on one of my rental houses and eventhough I could afford the payment at the time, I did not like the negative cash flow hence I sold the house. Had I kept it I would be much better off. I calculated the difference in interest between the 30 year and a 15 year mortgage is like $50 month on a small conforming loan less than $300K. The 30-year mortgage keeps all your options open, you can pay it off early or not is up to you.</p>
<p>Suze Orman says to hold on to the cash and pay down the mortgage as desired. In this economy, cash is king. IF you were to suddenly require funds (accident, sudden illness) would you have the cash to get you through? Cash is king. Especially today.</p>
<p>I don’t think there’s a ‘one size fits all’ answer to this question. It depends on the current cash flow, expected retirement point when cash flow might diminish and when one might want the mortgage paid off, how effective the tax write-off is, interest rate of the loan, interest rate of investments, exposure if the cash flow stops, etc.</p>
<p>Making extra principal payments on a 30 year loan will reduce the term but you’ll still pay a lot more in interest than if it was a 15 year loan because the ‘normal’ principal and interest payments each month are calculated based on the term of the loan with the principal being very low initially and the interest high.</p>
<p>The best thing to do is to run the calculations for both and take into account your own situation. For example (rhetorical questions), will the higher payment for a 15 yr loan put you at significantly more risk than a 30 year loan? For some situations it does and for some it doesn’t. Do you have adequate cash flow such that the 15 yr loan vs 30 yr wouldn’t be a burden? Do you have adequate savings to cover the 15 yr loan if the job situation was negatively impacted?</p>
<p>I think there are a lot of situations were a 15 yr loan is the better deal but other situations where the 30 yr loan is more practical. I’ve had both and they both were good choices for the particular situations.</p>
<p>I am in the process of taking each point given and putting it in a spread sheet. I will then put a comment/solution next to each point. I hope this will help with clarify my thinking somewhat. </p>
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<p>It is this point in particular that bothers me about the longer loans. </p>
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<p>No, because I can make the cash flow break even - ie, by putting in more down payment, I can always make income = expenses. </p>
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<p>I think so, if I make it cash flow even or even positive. </p>
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<p>Interesting, I thought the difference is much more than that. I am always very bad an this kind of analysis, so I better take a good look at the amortization tables again. I remembered the difference as much higher. </p>
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<p>We have insurance and a HELLOC we can tap in an emergency. We can sell other investments to raise cash though that may not be the best time.</p>
<p>We normally try to keep an adequate amount of “cash” around per financial experts to take care of contingencies. </p>
<p>I sincerely hope the terrible economic meltdowns we were talking about here on CC will never come to pass.</p>
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<p>Our other financial obligations: college tuition, car, furniture… has money already set aside. As for other forms of investments, in 2007/2008 I thought I was doing the right thing taking the money from savings earning 3-4%, barely keeping up with inflation and taxed to the boot, and put in into “safe” dividend yielding stocks and corporate bonds - as events turned out in 2008 we lost our shirts. I would have been so much better off just leaving things well enough alone. </p>
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<p>We have very little debt before we take on this new house.</p>
<p>I was referring to the interest part only, not the whole payment. I think when I refinanced it was a long time ago, 30-year fixed was 6.0 for 0 point/0 cost, while the 15-year fixed was 5.5 for 0 point/0 cost. So for .5 point of interest the difference in interest payment saved was negligible, not enough for me to take the plunge. For 15-year mortgage you pay back your principle 1/3 more than you the 30-year mortgage.</p>
Wrong. We have a 30-year mortgage - when we refinanced, we got a 30-year fixed because we wanted the flexibility to pay less each month if we needed extra funds for college. The interest rate was identical to our previous 15 year mortgage. Using handy-dandy amortization tables (available everywhere on the internet, including at your bank’s website), we set the “years” to 13 (the remaining term on our 15-year mortgage.) This amount is automatically deducted from our account each month. It isn’t costing us any more interest than our 15-year mortgage did.
If you get a 30-year mortgage at the same interest rate as a 15-year mortgage, and pay the 30-year mortgage off at the same amount per month as a 15-year mortgage, you will pay exactly the same amount of interest as the if you had a 15-year mortgage. It really doesn’t take any discipline to do this; just get autopay for that amount. Then, if you run into cash flow problems later, change your autopay amount back to the 30-year amount.</p>
<p>We also chose to go with a longer term loan but be aware of the shorter term amort schedule and see if we couldn’t reduce it faster. It has worked for us before, but I have to admit with 3 in university we have not made as much extra head way as we would have liked, so the flexibility has been helpful</p>
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I would have been so much better off just leaving things well enough alone. </p>