#askbp 15-yr vs 30-yr mortgage
@Brandon Turner
Hey Brandon!
What's better: a 15-yr mortgage or a 30-yr mortgage?
I can still cash flow just fine with a 15, so I decided to take it (PITI with the 15-yr is $550/month, while it is $350/month for the 30-yr. Market rent is currently $1200/month after reno).
I think I am happy with the decision, but it is staggering how much less comparative cash flow I will have during the first 15 years ($36,000!). On the flip side, it's even more staggering how much more comparative cash flow I will have the following 15 years ($63,000). Not to mention, by taking the lower rate I will pay $38,000 less in interest by taking the 15.
By just looking at the numbers, this seems like a slam dunk, but I know it is not that easy. When I own it free and clear I won't be able to write off the mortgage interest on my taxes. Also, in an inflationary environment (which I think we can bank on long-term), cash is worth far more in the earlier years than in the latter years.
Thoughts?
hi eddy. you did the math wrong. you are supposed to apply the extra $202 to the monthly payment on the 30 year loan, not the 15 year loan. in doing so, you wouldbe applying the extra $202 directly to the principal, thereby reducing the principal amount each month by the $202. every month, your intrest is calculated using the principal amount. if the principal is reduced every month, then your intrest for that period will also be reduced, thus allowing more of the actual payment to also reduce the principal amount. that " snowball" effect will allow you to pay off a 30 year loan in 12 years. re-do your math. apply the $202 to the 30 year loan each month in your amortization chart and see what happens. let me know
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For those interested in creative financing techniques, Jerry W. just pointed out a good one. As I've mentioned before, it's the creative use of your "assets" to facilitate better financing opportunities, not tricks, or gimmicks or types of contracts like an installment agreement.
Your assets include your ability to pay, your knowledge, education, management abilities and skills as well as your capital or other financial assets. Jerry employed them all with his bank accepting that no skin in the game loan. This type of creative leveraging can be done when your banker has confidence in you (not to mention the fact that Jerry might keep the banker's kid out of jail someday.......LOL)
I only read Jerry's last post, so this was probably touched on by others.
I usually suggest using a 30 year even at a higher rate. 1. Your DTI ratio is lower for the next obligation 2. you can schedule payments to fit any amortization without the obligation to do so. 3. You can usually employ the difference at a higher and better use than you're paying on a mortgage and 4 the other investments can grow quicker than your scheduled principal reduction. 5 you may have more as an interest deduction off setting other income. Lastly, your balance sheet, net worth will be the same or better investing the difference or wisely employing the additional capital you can realize from the above.
But, a 30 year is not the best for everyone as each investor has different needs and goals. It takes some financial planning to identify the best opportunity. :)
Originally posted by @David Zinn:
Thanks @Derek B
At what DTI do lenders start turning you away?
I have been seeing anywhere between 41-45%, including the mortgage you are applying for. Another way to keep DTI low is to finance property separately (ex. you finance one in your name only and your wife does another in her name) if you can qualify individually. Talk to your lender, but you should be able to get more mortgages that way and your loan amounts will only count against your DTI and same goes for her.
Thanks @David Solomon!
You are blowing my mind, @Jerry W. First of all, that method is incredibly creative! I don't have that type of reputation and relationship with a bank where they would let me do that (let the seller finance the down payment), but that is certainly something I will strive to work toward.
Secondly, did I mention that my mind is blown?! I was assuming that using a LOC or having to refinance would always be more costly than cash, but this was because I didn't take into account how much less interest you are paying on a 15-yr, and how quickly you are reducing the balance due.
It really seems like if I pocketed the extra cash flow (which in your example is $200/month extra if I took a 30-yr) to prep for the balloon payment, I would be better off (i.e. no need to pay refi charges to pull out equity), but if I did that while on a 30-yr the loan balance would only be at $73,340 (and this is using the same interest rate of 5% as the 15-yr, which would not be possible; so it would realistically be even higher). As you said, on a 15-yr it would already be down to $59,646.
Obviously, on the 30-yr example I would be able to combine the $12,000 I saved from cash flow with the small amount of equity I built up; but that wouldn't be as good as the equity built up from the 15-yr. In both scenarios, it is still necessary to pull equity from the house, so you might as well get more money for your refi via the 15-yr as opposed to the 30-yr.
@David Zinn, thank you for the kind words. On the mention function of BP, in order to notify someone you are mentioning someone you need to type the @ then the first 3 letters of their name and a list will appear at the bottom of the typing box for you to click on the name you want. You can also type @ followed by ? and it will give you a list of folks who have posted to that thread to choose from. If the person you want to mention has not posted to the thread you must be a colleague of theirs in order to mention them. Thank you again for the kind words and best of luck to you in your investing.
Originally posted by @Mark Elliott:
hi eddy. you did the math wrong. you are supposed to apply the extra $202 to the monthly payment on the 30 year loan, not the 15 year loan. in doing so, you wouldbe applying the extra $202 directly to the principal, thereby reducing the principal amount each month by the $202. every month, your intrest is calculated using the principal amount. if the principal is reduced every month, then your intrest for that period will also be reduced, thus allowing more of the actual payment to also reduce the principal amount. that " snowball" effect will allow you to pay off a 30 year loan in 12 years. re-do your math. apply the $202 to the 30 year loan each month in your amortization chart and see what happens. let me know
Mark,
I was applying the additional principle to the 30 year mortgage payment, not the 15 year. It leads to a 30 year mortgage being paid off in 16 years (because the interest is lower on the 15 year loan).
Lets say for the moment that the interest rate were the same on both the 15 year and 30 year loans. If I take a 30 year loan and make the 15 year loan payment, my loan would be paid off at exactly 15 years.
In actuality, the 15 year interest rate is pretty much always lower so the 30 year will always take longer to pay off, even if you make the 15 year payment because you'll be paying at a higher rate.
The only way you could pay off the 30 year payment in 12 years is by making a much higher payment than the 15 year P&I or by getting a lower interest rate on the 30 year than the 15 year (which isn't impossible but exceedingly unlikely.
I'm not sure where you heard this from, but it is fundamentally wrong. You are costing yourself time and/or money by thinking this way.
If you still disagree, please provide a link to a mortgage calculator and reply with all of the inputs into the calculator that you have used.
Eddy
Personally I took the 15 year and still have $670 leftover after PITI. I could always take a LOC at some point if I needed, but I would rather be forced to pay off the mortgage sooner and have less in my pocket and be tempted to spend. And if rates drop (more) you could always refi into something shorter or longer.
I think you really need to look at what is best for YOUR situation and goals! Do you require the income? Do you want to pay it off sooner? Will you have less job income later in life when the mortgage is paid off, that will help offset you income then?