If you had the option to take a 30 year mortgage or a 50 year mortgage, both with the same static interest rate(7%), which is the better choice?
Assumptions:
You have the monthly option to plink down any extra cash against the principle and have the interest payments recalculated that month.
The deal is for land and a house. In the future the land could be sold off as seperate lots.
I know that the interest is going to jump astronomically when you go to 50 years, but does inflation balance that out for you?
Does making an extra payment towards the principle of $10,000 dollars against the 30 year mortgage end up being more helpful(or less) to you than the same payment against the 50 year mortgage? Handy Dandy Little Mortgage Chart
Since you can earn more than 7% with a decent mutual fund (provided it’s not an internet fund ;)), you’d be better off IMHO taking the 50 year mortgage and investing the money you save (over not taking the 30 year mortgage) every month.
Although in theory the above is true, the problem many people have is not actually investing the extra money- in that case get a shorter mortgage.
You’re better off not making ANY extra payments to principal- again, if you have extra cash to pay down the loan, put it in a mutual fund instead- why pay down a 7% loan when you can earn 10% or more on the money?
Believe it or not, that was going to be a seperate follow-up question to this one.
I was going to ask about safer investment vehicles though, such as CD’s and Bonds. (if the rates were more than 7%)
So, feel free to talk about both scenarios.
One, where all available money goes straight to paying down the mortgage.
And…
Two, one where you put it into something that gives you a couple of percentage points higher return on the money. What are the tax implications of this strategy?
If you’re talking about a 30 or 50 year time frame, mutual funds invested in the stock market should be very safe (I’d consider 15 years or more to be long term). As you approach the point where you’d take money out, you can start putting more of the assets into lower-risk vehicles so you’re not wiped out in the stock market with no time to recover.
It’s really a good idea to talk about specifics with a financial advisor. It might be a good to start a Roth IRA or invest more in your 401k, by using the extra money you would have put into a shorter mortgage. The best path depends on your needs, time frames, assets, etc.
I’ll let an actual financial person dive into the gory details with some numerical examples
My advice as a banker is this: Don’t take our advice.
Your OP does not contain enough information about your total financial picture to make a judgement about what would be best for you at this point - and you don’t want to post that kind of info on the internet. You should make an appointment with a certified financial planner. Your OP indicates a need for specific information which should take no more than a couple of hours to answer. It will be time well spent.
Debt is a tool which, when used wisely, can help build your financial future. Used incorrectly it can ruin your financial future.
Well, waitaminute. It looks to me like the obvious choice is to take the 50-year mortgage. If the interest rate is the same, and if the up-front costs are the same, and if you can pay extra with no penalty, then you can always do the following:
Take out a 50-year mortgage.
Calculate your P&I payments for a 30-year mortgage.
Pay the 30-year P&I each month.
So this sort of looks like a 30-year mortgage; however, the advantage here is that if you have future financial trouble, or a not-to-be-missed investment opportunity, you can scale back your monthly payments to the 50-year level without having to refinance.
If you’re asking whether or not you should stick to the 50-year payment plan from the get-go, then my answer is “I dunno. It depends.” See what Doctor Jackson said.
