That’s pretty much it for me. In the long term, I’m willing to bet my investments return better than the current 3.5% mortgage I have. The 6.5% mortgage, though, I cashed in on by selling off investments mid-year last year, as I consider a 6.5% return (which essentially paying off the mortgage would be) pretty damned good. If it were at 3.75% or 4%, I wouldn’t have bothered and just let it ride.
I must admit, though, between the 3.1% 15-yr rate and the 4.1% 30-yr rate in the OP, I probably would just take the 15 yr on that and minimize the risk.
Remember, the interest is just as deductible from your taxes regardless of the terms of the loan. So if you have to pay an extra point or so for a 30-year term, well, at least you get to deduct that extra 1% off your taxes. You can always re-fi later if and when your situation changes.
Put it this way: if you know what you’re doing, it’s not necessarily always the best to pay off loans as fast as you can. (You have to take into consideration what rate that money is being loaned to you at and what you can be doing with the money otherwise, and you must use that extra money in the way you would use it otherwise, not just keep it sitting there or spend it on vacations and jet skis.) As general advice, though, it’s easiest and best to say that if you can afford to pay off the loan faster, do so. It’s harder to go wrong that way.
While it’s possible to re-fi every five years or so, it’s no longer possible to do it with a 5-minute phone call and may be a bigger, more costly hurdle than it was in the height of the frenzy.
We did refi to 15 years for essentially no costs and about a 1.5% rate drop by mailing in a postcard, but we paid it off five years after that. I wouldn’t expect to be able to do it that easily ever again in my life (ETA: and don’t think I’d want to see a crazy market like that again)… but then, I don’t expect to have another mortgage, either.
The real question isn’t which is a better investment - it is no contest- the 15 year mortgage saves you what $1800 a year in interest from the interest rate reduction alone for your extra 400/mo, ignoring the fact that you are also paying off the house faster and saving interest that way. If anybody has an investment that returns 1800 on your $4800 investment I want in.
The only question is whether you can really afford it. Will your job income catch up and make the payment makeable, and then easy in the 15 years it goes on ? If you go for the 15 year mortgage will you still be able to pay credit cards in full every month, and buy cars in cash ? You aren’t going to be saving anything if you run credit card balances, and won’t be saving as much if you take out car loans.
Forgive me for my ignorance, but how can this be true? It’s been my experience that interest on debt is always higher than return on investment, unless that investment is growing your own business, or some other kind of risky scheme.
If the bank could get a higher return elsewhere with a reasonably low risk, why are they investing their money with you? Diversification?
I can imagine some pretty rare instances where this isn’t the case, but by and large paying off debt is the best “investment” you can make, right?
It’s not true on a running basis. It’s an artifact of getting a long-term loan in a period of very low interest and looking at investment options when interest rises to normal levels or beyond. A lot of people have very-low-interest mortgages right now that, if not variable-rate, will be as good as gold in investment terms over the next 15-20 years.
They will also tend to lock people in place, since it will be more advantageous to keep a house and put a little money into improving it than to move. The number of people with sub-par mortgages they don’t want to lose will likely depress home sales for quite a while to come.
There is always an element of risk involved, but, let’s say I have $100K left on my mortgage and I have $100K in investments I could cash out. (Which is similar to my situation with different numbers.) Over 15 years, I’m willing to bet that I can do much better in the market with a low-cost index fund than I would in aggressively paying off my 15 year mortgage by liquidating my investment or by investing the “extra” money instead of putting it to my mortgage. If I want to hedge the bet, then I split the difference between the two. But, to me, it makes little financial sense to liquidate that $100K and will cost me more in the long run (in my opinion. If you think the market over the next 15 years will return less than 3.5% on average per year, you wouldn’t want to do this.) Currnetly, the S&P’s 15 year annualized return is 4.68% (which is historically quite low) and its 20 year is 9.22%, 25 year is 10.27%. For me and my risk level, which I feel conservative, yes, I’ll take that bet.
I have four separate mortgages, and I’m trying to pay them all off early. Every month, I make an extra payment on one of them (in a four month cycle), to go to extra principal. At least fifty percent of the time, this money gets mis-allocated to a “future payment” rather than to extra principal. Which of course doesn’t save me a dime of interest - it’s just a free loan from me to them.
I’ve tried checking off the box on the paper slip and mailing it in with a check. I’ve tried going to a branch and telling them in no uncertain terms that this is EXTRA PRINCIPAL. I’ve tried using the websites. I’ve tried waiting until after my regular monthly payment has cleared before sending in the extra principal. I’ve tried all these strategies with all four mortgage companies, and they ALL SCEW IT UP about half the time. Even calling them after the fact to get it straightened out is not foolproof, and they screw it up again about one time in four. If it was just one company, I’d write them off as incompetent. But these are four separate big-name lenders (Chase, Citi, BofA, and Wells Fargo) and they all screw it up over and over.
So my point is, planning to pay a mortgage off in fifteen years even though it is a 30 year mortgage makes sound mathematical sense, but I’ve found it to be a huge pain in the ass. Just something to think about.
Well, I don’t attribute it to any nefarious motives. I just think they are surprised when people actually pay more than they have to, and it throws them for a loop!
How much money do you have put away that you can afford to pull out $389/mo indefinitely? You’re 47. Do you have 6 months in reserve in case your job disappears? How’s the housing market? Do you want to be responsible for a $1282 payment if values go down?
My rough calculation is that if you add the first year’s extra $389/mo (a total of $4668) to the down payment, you’ll save something like $11,000 in interest over the life of the loan. Maybe a higher down payment is a better way to go than a higher (but shorter) monthly payment.
On the exact opposite side of the issue, we pay extra towards our principle every month, and we have for 15 years. No notes needed. No second check, no marked boxes. Extra money on the online payment automatically go towards principle for us.
By the way, what’s the benefit of rotating which mortgage your extra payment goes to? I would think either paying off the highest interest rate, or the smallest balance (for the joy of getting one to go away) would make more sense.
Which is why I’m refinancing mine. I could pay it off tomorrow. But I’d rather have :
Cash on hand, even if 80% of it is tied up in the stock market. If we are out of work, cash is king.
Investment income that outpaces my interest rate (minus the tax benefit). My new mortgage will be at 3.25%, I invest this money in dividend stocks paying 4% or better when I sink my money into them.
Very small monthly REQUIRED obligations. I don’t mind spending money, but I sure don’t need to have a large house payment - again, if there is no income due to job loss, I want to be able to minimize my outgo.
$800 a month in “savings” over my current mortgage, which means I can put more money into investments, as long as I have income.
In five years my mortgage will adjust - and in five years I’ll have to revisit and see if I pay it off, or refinance it, or keep paying it. A lot depends on where interest rates are five years from now - and if the stock market were to take a dive, I might have to pay high interest rates (it caps at 8.25%) until the market recovers
Do you have one of the mortgage companies I mentioned? If so, I’d love to know what you are doing differently than I am.
That would work, too. I’m just trying to get them all paid off about the same time, so I can retire if I feel like it. They all have about the same interest rate, so that’s not an issue. Getting one paid off before the others would just mean that I have to start handling the tax escrow on my own that much sooner.
If you have to dip into savings to pay your mortgage they aren’t going to let you do the 15 year because your debt to income ratio is too high. Unless there are other circumstances we don’t know about and other expenses you have.
I would call a couple lenders and see what they say regarding your rates and payments.
Also you can go online and find calculators that tell you exactly how much you pay over the long run for each scenario. You can even add in how much you would put in for extra payments and it will calculate that in for you too. (Look up debt snowball calculator).
Also keep in mind condos are a much higher risk for lenders so your rate will be higher than a single family residence. Some lenders require a full review of the condo association financials to get the loan approved and if they don’t meet their guidelines you don’t get a loan.
Also a payment for a condo is not stable. If they decide to redo the roof they can add more to your fees and there’s nothing you can do.
Utilities are usually a pretty low risk investment - do you think your local gas or electric company is likely to go under? They are heavily regulated, and the demand isn’t going anywhere in the near future.
Many are paying around a 4% dividend - you won’t get a hell of a lot of growth out of a utility stock, but they are fairly low volatility. I can get a 30 year fixed mortgage for 4%.
If you can stand volatility, the stock market has always recovered - it might take a decade. And historically you can expect an 8% return out of it (you might get 10 or 12% - but don’t count on long term gains of over 8%). But you need to be able to be patient and not cash out if it crashes so that you can recover your money - preferably having cash available to buy in when it does.
I don’t know how interest on a mortgage is deducted on taxes (we don’t have that as a deductible expense here) - does the mortgage interest comes straight off of your income, or is it deducted from something else? If it is deducted from your income, it doesn’t make financial sense to extend the length of time you pay the interest just for the deduction, unless my math is wrong.
Its deducted off your income - so as to if it makes sense, that depends on what you are doing with the money you AREN’T sending to the mortgage company.
If its under your mattress - no, it makes no sense to take out a longer long at a higher interest rate - you pay more interest.
If you throw it towards dividend stocks - say utilities, which tend to be non-volitile and pay good dividends - and manage to have a positive differential between what you earn and what you pay (with the tax break meaning you pay less than the straight interest rate), it can make sense.
Mortgage interest is deducted from your income IF you itemize. Which means you give up the standard deduction. Which means that in practice, the first $X of mortgage interest usually doesn’t really count (where $X depends on how much state tax/charitable contributions/other deductible expenses you have). So for example, if you filed married filing jointly, your standard deduction is $12,200. If you have say $3k in state & local taxes to deduct but don’t have anything else, the first $9,200 in mortgage interest is useless -you would deduct 12,200 anyway if you didn’t have a mortgage at all.
