Loan Choice: 15YR vs 30YR
A: Extending the mortgage posts a bit longer here, I want to discuss the possible advantage towards choosing a 15YR Jumbo mortgage over a 30YR one. If feasible based on your income and liquid assets after closing, a 15YR Jumbo loan might be a wise investment option.
No one knows where rates are going in the near future let alone 7-15 years from now. If anything, the environment right now is filled with so much uncertainty that the fed really could go either way based on incoming data. But people want security. They want little risk. So, to keep your investment decisions clear and to avoid making things more complicated, lets forget the adjustable rate mortgages (ARM) for now and take a look into whether or not a 15YR Jumbo loan might be a better choice than a 30YR one!
According to Bankrate.com, the rates on both the 15YR & 30YR Jumbo loan & their 1-Year charts are:
15 YR JUMBO LOAN - 5.69%
30 YR JUMBO LOAN - 6.03%
Now lets do some math. Lets assume that you are buying a $650,000 condo with 10% down and are doing an analysis on what the advantages of a 585,000 loan would be for a 15YR loan over the 30YR option in terms of monthly payments and interest saved.
While statistics show that most homeowners wind up selling or refinancing in less than 7 years, take a look at the incentive in interest savings if you live in or rent your home 15 years! Of course, this is entirely dependent on whether or not it is economically feasible for you to pay that extra $1,300 a month.
But if you can pull it off through the decision of buying a property that is well in your budget rather than at the top end, you will end up saving a bit less than $400,000 in total interest paid to the lender over the life of the loan.But wait, there's more to look into.
What about the higher expense that you pay monthly to get that advantage? Lets do some more math:
180 months (15 years) X $1,300 in extra monthly payments = $234,000 over the life of the loan
So, thats $234,000 more money that you are paying out of pocket over the life of the 15 year loan in order to save about $395,000 in total interest paid to the lender. In reality, that $234,000 more money is a bit less because in this example I didn't take into account tax benefits offered to homeowners!
UrbanDigs Says: For all those who have high salaries and are buying a property well within your budget, I say to consider the 15YR loan option with your lender and see if it is both economically feasible and consistent with your timeline to own! If you plan to grow into this new home, than it becomes a very attractive loan option. To determine if its economically feasible, check your debt/income ratio and see whether or not the higher loan payment will keep this ratio below 33% or so; and if the board will allow that. You might want to make up that expense by cutting down your costs somehow if you are closer to 33% to rationalize the decision. In the end, you could save some big bucks in total interest paid to your lender even after calculating in the total extra money you need out of pocket to carry the loan! You can quickly build wealth by using a combination of live in / rent out investment strategy over a 15YR term and at the end of the day have a great debt-free asset in your portfolio!
Comments (4)
1. Did you forget PMI?
2. Why would anyone ever want to pay-off their mortgage (early)?
Posted by Larry Nusbaum | March 30, 2007 10:26 AM
Why people pay off mortgage:
- people with low risk tolerance, dont care to take much risk to make a few % extra on the cash
- why pay the bank? just to give 1 dollars and get 30c back?
- peace of mind, nothing hanging on the shoulders
- less stress, better health knowing your home is paid off, dont need to work "for the man" as much just to pay off mortgage
Posted by uwsider | March 30, 2007 2:14 PM
It would be my argument that paying off one's mortgage (early) can actually create more stress later, when you need access to cash and don't have it.
That being said, I suppose if someone can't get better than 5.75% on the investable funds.........
I am not advocating this, but if the S&P 500 returns 10.2% per year over 30 years, and you ar epaying 5.75% for a 30 year mortgage.....then, what are we talking about?
Personally, I see it as a waste of capital. And, it makes no financial sense.
Guess what? I was amused to learn recently that my younger brother paid his off a couple of years ago. lol
Posted by Larry Nusbaum | March 30, 2007 9:48 PM
If you've owned for 5-10 years, I've heard that it can be a good tactic is to refinance to a 15 yr if rates are low... particularly for profitable rental properties.
Posted by spaceboy | March 30, 2007 10:59 PM