Help me settle this 20 yr fixed vs 30 yr fixed mortgage debate - Page 3

leto333 · #21 10-31-2006, 09:24 PM

The 30 year will give you more flexibility should you see a decrease in income or just want to spend some money on yourself and not your house payment. But if you want to pay the least amount of money to own the home, you should go with the shorter term loan and pay as much as you can as fast as you can.

Making a half payment 15 days early can save you the equivalent of one monthly payment per year. If you do make payments in excess of the required minimum, make sure to state that those payments are to be applied to principal.

You stated that you would like to rent this property out after you have lived in it (and earned some equity in it), so your goal should be to build that equity as fast as possible, this will give you refinance flexibility in the future to buy your next property, or give you more cushion as you move into a new property and the place goes empty in between renters.

prohornblower · #22 10-31-2006, 10:30 PM

Why are you buying a home right now? It doesn't seem like you are very interested in this investment.

scotchnrocks · #23 10-31-2006, 10:46 PM

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Why are you buying a home right now? It doesn't seem like you are very interested in this investment.

[/ QUOTE ]

Why do you say that? I'd be glad to tell you why you're wrong.

This property is in Atlanta where homes aren't so overinflated and this particular one was for sale by a motivated seller. I have lived here for the past 6 years and I'm happy here and know the area. The appraisal came in at $10k above my purchase price, which I was expecting since I've been following some properties for over a year. I'm very happy with my purchase.

Thremp · #24 10-31-2006, 11:33 PM

Umm... Buying homes for most people is very inelastic.

prohornblower · #25 11-01-2006, 01:20 AM

[ QUOTE ]
[ QUOTE ]
Why are you buying a home right now? It doesn't seem like you are very interested in this investment.

[/ QUOTE ]

Why do you say that? I'd be glad to tell you why you're wrong.

This property is in Atlanta where homes aren't so overinflated and this particular one was for sale by a motivated seller. I have lived here for the past 6 years and I'm happy here and know the area. The appraisal came in at $10k above my purchase price, which I was expecting since I've been following some properties for over a year. I'm very happy with my purchase.

[/ QUOTE ]

OK. You're right, I guess I was "wrong", as it were.

DesertCat · #26 11-01-2006, 08:05 PM

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The appraisal came in at $10k above my purchase price, which I was expecting since I've been following some properties for over a year. I'm very happy with my purchase.

[/ QUOTE ]

You do know that the appraisal always comes in where you need it, don't you? If appraisers killed your purchase by coming in too low they wouldn't be appraisers for long.

The real way to determine if buying is better than renting is to compare the costs of both. Have you done this? In many situations today it appears that renting is mucho cheaper than owning...

DesertCat · #27 11-01-2006, 08:22 PM

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But therein lies the trick right? You must be paying down the principal the entire time anyway to see the advantage. If the money is spent investing, then the loan continues to amoritize at the 30 year rate and you will still owe the $81k principle at the end of year 20. Your investment will have to do about 9% ROI each year to beat the 20 year after you figure in the capital gains tax.

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Not exactly. Remember the interest rate you are paying on your mortgage is "pre-tax", after deducting your tax benefits you get your true interest rate. In reality paying down your mortgage earns you a little over 4% after tax (assuming 28% federal and 6% state) because you are losing tax benefits as you reduce your interest charges. It is similar after tax return to what you'd see from a 6.125% per year investment taxed at ordinary income tax rates. So a decent rule of thumb is that your investment returns just need to be slightly higher than your mortgage rate to make investing a better option than mortgage paydown.

And if your investments generate mostly long term capital gains, you will be better off investing the difference even if your investment returns are slightly lower than your interest rates. For example, assume your combined state and federal tax rate is 34% (6+28). Paying down a 6.125% mortage yields you a 4.04% in after tax return. But if your gains are long term, you'll only pay 21% rate (15% long term cap gains + 6% state). It only takes a 5.1% return from a taxable investment generating long term capital gains to achieve the same after tax returns.

scotchnrocks · #28 11-01-2006, 10:19 PM

[ QUOTE ]
[ QUOTE ]
The appraisal came in at $10k above my purchase price, which I was expecting since I've been following some properties for over a year. I'm very happy with my purchase.

[/ QUOTE ]

You do know that the appraisal always comes in where you need it, don't you? If appraisers killed your purchase by coming in too low they wouldn't be appraisers for long.

The real way to determine if buying is better than renting is to compare the costs of both. Have you done this? In many situations today it appears that renting is mucho cheaper than owning...

[/ QUOTE ]

There is more to it than that. Having followed this building and 3 others specifically for over a year I was confident before the appraisal that I was getting a good deal.

The cheapest rental on the market in this particular high rise out of ~10 available rentals is $1200/month and over 93% of the units have been sold. Building opened to residents sometime early this year. I'm looking at $1680 w/HOA and power bill (HOA includes cable, internet, water, sewer, trash, insurance, etc.) and escrows before tax breaks. In the first few years I'm looking at about $1300/month with tax breaks. This is all putting ~16% down so my PMI is also $29. The loan is a 20 year fixed.

Thremp · #29 11-01-2006, 10:22 PM

Desert is correct about appraisals. If I sell a house in Cali for 50k under market, the appraiser is gonna say its worth almost exactly what I'm selling it for.

scotchnrocks · #30 11-01-2006, 10:31 PM

[ QUOTE ]
[ QUOTE ]
But therein lies the trick right? You must be paying down the principal the entire time anyway to see the advantage. If the money is spent investing, then the loan continues to amoritize at the 30 year rate and you will still owe the $81k principle at the end of year 20. Your investment will have to do about 9% ROI each year to beat the 20 year after you figure in the capital gains tax.

[/ QUOTE ]

Not exactly. Remember the interest rate you are paying on your mortgage is "pre-tax", after deducting your tax benefits you get your true interest rate. In reality paying down your mortgage earns you a little over 4% after tax (assuming 28% federal and 6% state) because you are losing tax benefits as you reduce your interest charges. It is similar after tax return to what you'd see from a 6.125% per year investment taxed at ordinary income tax rates. So a decent rule of thumb is that your investment returns just need to be slightly higher than your mortgage rate to make investing a better option than mortgage paydown.

And if your investments generate mostly long term capital gains, you will be better off investing the difference even if your investment returns are slightly lower than your interest rates. For example, assume your combined state and federal tax rate is 34% (6+28). Paying down a 6.125% mortage yields you a 4.04% in after tax return. But if your gains are long term, you'll only pay 21% rate (15% long term cap gains + 6% state). It only takes a 5.1% return from a taxable investment generating long term capital gains to achieve the same after tax returns.

[/ QUOTE ]

Does this calculation take into account the extra money paid out over the life of the 30 year loan so that at the end of year 30 one would have paid more for the 30 year loan and still come out with more cash if returns after fees avg. 5.1%?

I appreciate your response, I've already closed the deal though. Even if I may lose some value by not choosing the longer option and investing the difference, I'm more content with the safety/convenience of paying off the loan earlier than having to discipline myself and spend extra time to invest the difference each month. Somewhat results oriented thinking I guess, but it makes life simpler for me.