15 yr v. 30 yr mortgage (Page 2)

My advice: compromise with a 20 year loan. You get flexibility of a lower than 30 year payment, with faster pay-off.

My experience: I got married young (still am: young & married) and we bought our house before we got married when I was still 18 and we had a 15 year loan. This allowed us to build equity for a few years so we could put down 20% on our next house when we moved for better jobs. We took out a 20 year loan on that house (and refinanced to a 10 year loan last year 9 years into it). NO ONE offered us the 20 or 10 year options we used. We had to specifically ask and the bank was a little resistant about refinancing for 10 years, but we told them we wanted a 10 year or no refinance. We're in the process of selling that house since we relocated cross-country and have paperwork in the process to pay cash for our next home (1/2 with the equity from the second home and 1/2 from my husband's 401k-which is questionable at best, but I'm feeling more and more comfortable with the choice).

You'd be better off investing that money rather than putting it all into a house.  Historically, stocks have a greater return than what a mortgage would cost.  Also, you don't want to look at your residence as an investment.

With a mortgage, you also get a nice tax incentive.

Assume $100,000 house.

Assume a conservative 4% ROI on your investment balance.

Assume a conservative 1% annual increase in house value.

Assume $100/month homeowner's insurance

Assume 2.5% annual property taxes.

  If you pay cash for the house, and then invest your hypothetical house payment, after 30 years your net worth would be:

~$465,000.

Same assumptions, but you borrow the money for the house and invest the cash.

Assume 30 year loan at 3.875%

Assume PMI of .9%

Net worth after 30 years:

~$471,000

I didn't include the tax incentive because interest in this case isn't even close to the standard deduction.  If you happen to have a lot of other deductions, your case may be different.

As the spread between the actual investment rate and the mortgage rate gets bigger, the effect is more dramatic.  If your mortgage rate is higher than your expected return on investment, (plus the appreciation on your house's value, if any) then it makes more sense to pay cash up front.

For instance, a more historically accurate return of, say, 7% on stocks jumps your net worth to:

$712k for cash purchase and

$951k if you take out a loan!

As an exercise, I created a spreadsheet so that I could play around with the numbers.  I'm attaching it.

Enjoy!