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Checked the stock market lately? I hope you didn't invest in one of the many duds that didn't appreciate at all from 2000 to now or even fell an ungodly amount.
Las Vegas, Baby!
The stock market has averaged 12% annual returns over the past 100+ years. There are good years and bad years, but for someone investing over a 30 year period, the odds are pretty good they'll have more up years than down years. The longer you're in the market, the better your odds are - this is another reason to want to start investing early instead of paying off a mortgage.
And it's not like housing always goes up, either. Picking 2000 as a starting point is just as bad as assuming everyone that bought a house did so in Southern California in 2005. They're down 30% or more - how'd the stock market do since 2005?
The interest he makes on the investment already paid for that $200K. Look at my example again - both people are paying the same amount ($2400) over the same time (30 years). Both have the exact same paid off house at the end, and both have a retirement account balance. The only difference is the 15-year mortgage holder has 60K less in his retirement account.
Doh - you're right.
Now, how about comparing their net worth after 15 years? Your example only works IF the buyer puts the difference in investments and only if those investments do reasonably well and only IF the buyer holds on to the house for 30 years. The person with the 15 year mortgage will have a lot more equity if they have to sell the house at any time before the mortgage is paid off.
Now, how about comparing their net worth after 15 years? Your example only works IF the buyer puts the difference in investments and only if those investments do reasonably well and only IF the buyer holds on to the house for 30 years. The person with the 15 year mortgage will have a lot more equity if they have to sell the house at any time before the mortgage is paid off.
Well, if the investments do reasonably well they'll return more than 8% on average.
Anyway, on to the 30 year investor at 15 years. Investment balance after 15 years at 600/month is 208K. Equity in house = $87K. Total = $295K. Basically a wash at this point. Earlier than this the 15 year mortgage guy will have more equity. The 15 year investor will continue to lose ground against the 30 year investor until they hit the end of the 30 year mortgage with the 30 year guy 60K or so ahead. From that point they both invest the same amount until they retire, so it should be obvious that the 15 year investor never catches up.
I'm not arguing that the 30 year mortgage/invest the difference approach is obviously better - it comes with some risks and it might not win, and if it does it might not win by a lot. I just don't like reading that it's obviously better to have a paid off house without looking at the possible alternatives. And having a diversified portfolio instead of just putting all your money in a house is a good way to diversify risks.
I really like discussion about this. Sorta see that it isnt about changing what people do or think about loans, thats good. What I think is important is to financially do what is the best fit for the person. I like to obligate myself with more of a payment to pay stuff off. I have friends that swear by leverging investments. My wife wants to go longer term on investments, and put extra if available, to shorten the term. Who really comes out ahead, sometimes will be subject to the unknown. I like to have a good plan, follow it. Boy,,,,,if I had a bunch of cash right now for either stocks or RE.
You can save some money with a 15 year becuase the interest rate will be lower. But if the interest rate is close, I would get a 30 year and make payments as if it were a 15 year. that way you can pay the loan off just as fast (and save hundreds of thousands), but you have the flexibility of making a smaller payment if things get tough.
You can save some money with a 15 year becuase the interest rate will be lower. But if the interest rate is close, I would get a 30 year and make payments as if it were a 15 year. that way you can pay the loan off just as fast (and save hundreds of thousands), but you have the flexibility of making a smaller payment if things get tough.
Exactly! I'd locked with a builder's lender, but the drop of rates the last 10 days or so made me nervous and liking the rate less and less, so I went shopping today. There was the choice between 30y fixed at 5.25% and 20y fixed at 5.125%, which would've been somewhat of a stretch for me for the first few years. I'm disciplined enough, so if I can/want to pay down principal, I can always do it, but don't have to if the going gets tough. I think going for a shorter term loan is more advantageous for people who wouldn't pay down the principal otherwise. Well, unless it's a totally comfortable payment for them.
I am just about to close on my home and have been debating the 15 vs. 30. So many great posts but still doesn't make the decision any easier. Definitely loaded with more information though Thanks!
You can save some money with a 15 year becuase the interest rate will be lower. But if the interest rate is close, I would get a 30 year and make payments as if it were a 15 year. that way you can pay the loan off just as fast (and save hundreds of thousands), but you have the flexibility of making a smaller payment if things get tough.
It's not that simple. The gotcha is that the amortization of the loan is different for each loan.
For the 15 year loan a much greater percentage of your monthly payment goes to principle than it does for a 30 year loan. The difference for the 1st year's payments may be along the lines of 500.00 per month (a 15 year loan) vs 90.00 per month (a 30 year loan) going to your principle (of course mileage varies depending upon the loan amount and rate).
That is a huge difference and most people until they see the difference with an actual loan product comparison just don't seem to get it. Although a 15 year mortgage may only be 250.00 per month more, the actual principle portion of each monthly payment is much larger - it's just the way mortgage loans are created.
Sure you can double up on your payments for the 30 year loan... but the big winner for such a situation is the lender who will be taking a bigger chunk of your money each month in interest. If you indeed can double up your payments on a 30 year loan then I would recommend to definitely go with a 15 year loan product instead... your equity will thank you and you can rest assured that you're paying down your mortgage quickly and effectively.
One final thought - although the number crunchers may disagree with the notion that a 15 year mortgage will result in you being better off long term, I can state with utmost confidence the following. Not one of the people I know who earn in the 5 figures with little net-worth would ever be disciplined enough to invest money they have left over each month by obtaining a 30 year mortgage vs a 15 year mortgage. Not one... Sure it sounds great to pitch that to people looking for a loan: "Hey, look, with the extra money all you need to do is put it away and not touch it for 15-30 years earning 8% or more interest - and then you'll be much further ahead of the game long-term"... but the reality is that most people will find multitudes of reasons to not follow that plan to the end. All I'm saying is that you need to really evaluate carefully... do you have the discipline to save the extra money or are you just deceiving yourself into believing you do?
Last edited by belovenow; 01-17-2008 at 12:21 PM..
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