So we are currently renting and are in the market for a house. However, for various reasons, we plan to only be in this next house for 4-7 years before essentially moving into a "forever" house (yes we looked at the NYTimes rent v buy calculator and yes we chose a price point based on that, which is about half of what we would otherwise qualify for). I was looking at ARMs and at 15 vs 30 year mortgages when I ran across this little known/advertised fact -- because of amortization schedules, if you sell within a few years, and you can afford it, a 15 year mortgage vs a 30 year mortgage IS A GREAT DEAL as long as you are already maxing out your 401k employer match. Here is an example: todays rate for a 30yr mortgage is 4.4%. The rate for a 15 yr mortgage is 3.6%. Lets say you take out a loan for 250,000 (ignore taxes insurance PMI etc). Monthly payment is 1252 (30 yrs) vs 1800 (15 yrs). After 4 years on the 30 yr loan, you would have a balance of 232,441. After 4 years on the 15 yr loan, you would have a balance of 195,903. That's a difference of $36k that you get back after paying off the bank from the house sale. So I know what you're thinking/asking -- what if you had taken the difference in the monthly payments and invested it? Surely you would get back more than 36k? The difference in monthly payments is about 550, which is $6,600ish a year. Assuming compounded interest on a yearly basis, you would need a guaranteed return of 13% to turn 6600/year into 36,000 over a 4 year period. Thus, getting a 15 year mortgage relative to a 30 year mortgage is essentially a guaranteed annual interest rate of 13%. This is NOT EQUIVALENT to taking out a 30 year mortgage and making the higher payments, because you are STILL paying more in interest than principal in the first few years because of the way it's amortized. This calculation only applies to selling within a few years though, not when you're holding over the life of the loan, since at the tail end you're paying almost entirely principal rather than interest (on a 30 yr loan). I just realized this last night. Someone tell me why I'm wrong before I commit to a 15 yr mortgage.
Submitted February 22, 2017 at 12:30PM by mydoghasocd http://ift.tt/2lvKBba
