Posted on: 21st Sep, 2007 04:22 am
There is 20 years left for me to retire and it's time I feel I'd look for a home. I was planning to take a 15 year mortgage so that I could own the home when I retire. But my lender suggest 30 year loan. He is saying with 30 year, I can invest the monthly difference due to lower payments (around $700) in a tax deferred account and earn big cash rather than if I use a 15 year loan. I am not understanding what to do, I'm in a fix frankly speaking..are the available rates such that I can go for 30 year and make profit by investing and what are investment rates..and can you suggest where to invest and get suitable returns??
Welcome Guest,
It's better that you calculate how much you save in interest if you go for 15 year mortgage and then compare it with the profit from your investment. If you think you're getting better returns only then you should think about the 30 year loan.
It's better that you calculate how much you save in interest if you go for 15 year mortgage and then compare it with the profit from your investment. If you think you're getting better returns only then you should think about the 30 year loan.
Always keep in mind that with any investment there is no guaranteed return. Some investments are safer than others but none are guaranteed. If you pay off your loan in 15 years and save $100,000 doing so that is real money and is guaranteed as long as you make all your payments.
Now could you earn more with an investment? Perhaps. If you can get a better return on your money being invested somewhere else. Lets look at a simple scenario with CD's.
ex.
30 yr Mortgage = $200,000 for 30 years @ 6% is a payment of $1,199 for a combined total of $1,199 x 360 = $431,640 (this is the total cost of a 30 year loan)
15 yr Mortgage = $200,000 for 15 years @ 5.75% is a payment of $1,660 for a combined total of $1,660 x 180 = $298,800 (total for 15 year loan)
For a savings of $132,840. (this number is not quite accurate though as after the 15 years you don’t have a payment so you are technically adding your old payment into this which is like pocketing $1199 for 15 more years which is and additional $215,820 you will have to invest afterwards.
Now add the investment in a CD. This is a very low risk investment vehicle and is virtually guaranteed although it has a very low return on investment.
1 year CD @ 4% annual return = take 1 CD out every month with the extra money ($1660 - $1199 = $461 per month for CD) So you get a CD for $461 every month for 30 years. Every year this interest will compound as everytime 1 CD expires you roll the extra money into new Cd’s. So after the first year you have 12 CD’s, 2nd year you will have 24 and so on and so on. You could also consolidate all into 1 I just want you to get the general picture.
So lets look at it for the first 5 years and more – note: this is just the interest, you are still getting back the $461 per month x 360 = $165,960
Year 1 - 12 x $18.71 = $ 224.52
Year 2 – 24 x $18.71 = 449.04
Year 3 – 36 x $18.71 = 673.56
Year 4 – 48 x $18.71 = 898.08
Year 5 – 60 x $18.71 = 1122.60
1347.12
1571.64
1796.16
2020.68
year 10 = 2245.20
2469.72
2694.24
2918.76
3143.28
year 15 – 3367.80
3592.32
3816.84
4041.36
4265.88
year 20 – 4490.40
4714.92
4939.44
5163.96
5388.48
year 25 – 5613
5837.52
6062.04
6286.56
6511.08
year 30 – 6735.6
$104401
Grand total of simple interest only investing $461 per month in 1 year CD’s so you get the money back every year.
So at the end this is what you have
30 year loan with investments =
$431,640
-104,401 Cd interest earned
-165,960 your original $461 difference
$161,279 is the actual cost of this scenario
15 year w/ no investment
$298,800
-215,820 extra $1199 for 15 years
$ 82,980 is the actual cost of this scenario
So unless you are getting a very high return on your investments (greater than 5%) then you are better off getting out of debt and staying that way.
Special note: I used very simple math in this scenario and left out 2 important factors
1. You could compound the CD interest by reinvesting every year the previous years interest.
2. You could also invest the additional money after the first 15 years on that plan which would net you some interest as well.
So my firm belief is this. Banks want you to keep your mortgage. They don’t want you to bank on yourself and they would prefer that you pay them the interest instead of the other way around.
Now could you earn more with an investment? Perhaps. If you can get a better return on your money being invested somewhere else. Lets look at a simple scenario with CD's.
ex.
30 yr Mortgage = $200,000 for 30 years @ 6% is a payment of $1,199 for a combined total of $1,199 x 360 = $431,640 (this is the total cost of a 30 year loan)
15 yr Mortgage = $200,000 for 15 years @ 5.75% is a payment of $1,660 for a combined total of $1,660 x 180 = $298,800 (total for 15 year loan)
For a savings of $132,840. (this number is not quite accurate though as after the 15 years you don’t have a payment so you are technically adding your old payment into this which is like pocketing $1199 for 15 more years which is and additional $215,820 you will have to invest afterwards.
Now add the investment in a CD. This is a very low risk investment vehicle and is virtually guaranteed although it has a very low return on investment.
1 year CD @ 4% annual return = take 1 CD out every month with the extra money ($1660 - $1199 = $461 per month for CD) So you get a CD for $461 every month for 30 years. Every year this interest will compound as everytime 1 CD expires you roll the extra money into new Cd’s. So after the first year you have 12 CD’s, 2nd year you will have 24 and so on and so on. You could also consolidate all into 1 I just want you to get the general picture.
So lets look at it for the first 5 years and more – note: this is just the interest, you are still getting back the $461 per month x 360 = $165,960
Year 1 - 12 x $18.71 = $ 224.52
Year 2 – 24 x $18.71 = 449.04
Year 3 – 36 x $18.71 = 673.56
Year 4 – 48 x $18.71 = 898.08
Year 5 – 60 x $18.71 = 1122.60
1347.12
1571.64
1796.16
2020.68
year 10 = 2245.20
2469.72
2694.24
2918.76
3143.28
year 15 – 3367.80
3592.32
3816.84
4041.36
4265.88
year 20 – 4490.40
4714.92
4939.44
5163.96
5388.48
year 25 – 5613
5837.52
6062.04
6286.56
6511.08
year 30 – 6735.6
$104401
Grand total of simple interest only investing $461 per month in 1 year CD’s so you get the money back every year.
So at the end this is what you have
30 year loan with investments =
$431,640
-104,401 Cd interest earned
-165,960 your original $461 difference
$161,279 is the actual cost of this scenario
15 year w/ no investment
$298,800
-215,820 extra $1199 for 15 years
$ 82,980 is the actual cost of this scenario
So unless you are getting a very high return on your investments (greater than 5%) then you are better off getting out of debt and staying that way.
Special note: I used very simple math in this scenario and left out 2 important factors
1. You could compound the CD interest by reinvesting every year the previous years interest.
2. You could also invest the additional money after the first 15 years on that plan which would net you some interest as well.
So my firm belief is this. Banks want you to keep your mortgage. They don’t want you to bank on yourself and they would prefer that you pay them the interest instead of the other way around.
