15 yr vs. 30 year

[Jbird]

Lets say you are looking to buy a house for 650,000 with 100,000 down (using a creative mortgage like 80/15/5). It seems the you come out way ahead if you go with a 15 year mortgage, making the commitment that you will live there for that long, vs. paying the front end of a 30 year mortgage a few times over a 15 year period.

I ran some calcs and it seems that I could save over a 1/2 a million dollars in 15 years if DW and I made this commitment. DW likes change and would rather move every 5 years. At the same time she wants to retire early like me.

Does anyone have any advice for me?

[Alex]

Disciplined people are better off with a 30 year mortgage and investing the difference into a diversified portfolio. Most studies show that you will come out ahead in the long run. Also, banks do not lend money based upon equity, they lend it based upon INCOME. If you lose your income for some reason and a significant part of your net worth is tied up in your house, you will be screwed. Of course if you lack the discipline to invest the difference, go with the 15 year note.

PS - have you calculated the rate of return on home equity?? I'll help you out - its ZERO.

[jIMOh]

Originally Posted by Jbird

Lets say you are looking to buy a house for 650,000 with 100,000 down (using a creative mortgage like 80/15/5). It seems the you come out way ahead if you go with a 15 year mortgage, making the commitment that you will live there for that long, vs. paying the front end of a 30 year mortgage a few times over a 15 year period.

I ran some calcs and it seems that I could save over a 1/2 a million dollars in 15 years if DW and I made this commitment. DW likes change and would rather move every 5 years. At the same time she wants to retire early like me.

Does anyone have any advice for me?

If you can afford the 15 year payment, consider the following options:

30 yr fixed, make the 15 yr payment (give flexibility); net worth after 15 years =X net worth after 30 years = A
30 yr fixed, invest the difference of the 15 year payment; net worth after 15 years= X+Y, networth in 30 years is A+B
15 yr fixed, make the payment, move in 5 years etc... networth after 15 years=Z, which will be lower than X, and probably lower than X+Y based on my experience. Networth after 30 years will also be lower.

If your goal is to build the largest nest egg possible, it's better to keep payment low, and invest proceeds elsewhere. You will come out with higher total net worth not paying off your mortgage if you casn get an interest rate around 5.5% or less.

[Jbird]

Thanks for the responses.

So I would be better off coming up with an extra 30-40K to put 20% down and get a 30yr fixed and invest extra equity in my investments?

Are there any other types of creative loans for disciplined investors?

[brewer12345]

I would scrape up 20% and go for a 30 year mortgage. The lower payment will allow you to invest more when you are doing well, and it will give more breathing room if you go through a rough patch. 6 months after you buy the house, take out a HELOC as a security blanket. If you try to do both at the time of purchase, you are likely to have to pay up on rates.

[jIMOh]

Originally Posted by Jbird

Thanks for the responses.

So I would be better off coming up with an extra 30-40K to put 20% down and get a 30yr fixed and invest extra equity in my investments?

Are there any other types of creative loans for disciplined investors?

If you are SURE you are moving in 5 years, there are lots of products you could consider. If you have discipline, then even better.

For example:

3/1 ARM
5/1 ARM
30 yr interest only
15 yr balloon
5 yr balloon

I went into my house vertical and plan to be taken out horizontal, so 30 yr fixed is what I want for me. Even though some of the above make my money work better, not my way to take on that kind of risk.

[FIRE'd@51]

Originally Posted by Jbird

Are there any other types of creative loans for disciplined investors?

You might want to take a look at WaMu Mortgage Plus

http://biz.yahoo.com/bw/070426/20070425006488.html?.v=1

[Want2retire]

I went with a 30 year fixed mortgage, and paid it off in less than 4 years. The reason I went with it was the flexibility of being allowed to pay a little less over a longer time period than I could have with a 15 year fixed mortgage, just in case life threw me a curve. I probably lost a little money this way in return for that flexibility.

I also arranged a HELOC half way through paying it off, but didn't actually use it. I could have borrowed enough using the HELOC to cover four years' worth of payments on the fixed rate mortgage. Life went smoothly so I didn't need to use it.

I don't even want to know about all the creative financing "options" that are available. I have no desire to feel like I am boxed into a corner. There are other ways to resolve financing problems (choosing a lesser house, moving some place cheaper, working two jobs, seeking qualifications for a higher paying job, and so on).

Different strokes for different folks.

[Jbird]

Originally Posted by brewer12345

I would scrape up 20% and go for a 30 year mortgage. The lower payment will allow you to invest more when you are doing well, and it will give more breathing room if you go through a rough patch. 6 months after you buy the house, take out a HELOC as a security blanket. If you try to do both at the time of purchase, you are likely to have to pay up on rates.

Why should I take out a HELOC?

[brewer12345]

Originally Posted by Jbird

Why should I take out a HELOC?

'Sup to you. I like to have an undrawn HELOC sitting taround s o that I never have to worry about any iquidity issues. Its a free option.

[Jbird]

Thats a great Idea, Thanks for the advice.

[Rich_in_Tampa]

Originally Posted by brewer12345

'Sup to you. I like to have an undrawn HELOC sitting taround s o that I never have to worry about any iquidity issues. Its a free option.

Almost free; some have a small annual administrative charge even with a zero balance, at least in this area. In addition, we discovered that even with a zero balance, the open line could be considered as a lien against the property under some circumstances. Unlikely, to be sure, and may vary from lender to lender and region to region.

OTOH, if it is truly free with no strings, no reason not to have a HELOC open.

[wabmester]

Originally Posted by Rich_in_Tampa

In addition, we discovered that even with a zero balance, the open line could be considered as a lien against the property under some circumstances.

I have a weird situation with our HELOC. We sold the place and the HELOC should have been reconveyed, but for some reason it was left open. So, in effect we have an unsecured line of credit. I think.

Not sure it matters since I haven't used it since they ended their 1.9% special rate, but I suppose I should try to close it at some point. I'm sure headaches will ensue.

[spncity]

We were about to open a HELOC - but found out if we sell the property in less than four years there will be costs (points?) to pay even if you are not carrying a balance.

[maddythebeagle]

Originally Posted by spncity

We were about to open a HELOC - but found out if we sell the property in less than four years there will be costs (points?) to pay even if you are not carrying a balance.

I believe most are like that since there is no fees/low fees to open...they have to make up their money somehow....

[eridanus]

Originally Posted by Maddy the Turbo Beagle

I believe most are like that since there is no fees/low fees to open...they have to make up their money somehow....

In Texas, they charge upfront and there are no other fees for the life of the loan. My fixed-rate HELOC cost about 1.1% in fees to open. I'm using it to stooze with 0% credit cards.

[REWahoo]

Originally Posted by eridanus

In Texas, they charge upfront and there are no other fees for the life of the loan. My fixed-rate HELOC cost about 1.1% in fees to open. I'm using it to stooze with 0% credit cards.

Just before retiring two years ago, we got a floating rate (Prime -0.5%) HELOC in TX with no upfront charges and no other ongoing fees. We were required to borrow a minimum of $4,000 against it at closing, which we did and paid back 30 days later. For the next 18 years it will probably never be touched, but it's nice (and very cheap) to have.