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30 year mortgage
Old 07-20-2005, 12:00 AM   #1
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30 year mortgage

Hello again,

I am about to build a new home and was considering a 15 year mortgage but was advised to take the 30 year mortgage. The reason being is that with interest rates so low you have more options for the use of your money over the 30 years. If the market or what ever investment starts returning more than the mortgage rate then just make the payment but if not then put the extra money toward the principal and pay down the mortgage. Any comments?

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Re: 30 year mortgage
Old 07-20-2005, 01:22 AM   #2
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Re: 30 year mortgage

Quote:
Originally Posted by runnerr
....was considering a 15 year mortgage but was advised to take the 30 year mortgage. The reason being is that with interest rates so low you have more options for the use of your money over the 30 years. If the market or what ever investment starts returning more than the mortgage rate then just make the payment but if not then put the extra money toward the principal and pay down the mortgage. Any comments?

:
Runnerr,
There is no answer that fits everyone.

How do you feel about carrying debt?
How would you feel paying off debt early and living debt free?
How will you know in advance that an investment will return more than your mortgage rate?
Paying extra to principal is a guaranteed return of 5+%.

I've done 15 yrs and 30 years.
The 15yr forced me to make the extra payment to principal each payment.
We were on a tight budget and we put a high priorty on paying the mortgage and all debt off as quickly as possible. We also got a better rate with a 15 year. This was 1985, our interest rate? - 12.75%

Then in 94 we bought a new house with a 30 at 8% - with the intent of paying extra to make it like a 15. I liked having the flexibility of not having to pay the extra that a 15 would require if something came up that our budget didn't cover, but no problems and instead of looking for investments with any extra money I paid the hell out of the principal until it was in effect a 10 year mortgage. All gone in 2004.

It depends on your comfort level with debt. If you can handle making payments for 30 years then locking in rates at this level for 30 years would seem financially clever - it could go to 13+% again! If it does you won't want to be in stocks or bonds - probably money market funds.
But my advise would be to set aside money for investing that you would normally be doing. Then pay off your 30 quick as you like - building equity- your house is an investment you get to live in.
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Re: 30 year mortgage
Old 07-20-2005, 07:51 AM   #3
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Re: 30 year mortgage

Get the 30 year under these really low rates, and deduct the interest payments while you're at it.* Who cares what the market does year to year.* *Over 30 years, i think its a relatively safe bet the market can beat 5.5% (minus interest deductions) which brings that down to more like a 4% rate you have to beat.* *So take their virtual money and invest it in the market.

A 30 year mortgage doesnt have to stop anyone from ER'ing.* I dont plan on mine stopping me.* *I'll retire at 58 at the latest, possibly sooner, and at even 58 i'll have 3 years remaining on my 30 year mortgage.* So what?* 58-61 is a little more expensive than 61+.* I'll just save that much more to account for that.

I agree with the above poster in that its nice to have the flexibility of added expenditure power if an unforseen situation were to arise.* *Bottom line, i couldnt have afforded a house that would have satisfied me for the rest of my life if i was forced to only use a 15 year.* *I would have ended up buying one too small, then had to sell it a few years down the line when i could afford bigger.* * I wanted to avoid the "starter" home alltogether, and just buy something i'd be happy with for the rest of my life.
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Re: 30 year mortgage
Old 07-20-2005, 08:33 AM   #4
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Re: 30 year mortgage

Thanks for all the good information and here is the answer to some questions. I am only 56 and my wife is 45. She is has her masters in nursing and has steady employment. I, because I always wanted to try it, will be getting my realtors license after the house is built. So I plan on working part time again by choice.

As for the discipline in paying off the 30-year mortgage I purchased my house in 1979 and paid it off in 1985. So discipline shouldn’t be a problem. But it could be by the considering I am married now.

My stocks and cash amount to over 800,000 and my feeling is that 30 years is a long time and I see the market returning a greater return than I am paying on the mortgage. And if not then I can double up on payments. The 30 years just gives me more options. Remember the late 70’s, I believe when you could get 15 % on a three year cd. I believe the numbers are correct. Should that happen my money is better off in a cd than going into a house mortgage at 5 to 6%.

That is my reasoning. Thanks for the feedback.

Runner
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Re: 30 year mortgage
Old 07-20-2005, 08:55 AM   #5
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Re: 30 year mortgage

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The mortgage interest deduction is a fallacy for many considering that you should look at the difference between the standard deduction and the itemized deduction.
Every since ive been a homeowner, itemizing has always well surpassed the standard for me.* *This is going to be true for many new homeowners because the interest amounts to so much.


Quote:
You dont just subtract out the mortgage interest and figure that is your savings. It will also depend on your state taxes, property taxes, income, cost of house, etc. also. And some only itemize every other year to lump payments.
See above.* Probaby most new home owners (who are paying mostly interest) will be able to itemize every year.* *I'm not a real big charitable giver, and even i "get" to itemize every year since i've been a homeowner.

....

Big deal even if you cant itemize.* If you cant beat 5.5% not even counting the deduction in your portfolio, you need some help.* My FIRE investments are all tax-sheltered (401(K) and roths) so i dont have to subtract out any taxes paid on my investments when comparing to my home loan rate.

Quote:
There are other ways to lower your taxes including iras, 401ks etc. Also, having all of your assets in the stock market isnt a great idea and home equity gives you a hedge.
Yes, those also also good ways to lower your taxes.* I do those too.* Why not do both.* *I really dont like paying taxes.* *

Having all my assets in the stock market isnt a good idea?* Peter Lynch and I disagree with you.* *My investment horizon is 20 years.* *The bulk of my money is in stocks and home equity.* You have a better idea for investing my money?

Also, if you buy a house, whether you've paid for it or not, you have virtual home equity anyway cause you'd keep the difference if you were to sell it (difference between what you sold it for and what you bought it for).* *And like most smart buyers, i already have 20%+ equity in it anyway since i paid down 20% to avoid PMI.

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Re: 30 year mortgage
Old 07-20-2005, 09:04 AM   #6
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Re: 30 year mortgage

Quote:
Originally Posted by runnerr
The reason being is that with interest rates so low you have more options for the use of your money over the 30 years.
Congrats on building your dream house... although I'm afraid that most of those homeowners would say "never again". *But that's not the question you asked.

The only time we prepaid a mortgage was when we were being given extra money for higher mortgage payments. *With low interest rates (under 6%), exceeding the standard deduction (IOW big mortgage), and low-expense tax-efficient investments you can earn more money than you'll pay. *However that potential return is significantly affected by whether you're also investing in any bonds or CDs, whether you're staying in the house for longer than five years, and whether you're able to make the mortgage payments with other funds. *FIRECalc actually gives this idea greater than a 70% success rate under certain conditions. *That math was beaten to death in this thread.

The mortgage's deductibility is greatest in its first 15 years. *After that you may or may not beat the standard deduction and you might even decide that it's better to pay it off. *That all depends on the loan's interest rate and your stock-market returns to that point.

If you're not putting the money in the stock market, it's still a lot easier (and a lot cheaper) to turn your mortgage from 30 to 15 than it is to go the other direction. *You can start your 30-year mortgage with much lower payments (easier on the cash flow) and pay additional principal anytime you want. *(You don't get "lower payment" and "reduced principal" options with a 15-year loan.) *You can make one extra principal payment a year or pay biweekly and knock 7-10 years off the loan without even trying. *If you have other expenses you can suspend the accelerated payments without having to try to refinance at a lower rate, and you can restart the payments anytime you want.

I'd like to know more of the math behind paying points. *I've always suspected that paying points is a good deal for the lender because they're setting the prices, so we don't pay to reduce the loan rate. *But that logic could be flawed if you're staying in the house for the life of the loan and the lender is desperately pricing the points cheap to grow their business.

Having all your assets in the stock market is neither good nor bad-- it's a choice driven by the tradeoffs among inflation, tolerance for volatility, desire for diversification, and personal comfort. *In our case inflation is the biggest issue and the other three are negligible, but we've also been afforded substantial gains in home equity over the years. *It's just too expensive to pull all that equity out and try to leverage it into the market!
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Re: 30 year mortgage
Old 07-20-2005, 09:14 AM   #7
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Re: 30 year mortgage

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Having all your assets in the stock market is neither good nor bad-- it's a choice driven by the tradeoffs among inflation, tolerance for volatility, desire for diversification, and personal comfort.* In our case inflation is the biggest issue and the other three are negligible, but we've also been afforded substantial gains in home equity over the years.* It's just too expensive to pull all that equity out and try to leverage it into the market!
I wouldn't advocate someone actually take equity out of their house to invest it.* *I guess it could be done, but I probably just wouldnt bother with that.* *I'm just not going to pay them back fast in full in the first place.

My mortgage is at 5.96% and as i said above, i have easily been able to fully itemize the interest (meaning i'm not just barely going over the standard, i'm clearing it enough that all my mortgage interest is deductible).

I just love stocks like JG loves real estate.* I mean come-on, its the american dream!* I can be a virtual owner in 100s of businesses both in the U.S. and overseas; businesses large medium and small.* *I certainly diversify within stocks by owning large/med/small caps in all sectors and in many different countries.* * If I "go down", millions and millions and their economies will be going down with me, and i'll have plenty of company in the poor house.* *But i tell ya.... i like my odds ;-).

I'm reminded of one of those Buffet sayings, something to the effect of, "with bonds, the most you can hope for is to get your money back with interest."
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Re: 30 year mortgage
Old 07-20-2005, 09:37 AM   #8
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Re: 30 year mortgage

Anyone can retire at 40-45 provided your standards are adjusted accordingly.* I have posted in the past about the 1000s of people back home from my small hometown who live in run-down houses, have minimial yards, cars that backfire, probably eat ramen for breakfast, lunch, supper, are probably on welfare, and on and on.

My household income is 110K in Arkansas, Maddy, and i'm only 33 and just getting warmed up.* I live on 85% of that.* *I'm going to have both (ER and a comfortable life).* *I highly doubt you'll be able to live the standard of living i do retiring at 40-45.* Oh sure, some have pulled exactly that off here, and i commend them for that.* *Who knows, maybe i will too.

So, living on next to nothing, and doing mostly nothing with your life is actually the norm, Maddy.* *I'm not the norm, Maddy.

(edit) I have also said before i dont personally agree with the extremist approach to ER.* *If you cut the time for compounded growth too much, then you have to save exponentially more to retire fewer and fewer years younger.* *This can be mathematically shown.* * Anyone's who seen a compunded growth chart, knows the real growth is in those last 5-10 years.* If you dont save long enough for that to happen, you'lll never see that.* *So,* i believe you can and do reach a point where your sacrifices you're making to retire early are just not worth it.* *Anyone who wants to retire that bad much really have a sucky job or some other issues, if you ask me.
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Re: 30 year mortgage
Old 07-20-2005, 10:46 AM   #9
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Re: 30 year mortgage

Quote:
Originally Posted by runnerr
Hello again,

I am about to build a new home and was considering a 15 year mortgage but was advised to take the 30 year mortgage. The reason being is that with interest rates so low you have more options for the use of your money over the 30 years.* If the market or what ever investment starts returning more than the mortgage rate then just make the payment but if not then put the extra money toward the principal and pay down the mortgage.* Any comments?

Thanks
:
The tradeoff is that the 30-year will have a higher interest rate, but lower payments.* So you're paying more to have that money available to invest elsewhere and must get a larger return on that invested money.* Are you going to keep your new house for a long time?* If not, you might want to look at some other options, like interest-only or adjustable rate mortgages.* Why pay a higher rate for the mortgage money if you're not going to keep the mortgage long-term?
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Re: 30 year mortgage
Old 07-20-2005, 10:51 AM   #10
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Re: 30 year mortgage

Quote:
Originally Posted by maddythebeagle
I cant figure why somebody that wants FIRE would want to build a new house?

The few folks that I know that built new had huge cost overruns. I remodeled an old house and I know that things cost a lot more than you plan. I have a 15-year and did a lot in cash as I had it and some short-term loans on credit cards for materials. Did some extra overtime to pay those off before the rates shot up.
I know several people who built their own new houses.* They made a lot of money, either on sale of the property or in "sweat equity."* By assuming the role of General Contractor, they put what would have been the GC's profits in their pockets.* By doing some of the work themselves, in some cases, they made the wages of the workers that they didn't have to pay.* I don't know one person that lost money building their own house.
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Re: 30 year mortgage
Old 07-20-2005, 11:11 AM   #11
 
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Re: 30 year mortgage

The most important factor is missing from this discussion -- how much lower is the rate on the 15 year mortgage?

Sounds like you will pay off your mortgage in 15 years anyway. I'd run the numbers and see how much you'd save with the 15 year rate.

We built a house in '92. I said "never again" but my wife enjoyed the process. Go figure.
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Re: 30 year mortgage
Old 07-20-2005, 11:41 AM   #12
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Re: 30 year mortgage

I also know several people that ended up in court with a lot of hassles being their own general and even some with generals that ended up in court, too. If you can find a good builder, more power to ya and if home prices continue to go up even more power to ya. and you value "new". I just went through a remodel and found that when rates go down, the best contractors are really busy and some really bad ones pick up a hammer and think they are professionals. Really fun screening through all of these guys.

Another point to make is the property tax liability of building new. I know several people that are working much later in life to support the bills. Yeah, you can throw out anecdotes that people are making money, but so are people that rebuild and remodel. It is all about values, I think and I thought this was the FIRE board
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Re: 30 year mortgage
Old 07-20-2005, 03:12 PM   #13
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Re: 30 year mortgage

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Originally Posted by maddythebeagle
I think and I thought this was the FIRE board*
It is.* I was answering your original post:

"I cant figure why somebody that wants FIRE would want to build a new house?"

Building his own home could help someone RE by providing him with a place to live that he otherwise would not have had, or a better place to live than he could have afforded had he bought it already built.
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Re: 30 year mortgage
Old 07-20-2005, 03:28 PM   #14
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Re: 30 year mortgage

Quote:
Originally Posted by maddythebeagle
I cant figure why somebody that wants FIRE would want to build a new house?
In our case it was the final step in our FIRE plan. We wanted a house we designed specifically for us as a place to call home base for the rest of our lives.

Built it 6 years before retiring, paid off the mortgage in 5 years. Not a mcmansion, just a very comfortable single story 3 bedroom house with a large back porch and deck. On 5 acres out in the hill country of Texas.

To each his own, and this was (and still is) ours.

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Re: 30 year mortgage
Old 07-20-2005, 03:52 PM   #15
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Re: 30 year mortgage

I like your explanation Rew. I could see doing a modest home with energy efficiency and the whole 9 yards and paying off before retirement. The original poster was talking about taking a 30 year mortgage into retirement so that he could probably build a "dream home" and upscale. I dont think it was answered why he was doing this? I can except that others have different values :

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Re: 30 year mortgage
Old 07-20-2005, 04:15 PM   #16
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Re: 30 year mortgage

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Originally Posted by maddythebeagle
I like your explanation Rew. I could see doing a modest home with energy efficiency and the whole 9 yards and paying off before retirement. The original poster was talking about taking a 30 year mortgage into retirement so that he could probably build a "dream home" and upscale. I dont think it was answered why he was doing this? I can except that others have different values* :
As long as you have provided for a way to make the mortgage payments, why not?* Hey, I just thought of a great plan: get the longest possible mortgage term right before you retire, then if you die first you don't have to pay it off and have lived in a great house!* And in the meantime I'll be paying the bank back with deflated dollars.* Do they have 50-year mortgage terms?* I'm calling my mortgage banker right now!
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Re: 30 year mortgage
Old 07-20-2005, 05:49 PM   #17
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Re: 30 year mortgage

they have the interest only mortgage, so you wont have any of the nasty equity when you push up the daisies. Hey, isnt sound financial planning bouncing your very last check?
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Re: 30 year mortgage
Old 07-20-2005, 06:13 PM   #18
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Re: 30 year mortgage

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they have the interest only mortgage, so you wont have any of the nasty equity when you push up the daisies. Hey, isnt sound financial planning bouncing your very last check?
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Re: 30 year mortgage
Old 07-20-2005, 06:22 PM   #19
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Re: 30 year mortgage

I prefer Dizzy or Jimmy...

I got a 30-yr. mort (at 5.5%) to keep the payments lower, in case of emergency. But I pay bi-weekly, and pay some extra beyond that, equal to about two payments/year. I'm putting 15% in 401k (+6% match), and adding to Vanguard in taxable, so the extra mortgage payments are icing on the cake, a way of diversifying, so to speak. Also, not planning to move for at least 9 years.
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Re: 30 year mortgage
Old 07-20-2005, 06:26 PM   #20
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Re: 30 year mortgage

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Originally Posted by Have Funds, Will Retire
I prefer Dizzy or Jimmy...
Is Jimmy still alive?* He sure makes good sausages.* :P
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