Peaceful_Warrior
Full time employment: Posting here.
- Joined
- Dec 27, 2006
- Messages
- 509
For the purchase of our home, I'm looking at two mortgage programs - and I'm fully aware I'm comparing apples to oranges. However, I also know that from a strictly financial perspective there is a way to compare these... I think I'm just getting my head spinning around so much that I'd like some outside input onto this subject.
Removing emotion from the equation, which of the following programs is *financially* wiser for having more total assets at the end of 10 years?
So here goes......
We're not buying with anything down - purchase price $208,000. Numbers below assume roughly equivalent total closing costs. We currently plan to keep the home for about 10 years.
"Program 1" is a 100% traditional 30 year mortgage at 7%. "Program 2" is a 100% IO (fixed for 10 years, amortized over remaining 20) at 6.5%
Program 1 payment: ~$1,375 (Principal + Interest)
Program 2 payment: ~$1,275 (Interest + PMI )
So the difference in the two programs is ~$100 per month. I could invest that difference of $100 over 10 years ($12,000) at say 6% and and up with ~$13,500 (Results of taking Program 2 and investing the difference) before taxes.
After 10 years with Program 1, I would have accumulated ~$30,000 in equity that is illiquid, but in theory would be tax-free when I pull the money out. However, I also have to account that for Program 1, my mortgage interest deduction would be reduced every year... and this difference I would have to subtract from the $30,000 tax free.
Based on my initial assessment, it seems like a no-brainer that "Program 1" is better for assets at 10 years, even though it costs more per month.
Financially speaking, what am I missing?
Removing emotion from the equation, which of the following programs is *financially* wiser for having more total assets at the end of 10 years?
So here goes......
We're not buying with anything down - purchase price $208,000. Numbers below assume roughly equivalent total closing costs. We currently plan to keep the home for about 10 years.
"Program 1" is a 100% traditional 30 year mortgage at 7%. "Program 2" is a 100% IO (fixed for 10 years, amortized over remaining 20) at 6.5%
Program 1 payment: ~$1,375 (Principal + Interest)
Program 2 payment: ~$1,275 (Interest + PMI )
So the difference in the two programs is ~$100 per month. I could invest that difference of $100 over 10 years ($12,000) at say 6% and and up with ~$13,500 (Results of taking Program 2 and investing the difference) before taxes.
After 10 years with Program 1, I would have accumulated ~$30,000 in equity that is illiquid, but in theory would be tax-free when I pull the money out. However, I also have to account that for Program 1, my mortgage interest deduction would be reduced every year... and this difference I would have to subtract from the $30,000 tax free.
Based on my initial assessment, it seems like a no-brainer that "Program 1" is better for assets at 10 years, even though it costs more per month.
Financially speaking, what am I missing?