Finance people: Help me figure out if a 30 year or 15 year mortgage makes more sense

[Anonymous]

Interest rate on 155k mortgage refinance is 2.5%, 30 year is 3.5% and we can afford the higher monthly payments on the 15 year. The home was purchased 5 years ago with 4.9% interest so obviously we need to refi. Seemed like a no-brainer to do the 15 year BUT we only plan to be in the house 6-8 more years. It still seemed like a good idea with all the on-line amortization tables I ran, but I can't find one to help me figure out if the decrease in mortgage interest that we can deduct with the 15 year loan will offset how much more equity in the house we'll have in 6-8 years. Can anyone help me out?

[Anonymous]

Where are you getting the 2.5 if you don't mind me asking? The best I've gotten is 2.75.

I'm taking into account that I'm gaining equity, and I am not putting that money into anything that is making a higher % than my mortgage.

But I'm not a finance person. Interested to see what others say.

[Anonymous]

I'm in North Carolina now,9 formerly DC so don't flame me for being on this site, it is so helpful0

So PP that may be why the interest rate is lower down here. It is through Wells Fargo.

Also, we max out 401 k, kids college savings on track, etc

[Anonymous]

We did a 15 at 2.5 a few months ago and glad we did. Pay a bit extra in so you can have it paid off sooner in case you don't move.

[Anonymous]

You might try this calculator-- http://www.mtgprofessor.com/calculators/Calculator9ci.html

when I ran the numbers it suggested that the 15 year mortgage would save you about $11k over 8 years.

The amortization curve is pretty steep for the 30 year mortgage. At the beginning on a 155k loan you would pay about $250 in principal and $450 in interest (worth about $100 on your tax return). (If you poke around that site he has other calculators that might be helpful, or find a different one if the numbers seem wonky).

On the 15 year loan, you will pay about $700 in principal and $300 in interest (worth about $75 on your return).

So the principal payment on the 15 year really dwarfs the tax benefit of the 30 year.

On the other hand, the 30 year will leave you a lot more liquid, so for example if you want to save money for the next move, or have a good cushion, that would be a good reason to still go for the 30 year loan.

[Anonymous]

The rate savings between the two is 1%, so for a 1% savings, you tie up X$ more per month. The key for me is, what are you otherwise planning to do with this money and would you earn more than that differential?

For example DH and I just put 10% down on a house instead of 20% because I felt leaving my 10% extra in the market would earn more of a return than the rate savings I got from a larger downpayment.

Its very individual - if you feel like you would waste the money otherwise, than I would go for the 15. If you would invest it the extra cash flow each month, I might go for the 30 personally.

[Anonymous]

Talk to the company you are dealing with to run the numbers. Our mortgage payment stayed the same but we cut our interest rate in half going from the 15 from the 30.

[Anonymous]

Anonymous wrote:Interest rate on 155k mortgage refinance is 2.5%, 30 year is 3.5% and we can afford the higher monthly payments on the 15 year. The home was purchased 5 years ago with 4.9% interest so obviously we need to refi. Seemed like a no-brainer to do the 15 year BUT we only plan to be in the house 6-8 more years. It still seemed like a good idea with all the on-line amortization tables I ran, but I can't find one to help me figure out if the decrease in mortgage interest that we can deduct with the 15 year loan will offset how much more equity in the house we'll have in 6-8 years. Can anyone help me out?

The extra tax paid with the lower interest rate will be only fraction of 1 percent of the balance. The extra equity will be more than that. Easily.

One pp advised investing the money elsewhere. This is not something I would do unless I had a safe investment - otherwise by having a larger mortgage and investing it is the same as borrowing to invest which most of us would never do.

[Anonymous]

Wow, thanks everyone. I'm the OP and just checked this thread. Really good advice and things to think about. Much appreciated!

[Anonymous]

It is a no-brainer to go with the 15 year mortgage. Even if you move in 6-8 years, you build up more equity in your home, meaning you will be left with more cash when you sell it. Why pay the money to the bank instead.

Alternative investments are riskier or yield less.

[Anonymous]

Something else to consider might be a 7 yr ARM, and pay the payment amount of the 15 yr mortgage. What that would give you is a lower MINIMUM monthly payment in case you end up needing the flexibility. You just need to either really move in 7 yrs, or be prepared some other way for a big increase in the mortgage payment (which wouldn't be that big if you've prepaid using the 15 yr payment amount).

Be aware that many of the tax reform proposals suggest lowering the mortgage interest deduction, particularly for high income tax returners.

[Anonymous]

Anonymous wrote:The rate savings between the two is 1%, so for a 1% savings, you tie up X$ more per month. The key for me is, what are you otherwise planning to do with this money and would you earn more than that differential?

For example DH and I just put 10% down on a house instead of 20% because I felt leaving my 10% extra in the market would earn more of a return than the rate savings I got from a larger downpayment.

Its very individual - if you feel like you would waste the money otherwise, than I would go for the 15. If you would invest it the extra cash flow each month, I might go for the 30 personally.

Thanks for this, good point. We are already putting 20% into 401k (with the matching it's 20%), have college savings funds on track, emergency fund for up to 12 months living expenses, plus a variety of investments (short and long term). I was thinking the 15 year would be another type of investment for us, and like you said, basically force us to "save" that money every month. I was just unsure about the tax issue and couldn't figure out how to calculate it. Thanks again