koch@haydn.DEC (Kevin Koch LTN1-2/B17 DTN229-6274) (06/20/85)
Two issues are addressed here: is it better to initially
get a 15 year mortgage or a 30 year mortgage; what is the
breakeven point for refinancing? This file is 87 lines long.
A lot of assumptions and definitions must be made first. For
example, what does 'better' mean in the above paragraph? One must
also structure the comparison so apples are compared to apples, and
oranges to oranges. EG: It is meaningless to compare a mortgage with
a $1000/mo payment to a mortgage with a $900/mo payment without
considering what you'd do with the extra $100/mo in the second case.
You do SOMETHING with it. Similarly, you must define what you do with
the fraction of your interest payment the IRS gives back to you.
In the interest of brevity I haven't explained all of my
reasoning in detail. If you want the detailed explanation, send mail
directly to me. Similarly, if you have specific feedback, send it to
me, not to the net.invest, and I will summarize it to the net.
Here are my assumptions:
The less debt, the better.
The same amount of cash flow is used in both halves of a comparison.
All cash flow is applied toward the debt being serviced.
All tax benefits are applied toward the debt being serviced.
The rate for old 30 year mortgages is 13%.
The rate for new 15 and 30 year mortgages is 11%.
It costs 4% to refinance. Points, searches, legal fees, etc.
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Question 1: When getting a new mortgage, is it better to get a
15 year or 30 year mortgage? The 15 year mortgage requires the
greater cash flow -- 1136.59/mo.
$100,000 @ 13%. 1136.59/MO. $100,000 @ 11%. 1136.59/MO.
TAX !LOAN! DEBT OUTSTANDING AFTER TAX !LOAN! DEBT OUTSTANDING AFTER
BRKT!LIFE! BRKT!LIFE!
!(MO)! 1 YR! 3 YR! 5 YR!10 YR! !(MO)! 1 YR! 3 YR! 5 YR!10 YR!
----!----!-----!-----!-----!-----! ----!----!-----!-----!-----!-----!
0 ! 285!99321!97670!95531!87022! 0 ! 181!97222!90670!82511!52276!
30 ! 146!95266!84410!71395!26386! 30 ! 130!93846!80028!63517!10955!
40 ! 131!93947!80335!64432!11966! 40 ! 121!92744!76717!58436! 674!
50 ! 120!92644!76422!57954! 0 ! 50 ! 113!91652!73578!53280! 0 !
Conclusion: the 15 year mortgage is a big win, no matter how
long you hold the mortgage.
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Question 2: Does it pay to refinance my old 30 year mortgage
with a new one? A point often missed in these comparisons: where do
the points and fees come from? You borrow them, either from the bank
or from yourself. Therefore you pay interest on them, so they are
included in the loan value. The 30 year 13% mortgage requires the
greater cash flow -- 1106.20/mo.
$100,000 @ 13%. 1106.20/MO. $104,000 @ 11%. 1106.20/MO.
TAX !LOAN! DEBT OUTSTANDING AFTER TAX !LOAN! DEBT OUTSTANDING AFTER
BRKT!LIFE! BRKT!LIFE!
!(MO)! 1 YR! 3 YR! 5 YR!10 YR! !(MO)! 1 YR ! 3 YR! 5 YR!10 YR!
----!----!-----!-----!-----!-----! ----!----!------!-----!-----!-----!
0 ! 360!99708!98999!98081!94419! 0 ! 217!102070!97514!91844!70827!
30 ! 154!95647!85622!73693!32300! 30 ! 145! 98543!86290!72004!25040!
40 ! 137!94325!81563!66653!17464! 40 ! 133! 97392!82796!66148!13545!
50 ! 125!93020!77626!60102! 4930! 50 ! 124! 96252!79420!60637! 3584!
Conclusion: It depends on your tax bracket and how long you plan
to stay there.
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Question 3: What about refinancing the 30 year mortgage with a 15
year mortgage? The 15 year 11% mortgage has the higher payments.
$100,000 @ 13%. 1182.06/MO. $104,000 @ 11%. 1182.06/MO.
TAX !LOAN! DEBT OUTSTANDING AFTER TAX !LOAN! DEBT OUTSTANDING AFTER
BRKT!LIFE! BRKT!LIFE!
!(MO)! 1 YR! 3 YR! 5 YR!10 YR! !(MO)! 1 YR ! 3 YR! 5 YR!10 YR!
----!----!-----!-----!-----!-----! ----!----!------!-----!-----!-----!
0 ! 231!98742!95681!91717!75906! 0 ! 180!101113!94296!85811!54366!
30 ! 136!94697!82536!67956!17537! 30 ! 130! 97600!83229!66473!11392!
40 ! 124!93382!78497!61108! 3740! 40 ! 121! 96453!79795!60773! 700!
50 ! 114!92082!74620!54740! 0 ! 50 ! 112! 95318!76459!55411! 0 !
Conclusion: It still depends on how long you're going to be
there and what your tax bracket is.
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Kevin Koch (Koch is it!)
...decwrl!dec-rhea!dec-handel!koch
koch%handel.dec@decwrl.ARPA