don@novavax.UUCP (Don Joslyn) (05/26/85)
I am in the process of evaluating Home mortgage loans. I have been
given the following choices:
1. 30 year fixed rate @ 12.75%
2. 15 year fixed rate @ 12.25%
Which one is better and why? Please consider tax deductions for interest
payments and time value of money as well as total interest paid over the
life of the loan.
Approximate mortgage amount is 60,000.
--
Don Joslyn
{ucf-cs, allegra, neoucom}!novavax!donark@alice.UUCP (Andrew Koenig) (05/28/85)
Which is better, a 15 year loan as 12.25% or a 30 year loan at 12.75%? Answer: it depends, among other things, on what you can afford, how much it's worth having more money available now, and so on. To be specific, let's consider a $60,000 loan. For 30 years at 12.75 percent, your payment would be $652.02, for 15 years at 12.25%, it would be $729.78, and for 15 years at 12.75% it would be $749.30. First, let's compare 30 and 15 years, both at 12.75%. The 30-year term is clearly superior, regardless of the time value of money or anything else, because you always have the option of paying it off over 15 years and you will be in exactly the same situation as if you had taken out a 15-year loan in the first place. Thus the 30-year term gives you everything the 15-year term does, plus some extra flexibility. Is this extra flexibility worth an extra half percent interest? That's a decision only you can make. You are comparing a payment of $652.02 and a payment of $729.78. If you can afford the former and not the latter, there's no decision. If you can afford both then it's really a question of how badly you need the extra $77.76 each month.
fadoc@brl-tgr.ARPA (Capt. Terry Dougherty ) (05/28/85)
> > I am in the process of evaluating Home mortgage loans. I have been > given the following choices: > > 1. 30 year fixed rate @ 12.75% > > 2. 15 year fixed rate @ 12.25% > > Which one is better and why? Please consider tax deductions for interest > payments and time value of money as well as total interest paid over the > life of the loan. > > Approximate mortgage amount is 60,000. > -- > Don Joslyn > {ucf-cs, allegra, neoucom}!novavax!don For the 30 yr, 12.75% mortage - Monthly Payment would be $652.02 with the total interest over 30 years being $174,726.00. Savings for taxes would be difficult to determine since you did not provide any information as to yearly income, number of dependents and other tax information. For the 15 yr, 12.25% mortage - Monthly Payment would be $729.78 with the total interest over 15 years being $71,360.30. The 15 yr mortage has the advantages of lower interest rate, faster pay-off of loan balance and quicker build-up of equitity in the property (if you may sell within 5 or 10 yrs). Disadvantages would be higher monthly payment and less interest deduction for income tax purposes. For overall dollar for dollar value - the 15 yr mortage would be best if you can afford the higher monthly payment. Terry Dougherty fadoc@brl-tgr.arpa
fadoc@brl-tgr.ARPA (Capt. Terry Dougherty ) (05/29/85)
> Which is better, a 15 year loan as 12.25% or a 30 year loan at 12.75%? > First, let's compare 30 and 15 years, both at 12.75%. The 30-year > term is clearly superior, regardless of the time value of money or > anything else, because you always have the option of paying it > off over 15 years and you will be in exactly the same situation > as if you had taken out a 15-year loan in the first place. Thus > the 30-year term gives you everything the 15-year term does, plus > some extra flexibility. How can you say that the 30-year term gives you everything the 15-year term does? That is only true if you start from the first mortage payment paying the additional principal payment like you were paying on a 15-year loan. If you do not and delay any payment then two things will happen: 1. You will be paying less on the loan balance and 2. You will therefore be paying more interest on the balance. Most people, if given the choice will delay the payments and hence in the long run will be paying more than twice the amount of money in a 30-yr versus a 15-yr mortage.
stj@calmasd.UUCP (Shirley Joe) (05/31/85)
In article <3766@alice.UUCP> ark@alice.UUCP (Andrew Koenig) writes: >Which is better, a 15 year loan as 12.25% or a 30 year loan at 12.75%? >Answer: it depends, among other things, on what you can afford, >how much it's worth having more money available now, and so on. >To be specific, let's consider a $60,000 loan. For 30 years at >12.75 percent, your payment would be $652.02, for 15 years at >12.25%, it would be $729.78, and for 15 years at 12.75% it would >be $749.30. > >First, let's compare 30 and 15 years, both at 12.75%. The 30-year >term is clearly superior, regardless of the time value of money or >anything else, because you always have the option of paying it >off over 15 years and you will be in exactly the same situation >as if you had taken out a 15-year loan in the first place. Thus >the 30-year term gives you everything the 15-year term does, plus >some extra flexibility. I agree. With the 15 year term, you are stuck with the higher payments, even though the interest rate is lower. You MUST make that higher payment every month, plus you won't get to deduct as much interest each year (assuming that the tax laws don't change drasticly). However, if you want to pay off your 30 year mortgage in less than 30 years, there is a way to do it without making a higher payment per month. This method is a way that you can pay off a 30 year mortgage in roughly half the time (~15 years) without paying more each month. You make two payments per month, but each payment is 1/2 the normal monthly payment. You are still paying the same amount each month, but apparently the interest you save makes a big difference. Another method is to make a payment every 4 weeks instead of once a month. You end up making 13 payments per year instead of 12, but again the interest savings are enormous (we can't afford to do this). Before you go off and try this, you must check with your lender to make sure they allow it. -- Spike {decvax,ucbvax,ihnp4}!sdcsvax!sdcc6!calmasd!stj
ark@alice.UUCP (Andrew Koenig) (06/02/85)
>> Which is better, a 15 year loan as 12.25% or a 30 year loan at 12.75%? >> First, let's compare 30 and 15 years, both at 12.75%. The 30-year >> term is clearly superior, regardless of the time value of money or >> anything else, because you always have the option of paying it >> off over 15 years and you will be in exactly the same situation >> as if you had taken out a 15-year loan in the first place. Thus >> the 30-year term gives you everything the 15-year term does, plus >> some extra flexibility. > How can you say that the 30-year term gives you everything the 15-year term > does? That is only true if you start from the first mortage payment paying > the additional principal payment like you were paying on a 15-year loan. If > you do not and delay any payment then two things will happen: 1. You will > be paying less on the loan balance and 2. You will therefore be paying more > interest on the balance. Most people, if given the choice will delay the > payments and hence in the long run will be paying more than twice the amount > of money in a 30-yr versus a 15-yr mortage. I can say it because it is true. You have the option of treating a 30-year loan as if it were a 15-year loan or not. This is what I mean by "increased flexibility." I'm afraid I don't see it as a disadvantage.