john@hp-pcd.UUCP (john) (04/08/85)
<<<< I read an article in the paper that compared a 30 year fixed rate mortgage with a 15 year one. They showed that by paying an extra $130 a month for 15 years that you would save about $172 K. It sounded real great until you went back and looked at some of the areas that they didn't cover. For one thing they did not even mention taxes in the article. That $172K is all deductable so a large part of the savings will simply go to the goverment as higher taxes. They also didn't figure in the value of having an extra $130 a month to spend. If the 30 year mortgage were to be paid off with exactly the same payments as the 15 year then it would be prepaid sooner and only cost an addition $18,600. After taxes that could be as low as $10,000. That $10,000 extra that a 30 year loan costs does provide some benefits. If interest rates rise so that you get a better return in the money markets then you can get a higher return for your $130. The biggest advantage is that if disaster strikes then you can easily pull back your payments to a lower level. That could make the difference between keeping or losing your home. John Eaton !hplabs!hp-pcd!john
shazam@mhuxn.UUCP (Tom Marsden) (04/10/85)
I am shopping for my first mortgage and would appreciate all the advice readers of this group can offer. One plan that is particularly interesting is something called "Graduated Equity Mortgage." Payments with this plan start out at 8.9% during the first year, and then increase 7.5% each successive year until the sixth year at which time they level off at the current (4/85) rate for a 30 year fixed mortgage: 13.25%. The primary advantage of this plan is that we can purchase a more expensive house than would have been possible with a straight 30 year fixed mortgage, and the mortgage is paid off after 15 years, which of course lessens the overall cost of the mortgage (assuming we keep the house for 15 years). Besides the GEM plan, we are also considering a standard 30 year fixed rate mortgage. But I am mostly interested in hearing from Netnews readers who have had experiences with a GEM-type plan, as well as anyone else who has undergone the trials and tribulations of procuring their first mortgage. Thanks in advance. Tom Marsden AT&T Bell Laboratories Room 6A-309 600 Mountain Avenue Murray Hill, NJ 07974 (201) 582-6202 mhuxn!shazam
rkl@ahuta.UUCP (k.laux) (04/11/85)
REFERENCES: <188@mhuxn.UUCP> Arrange to pay the points on the mortgage when you actually close. I got my (first) mortgage in June 81 and paid the points. I expected to close on the first of September but due to the builder's delays, I didn't close until late January 82. I wasn't able to take the tax deduction for the points at all because I didn't have enough itemized deductions for 1981 (the year in which the points were actually paid) R. Kevin Laux Software Vendor Tech Support ATTIS Lincroft ahuta!rkl
john@hp-pcd.UUCP (john) (04/12/85)
<<< Sorry about the confusion between 15 and 30 year loans. The article that I was refering to compared a $100,000 mortgage for current rates of 12.75 for the 30 and 12.25 for the 15. The payments on the 30 would be $1087 and the 15 would be $1217. The $130 difference would save you $172,260 (Before taxes) if you took the 15. I figured that a 12.75% loan for $100,000 paid off at $1217 a month would take 16.27 years for a difference of $18600.(before tax) John Eaton !hplabs!hp-pcd!john
ed@mtxinu.UUCP (Ed Gould) (04/14/85)
> I am shopping for my first mortgage and would appreciate > all the advice readers of this group can offer. > > One plan that is particularly interesting is something called > "Graduated Equity Mortgage." All of the advice I've heard (except from real estate brokers, whom I don't trust much) says to chose the lowest-numbered mortgage you can get from this list: 1. Fixed rate 2. Variable rate (capped is better than uncapped; I think everyone is offering capped ones these days) 3. Negative amortization (same as "GEM" above) The reason given is that the real cost of the loan will be lower. As for paying off the loan faster, which is usually a good idea if you can afford it, just pay more (by $50 - $100 or so per month) than the minimum payment. Be sure, however, to designate the extra to go towards principal, or the lender will probably apply it to interest! -- Ed Gould mt Xinu, 739 Allston Way, Berkeley, CA 94710 USA {ucbvax,decvax}!mtxinu!ed +1 415 644 0146
sieg@bocar.UUCP (B A Siegel) (04/18/85)
> All of the advice I've heard (except from real estate brokers, > whom I don't trust much) says to chose the lowest-numbered > mortgage you can get from this list: > > 1. Fixed rate > 2. Variable rate (capped is better than uncapped; > I think everyone is offering capped ones these days) > 3. Negative amortization (same as "GEM" above) One should be aware that there are some GEM motgages which DON'T have negative amortization. One such is offered by Somerset Savings Bank, Somerset NJ fits this category. Basically years 1-6 are at a 30-year fixed rate & the remaining 9 years payments increase by 7% per year. Barry Siegel ..!bocar!sieg
ark@alice.UUCP (Andrew Koenig) (04/19/85)
> For one thing they did not even mention taxes in the article. That $172K > is all deductable so a large part of the savings will simply go to the > goverment as higher taxes. They also didn't figure in the value of having > an extra $130 a month to spend. If the 30 year mortgage were to be paid off > with exactly the same payments as the 15 year then it would be prepaid sooner > and only cost an addition $18,600. After taxes that could be as low as $10,000. Ummm...something's wrong here. If you take out a 30-year mortgage and make exactly the same payments on it as you would on a 15-year mortgage at the same interest rate, your total cost will be exactly the same for both loans. Alternatively, if you take the difference between the payments for the 30-year and 15-year terms and invest it at the same interest rate as the mortgage, after 15 years you will have exactly enough money to pay off the balance of the 30-year loan. This is true whether you include tax consequences or not. Finally, a taxable investment at n% is equivalent to a non-taxable investment (i. e.: municipal bonds) at (n*(1-k))%, where k is your net marginal tax rate. In other words, if your marginal rate is 40%, a 15% taxable investment (hard to find) is equivalent to a 9% tax-free investment.
disc@homxb.UUCP (Scott J. Berry) (04/19/85)
>> For one thing they did not even mention taxes in the article. That $172K >> is all deductable so a large part of the savings will simply go to the >> goverment as higher taxes. They also didn't figure in the value of having >> an extra $130 a month to spend. If the 30 year mortgage were to be paid off >> with exactly the same payments as the 15 year then it would be prepaid sooner >> and only cost an addition $18,600. After taxes that could be as low >> as $10,000. > Ummm...something's wrong here. > > If you take out a 30-year mortgage and make exactly the same payments > on it as you would on a 15-year mortgage at the same interest rate, > your total cost will be exactly the same for both loans. Ummm...something's wrong THERE If you take out a 30-year mortgage, your interest is calculated based on a 30-year repayment schedule. If you want to make an additional principal payment that month, fine. But you still owe the (30-year) interest-- the principal is not reduced instantaneously. The amount of that "extra" interest does diminish monthly, however. Scott J. Berry
ark@alice.UUCP (Andrew Koenig) (04/20/85)
>> Ummm...something's wrong here. >> >> If you take out a 30-year mortgage and make exactly the same payments >> on it as you would on a 15-year mortgage at the same interest rate, >> your total cost will be exactly the same for both loans. > Ummm...something's wrong THERE > If you take out a 30-year mortgage, your interest is > calculated based on a 30-year repayment schedule. If > you want to make an additional principal payment that > month, fine. But you still owe the (30-year) interest-- > the principal is not reduced instantaneously. The amount > of that "extra" interest does diminish monthly, however. > Scott J. Berry Not true, at least in New Jersey. All mortgage loans here (and, I think, all mortgage loans anywhere that are obtained through FNMA or GNMA) are "simple interest" loans. Here's how it works. Suppose you take out a loan at a nominal rate of 12% per year (actually 1% per month). When you get the loan, you are given some amount of money, which is what you owe at that point. Each month, the following calculation is done: new balance = old balance * 1.01 - payment When the new balance is 0, your debt is erased. You can pay as much as you like, as long as each payment is at least some stipulated amount. This amount is chosen so that if you pay the minimum each month, your balance will reach 0 at the end of the nominal term of the loan. For example, suppose you borrow $100,000 for 30 years at 12%. Assume, for the sake of argument, that you take out the loan on January 1, 1985. Then, on January 1, you receive a check for $100,000 and you agree to pay at least $1028.61 each month. Your first payment is due February 1. After you have made that payment, you owe: 100000 * 1.01 - 1028.61 = 99971.39 so $1,000 of your payment has gone to interest and $28.61 to principal. Your next payment is due March 1. You then owe: 99971.39 * 1.01 - 1028.61 = 99942.49 so $999.71 of that payment has gone to interest and $28.90 to principal. Now, suppose you win $50,000 in a lottery and want to pay back part of your loan early. So, instead of sending in $1028.61 for your April 1 payment, you send $50,000. You now owe: 99942.49 * 1.01 - 50000.00 = 50941.15 Of your $50,000, $999.42 has gone to interest and the remaining $49,000.58 has gone to principal. Now, you send in your normal $1028.61 on May 1, so after that you owe: 50941.15 * 1.01 - 1028.61 = 50421.95 On this payment, $509.41 has gone to interest and the remaining $519.20 has gone to reduce your principal. In fact, if you continue making your payments on the normal schedule, you will retire the loan in about five and a half years instead of the 30 originally planned, and the total interest you pay will be that much less. --Andrew Koenig
ark@alice.UUCP (Andrew Koenig) (04/23/85)
John Eaton says: > Sorry about the confusion between 15 and 30 year loans. The article that I > was refering to compared a $100,000 mortgage for current rates of 12.75 for > the 30 and 12.25 for the 15. The payments on the 30 would be $1087 and the > 15 would be $1217. The $130 difference would save you $172,260 (Before taxes) > if you took the 15. I figured that a 12.75% loan for $100,000 paid off at > $1217 a month would take 16.27 years for a difference of $18600.(before tax) If the rates are different, that definitely changes the picture. As I indicated, a 30-year loan is preferable to a 15-year loan at the same rate. Similarly, a 12.25% loan is preferable to a 12.75% loan over the same term. In this sort of situation, each individual must decide which preference is worth more.
smb@ulysses.UUCP (Steven Bellovin) (04/25/85)
Before worrying too much about the cost of a mortgage over its full term, it's worth considering the odds that you'll live there that long. If I remember the numbers correctly, 6-7 years is the median.