15 year or 30 year mortgage refinance?

Sami

candyliquor35m wrote: »

Go with 15 and pay it off in 7-8 years. You won't find a better investment than paying off your mortgage early and saving thousands of dollars in interest.

Simply not true. There a tons of investments out there that would be many times better.

$200 with 5% interest will cost you $665 in 30 years. $200 with 10% return will make you $3290 profit.

shack

Face wrote:

I need to find a new bank, mine won't go under 6.25%.

Then you bank with a very smart bank. We have decided to do the same...but maybe even more drastic. We will not do ANY fixed rate loans below 6.50% and fixed for no more than 5 years...and even that is very selective. If business walks...so be it. After the election when there is little or no pressure on the Fed to "energize" the economy and inflation really starts to take it's toll...rates WILL go back up. Not just loan rates...but deposit rates as well. We have no desire to have loans yielding less than 6% when we are paying that much or more for deposits. The money we loan out (our deposits) re-prices much faster than the loan portfolio. It's hard to make money that way. We will give up some revenues now to not get caught up in a negative yield on our loans. We will make mortgage loans and sell them in the secondary market...but nothing to keep. We have made some loans floating around prime rate with a cap on the rate so customers can take advantage of low short term rates but have some protection against rising rates in the future. This is primarily business and investment loans and we are still doing a good amount of business.

bobman1235

shack wrote: »

If you would be are comfortable and willing to borrow against your home to invest in whatever (because in reality that is what you would be doing)....go 30 years and invest the difference in the payment. Just be sure you are disciplined enough to invest the amount EVERY month to make that a viable investment strategy. If not, go 15.

This is the problem, everyone thinks they're disciplined enough, and then they see an extra 800 bucks in their account every month and go party with it (figuratively speaking). This is why everyone who did those "interest only" loans are getting killed - in theory, it's great, you're investing all that money you could put to principle and making it work for you; in practice you're probably not investing it all and end up in rough shape at the end of the term.

So for someone like me who isn't very good at saving / investing the 15-year path would make way more sense because I'm forcing myself to do something and I know exactly what the outcome will be.

George Grand

15 years if you can swing it. If you can really swing it, at closing throw them one extra monthly right out the gate. Knock years off that 15.

I had a 30 year that I got in 1987, re-financed to a 15 @ 6% in 94. This place is paid off in a matter of months. The big addition included. That area of the house was paid off with audio sales within two or three years of being constructed in 1999.

candyliquor35m

Sami wrote: »

Simply not true. There a tons of investments out there that would be many times better.

$200 with 5% interest will cost you $665 in 30 years. $200 with 10% return will make you $3290 profit.

That is what many ppl think but finding those iron clad 10% investments are few and far between or for only the super rich that have millions to invest.

Many ppl end up losing 50% of their investment in the stock market for instance.

I didn't start getting ahead in life until I paid off my mortgage. It's a no brainer.

shack

bobman1235 wrote:

So for someone like me who isn't very good at saving / investing the 15-year path would make way more sense because I'm forcing myself to do something and I know exactly what the outcome will be.

This is THE "risk averse" strategy. The end result can be forecasted with certainty. Even if you are disciplined enough to invest as stated...there is NO guarantee what your rate of return will be or that you will even retain all the money you have invested (think current stock market and/or R/E market). Paying the mortgage faster is a guaranteed return (diminishing the cost of the funds you owe at the rate you borrowed at is a rate of return.).

It all depends up on your discipline and risk tolerance.

Sami

candyliquor35m wrote: »

That is what many ppl think but finding those iron clad 10% investments are few and far between or for only the super rich that have millions to invest.

There are no iron clad 10% investments, but saying there aren't any better things for your money than paying mortgage off isn't accurate. Like I've said many times before, investing isn't for everyone and for many people the early mortgage payment is a good and safe way to save money. Nothing wrong with that but it's also a very low yield method. If you really want to get ahead you will have to take some risks.

PhantomOG

reminds me of that "Zurich Axioms" book. That was a good free read. Saw it on fatwallet and someone posted it here at CP as well:

http://neif.org/Zurich_axioms.pdf

candyliquor35m

Sami wrote: »

There are no iron clad 10% investments, but saying there aren't any better things for your money than paying mortgage off isn't accurate. Like I've said many times before, investing isn't for everyone and for many people the early mortgage payment is a good and safe way to save money. Nothing wrong with that but it's also a very low yield method. If you really want to get ahead you will have to take some risks.

I agree everyone should do their own research and make the best decision for their own situation. There is no one right answer for everyone.

jdhdiggs

candyliquor35m wrote: »

That is what many ppl think but finding those iron clad 10% investments are few and far between or for only the super rich that have millions to invest.

Many ppl end up losing 50% of their investment in the stock market for instance.

I didn't start getting ahead in life until I paid off my mortgage. It's a no brainer.

Huh?

If someone was maxing out all of their retirement funds already you may have a leg to stand on, but lets say he doesn't have the 401K maxed out, that a free 15% (probably 20-25%) minimum on return. At a 15 year time frame, you could safely assume ~10-15% compounding rate of return on some decent mutual funds. This would put you a HUGE amount ahead of the 15yr mortgage. So the decision becomes do you want a ~5% safe return or a ~12% return that's fairly safe... Me, I'd take that extra 7% a year compounding over 15.

The 401K approach or setting up a sharebuilder IRA can keep you from ever missing that "extra" money.

shack

jdhdiggs wrote:

At a 15 year time frame, you could safely assume ~10-15% compounding rate of return on some decent mutual funds. This would put you a HUGE amount ahead of the 15yr mortgage. So the decision becomes do you want a ~5% safe return or a ~12% return that's fairly safe... Me, I'd take that extra 7% a year compounding over 15.

Sorry...history will not support a 10-15% rate if return over any 15 year period. The average is much closer to 8%.

jdhdiggs

For large caps, that's true. But you can diversify into small caps and definately push it into the 12-15%, so please forgive me for adding 2% to the return....

Returns 1927 - 2005

Small Cap Value funds: 15.4%
Small Cap Growth: 9.2%
Large Cap Value: 12.4%
Large Cap Growth: 9.6%

shack

jdhdiggs wrote:

For large caps, that's true. But you can diversify into small caps and definately push it into the 12-15%, so please forgive me for adding 2% to the return....

No that's the average for all funds over a 15 year time frame. You have to remember that funds are simply a subset of the market and no fund or sector has performed that well over a long period of time. One could be lucky and guess right and get that performance...but that is the exception rather than the rule. There are a lot of funds who would like you to believe those returns...and what they will do is tell you that by extrapolating backward, their fund would have met those returns...if they had made those decisions, at that time.

jdhdiggs

Are bear funds included in that? Of course mutual funds will almost always underperform the market as a whole, but I didn't think it was THAT bad... As above, average market returns are well above 8%.

shack

There were less than 300 mutual funds TOTAL at the beginning of 1970 Going back to 1927 is a little loaded.

sucks2beme

The ol' crystal ball doesn't work so well right now. Maybe investing will turn out better. Maybe paying off quicker is better. The outlook for the next couple of years looks all over the map. Who knows if someone might
really do a flat tax and kill the deductions. The only sure thing is
interest is low right now. Along with prices leveling off, it's a good time
to buy property in many areas of the country.

shack

Average market returns since 1926 are around 10%.

jdhdiggs

It was just by stock types, not mutual funds-Data can be found on numerous sites. I just have never seen any investment site set market returns below 10%.

J_Kennedy

Is your house an investment, or a place you live? Do you want to make money with it, or get it paid for as quick as possible so you can live in it mortgage free for years and years?

People look at homes and mortgages totally backwards. Put the numbers on paper and convince yourself it's an investment yet live in it for years and years. Put the numbers on paper and see how paying a mortgage down as quick as possible pans out when you plan on selling at some point. What else could that money do? Look at exactly how well that 15 year with less interest helps you at tax time vs. the difference in principal reduction.

Read up on on people that have made big money in real estate and see how they acquire and hold property. You'll be surprised, and still take some of the advise yo9u've gotten here, because it's "what everyone else does" or it's what a mortgage broker suggests (the person making money on how well they position your mortgage.

J_Kennedy

shack wrote: »

Average market returns since 1926 are around 10%.

I've had years near 40% and thought I was a genius. I've had years in the - and wanted to shot myself. Then I look at 5 years, 10 years etc. and see something funny. We average about 10%, actually a little better.

Now for that crystal ball to know when to jump out and toss it all on a cookie jar and when to jump back in.

whitetruk

candyliquor35m wrote: »

Go with 15 and pay it off in 7-8 years. You won't find a better investment than paying off your mortgage early and saving thousands of dollars in interest.

been there,done that.
then the divorce i`m now 5 into a twenty year.
good luck!

candyliquor35m

Everytime I invest in the stock market, I lose money. For me personally, paying off my mortgage in 7-8 years was the best decision I ever made. Of course my house only cost $42.5k in 1990 with 1074 sq ft, 3 bdrm, 1 3/4 bath, 2 car garage, no dining area, only a breakfast bar so I improvised and put a dining table in front of the patio door

shack

The average capitalized rate of return of the stock market is around 10.7%. That is not the indexes but the whole spectrum of stocks. That figure includes no fees and so forth that are part of a mutual funds (which average about 2%). You may have a fund that has 30% rate of return for a period of time. It may also have a period with returns of negative 5%. It is not unusual for a fund to have a 15% rate of return for 5 years. Very few can generate anywhere near that for 10 years and 8%-10% is considered a very good rate of return over 15 years. The market is very cyclical. I dare say most of the people on this forum have not been investing or following the markets for 15 years and haven't seen the real fluctuations that have occured. In order for the market to average 10% there has to be market returns above and BELOW that amount.

How much are your funds down now. I've got a couple that are down 20% because they are heavy in financials. I'm not worried, because even thought they may stay down for another year or two they will return.

candyliquor35m

I'm afraid to check my 401k but it's for retirement so I'm not worried. It's 100% invested in a IPP MIR which is a rock solid company imo with earnings coming out tomorrow :eek:

Sami

For this year, I think I'm up 10-15%. Last year, the crash took some of my earnings away and I ended up with ~15% yield.

jdhdiggs

Sami wrote: »

For this year, I think I'm up 10-15%. Last year, the crash took some of my earnings away and I ended up with ~15% yield.

Ditto here, my stocks are doing much better than the 401K but dumping my local for international funds kept me from getting hit too hard in the drop this last winter.

Net up around 4% since Jan 1 and cleared around 22% last year.

TroyD

Here is my thing, LOTS of people say, well, I'll do the 30 year mortgage and pay over on it...but, realistically, how many people actually do it? I'd be willing to wager very few.

As far as investing goes, you know, I'd defer to some of the smarter folks on here. However, for me....I'm about making it easy on myself. 15 yr mortgage and a steady 8% avg growth over the next 40 years? Yeah, I'll be content with that.

BDT

shack

In my line of work, if I had a dollar for every person who told me their investments were returning XX% but in reality when I was able to take a look at the portfolio it was lower...sometimes significantly... Let's just say I could purchase a pair of brand new LSi15s and have a good start towards a LSiC. Not saying anyone in particular isn't getting the return they think...just my experience.

jdhdiggs

Shack: I would have to agree with you. Everyone remembers their winners but forget about their losers. Same with my buddies that go to vegas. But I would say that I'm one of the higher rated players on fool.com.

TroyD

I'd say that guys are as, if not more, likely to lie about thier financial prowess as the size of thier johnson.

BDT