Here is a numerical analysis of a $400,000 loan at 7% interest during your first year:
Type........Monthly Payment........Approx. Principal Paid per month
Option ARM.........$1286 (@1%).......................-$1047
Interest-Only........$2333 ..............................$0
50-year ..............$2406 ..............................$75
40-year .............$2485 ...............................$150
30-year .............$2661 ...............................$330
15-year .............$3595 ...............................$1270
Learning Points
- Notice that the interest-only is the same as an "infinite-year" loan. So, if someone tells you that you are getting a 100-year loan, it is almost the same as interest only.
- By underpaying your 30-year $400,000 mortgage by $200/month, you are adding on 10 more years of payments.
- Conversely, by overpaying your 30-year mortgage by $200/month, you are happily losing 5 years of payments.
- You are barely paying down any principal the first few years of a long-term mortgage.
- A 15-year mortgage is about just as good as an Option ARM mortgage is bad.
6 comments:
In our layoff prone economy with endemic lack of health insurance coverage, I think it pays to have the minimum monthly expense in case of an emergency and ample savings to go along with that.
Thus, I would prefer an interest only 30-yr fixed loan, however, I would normally pay it by including the normal principle, but in case of an emergence, it would be easier to make the interest only payment than the p & i payment.
I say this as someone with a 321k 30yr fix trad mortgage and 50k in the bank for emergencies. If laid off, to keep my health insurance, my monthly house and health expense alone would be $3000.
So, I'm trying to be prudent by saving for emergencies (while getting 5% interest) at the expense of saving 4.1% (after tax interest) by paying extra principle.
Paying down my mortgage comes after emergency savings, after tax exempt funding of 401k (especially after getting full match from my employer). Then, only then do I pay extra principle.
It's all about priorities and there are higher ones than having less mortgage debt.
Great points - looks like you have your situation very well handled. An emergency account is something everyone should have -
Yep, your idea of taking an I/O 30-year fixed and overpaying it by a few hundred to include principal is a good move - if only we all had that discipline. That can be extended to overpay a 30-year I/O like a 15-year fixed. No sense in taking out a 15-year fixed if you overpay, even though many do.
Another good idea - if you have a ton of savings (>mortgage balance), you can offset your 30-year mortgage payments with interest from your savings account.
on the flip side, if you believe (like I do) that the Federal reserve is going to inflate all the value out of the dollar, it might make sense to get a 100 yr mortgage.
Considering that a decent house in LA that is currently selling for $600k (but probably worth only $450k) sold for $45k 30 years ago, I think its safe to assume it will be worth $4.5 million in another 30 yrs. So by paying the minimum (and investing the rest at a higher rate) you'll come out ahead even if you never pay it off.
but if it weren't for inflation, you'd be 100% correct. (that and the fact that most people can't follow a simple budget!)
I love your analysis on inflation. It is so true...
Good day !.
You may , probably curious to know how one can reach 2000 per day of income .
There is no need to invest much at first. You may start earning with as small sum of money as 20-100 dollars.
AimTrust is what you haven`t ever dreamt of such a chance to become rich
The company represents an offshore structure with advanced asset management technologies in production and delivery of pipes for oil and gas.
It is based in Panama with offices around the world.
Do you want to become an affluent person?
That`s your chance That`s what you desire!
I feel good, I began to get real money with the help of this company,
and I invite you to do the same. It`s all about how to choose a correct companion utilizes your funds in a right way - that`s AimTrust!.
I take now up to 2G every day, and what I started with was a funny sum of 500 bucks!
It`s easy to join , just click this link http://avezyjyxi.builtfree.org/dybonom.html
and go! Let`s take this option together to get rid of nastiness of the life
Hello!
You may probably be very interested to know how one can make real money on investments.
There is no need to invest much at first.
You may commense earning with a money that usually is spent
on daily food, that's 20-100 dollars.
I have been participating in one project for several years,
and I'm ready to let you know my secrets at my blog.
Please visit blog and send me private message to get the info.
P.S. I make 1000-2000 per daily now.
http://theinvestblog.com [url=http://theinvestblog.com]Online Investment Blog[/url]
Post a Comment