Jason95357 wrote: ↑Tue Jul 07, 2020 9:23 pm
nwa-non wrote: ↑Tue Jul 07, 2020 8:59 pm
For home buyers (to draw the distinction between home buyers and re-financers), especially first time home buyers, going for a 30-year mortgage makes most sense, most of the time. Then try to pay off as a 10- or 12-year loan.
If you were paying it as a 15-year loan on a 30-year note, you will end up making a few more payments than 180.
I've created a calculator where you can play with numbers =>
https://docs.google.com/spreadsheets/d/ ... =838586321 .
Great resource to run the numbers. 30 + extra vs. 15 in the default spreadsheet saves 12 payments, or 1 year. Is this worth the risk of losing a home vs. the flexibility of a 30-year? I don't think so. One would also want to increase their emergency fund amount about 50% as far as the mortgage, vs. on a 30 year loan you don't need to "waste" as many funds in an emergency fund.
According to
BankRate.com, the average 30 year mortgage rate today is 3.25%, the rate is 2.75% for a 15 year mortgage. At those rates, a 30 year mortgage for $100k would be $435.21/month; for a 15 year mortgage, it would be $678.62.
In order to have a six month emergency fund, you would need $2,611.26 for the 30 year mortgage and $4,071.72 for the 15 year mortgage, a difference of $1,460.46.
If you paid off the 30 year mortgage in 15 years, the total amount of interest paid would be $26,480.60 vs. $22,151.60 if you took out the 15 year mortgage to begin with. That's a difference of $4,329. (Note that is the nominal price to be paid for paying off a 30 year mortgage in 15 years vs. getting a 15 year mortgage to begin with. Considering that the typical mortgage is about $300k, that works out to about $13k in additional interest, which few are able to deduct from their taxes now.)
A $1,460.46 larger emergency fund leading to a savings of $4,329 (after-tax for most people) over a 15 year periods corresponds to an effective rate of return of 9.22% (and it would be slightly higher than that due to the additional return you would get from the interest on the additional amount in the emergency fund). That's
really high for a guaranteed, after-tax rate of return and doesn't seem like a "waste" to me.
Even if you wanted a 12 month EF for the 15 year mortgage, your effective rate of return on the higher emergency fund amount would still be 4.61%, which is still very respectable.