Kevin Pool, Home Buyer in La Vernia, TX

Financing Question

Asked by Kevin Pool, La Vernia, TX Fri Mar 22, 2013

I have a finance question. I am looking to spend at most, 300k for a home. I have 80k available for a down payment. Which is better? A 15 yr note with the 80k as a down payment or take out a 30 yr note with the minimum down and make extra payments to pay the note off in 15 yrs?

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Answers

10
That is a hard question to give a direct answer but here are some things to consider so you can see what is best for you.

1. What are your long-term goals? Do you want to live in a paid off house or do you plan on retiring or having children in college in the next 15 years or so. Living mortgage free would give you more cash flow to pay for things like that or if your income will be less due to retirement.

2. Can you afford the payment and still maintain the lifestyle you are accustomed too? Even with the larger down payment you will have a slightly higher payment with a 15 year most likely. Make sure the payment is something you can live with based on your current and future income estimates.

3. Could you better invest that money elsewhere for a higher return. There was a good article written years ago that showed a person who paid off their mortgage earlier by paying an extra amount each month and another person who invested the same extra payment amount each month in mutual funds or other investments. The person who invested in the mutual funds was able to accumulate much more wealth and pay off the home earlier than the person who made the extra principal payments. And remember this was back when interest rates were a few points higher than they were today. Of course no investment is guaranteed so this option does have more risk but has the possibility to offer you a better return.

Remember that with tax advantages your effective interest rate is lower than the rate on your mortgage... money is very cheap these days so by paying off that very low interest mortgage you really need to think if that is the best possible use for that money?

Living in a home with no mortgage is great but you really need to look at the big picture to see what will help you accumulate the most wealth over time.

Hope this helps.

______________________________________________________________________
Don Groff | REALTOR® & Mortgage Broker | Austin Real Estate Pros & 360 Lending Group
office: 512.669.5599 | mobile: 512.633.4157 | email: listings@dongroff.com
websites: http://www.AustinListed.com | http://www.360LendingGroup.com
0 votes Thank Flag Link Mon Mar 25, 2013
Hi Kevin,

I agree somewhat with Chris but I'm going to take it one step further.

Using just an example of a minimum down 30 year fixed scenario.

Let's say you put 5% down which would give you a loan amount of $285,000 & at that you would have an interest rate of 3.75%. You would have a principle & interest payment of $1,318.88 and a PMI (private mortgage insurance) payment of around $213.75.

Now let's look at what happens when you put 20% down.
You would have a loan amount of $240,000 & at the same rate, your PI payment would be $1,111.48. That's a savings of $421.15 per month, sounds good right? Not so fast. Let's look at your break even point.

The difference between the down payment options above is $45,000. To calculate your break even point, divide the difference by the monthly savings. $45,000 / $421.15 = 106.85 months or 8.9 years. So it will take you 8.9 years to recoup the extra $45,000 you put down by saving $421 per month. In my humble opinion, cash is king & once you tie up your cash in a home, it's pretty difficult to get it back it out, especially in Texas. There are plenty of people that put 20% or more down on new home purchases before & after the housing crash that lost it all so in my opinion it's better to keep that cash in another investment vehicle with easy access in the event you need to get at it.
0 votes Thank Flag Link Sat Mar 23, 2013
I would like to personaly thank each and everyone of you for taking the time out of your busy day to respond with the advice.
0 votes Thank Flag Link Fri Mar 22, 2013
Just depends on your goals and how long you want to hold it and if you want to pay it off or for it to be a rental. Call me if you want to chat on it.

Thanks,
Holly McCormick
EXIT One Realty
512/699.5590
http://www.hollymccormick.com
holly@hollymccormick.com
0 votes Thank Flag Link Fri Mar 22, 2013
Kevin,

You received good advise from the other respondents.

Simply put, the least cost way to pay the house off in 15 years by making payments on regularly scheduled dates is with the 15 year loan when compared to a 30 year loan with additional principal payments to pay the loan off in 15 years..

There are two way that you can financially justify taking the 30 year loan and paying it off in 15 years: one is if you believe that there may be times when you need the flexibility of paying the 30 year payment because your finances may not allow you to reliably make the 15 year loan payment on a consistent basis.The higher rate and overall cost of the 30 year loan is significant; the other is the case where you believe that you can, over time, make significantly more(after tax) than the rate on the 30 year loan by investing the funds freed up by making the lower down payment and the difference between the 15 and 30 loan payments (say $65k lower down payment and $400 a month on the regular mortgage payment), where you can periodicaly make payments from money invested or make a balloon payment from your accumulated invested funds at the end of 15 years.

CONSULT YOUR FINANCIAL OR TAX ADVISOR to determine which is best for you. As a Realtor, I cannot, by law, advise you in that regard. I can advise you on a real estate purchase if you have not engaged a Realtor. Please contact me at your convenience if I can be of service.

Best of luck,

Tom
Thomas J. Cantalini
Broker Associate, REALTOR(R) GRI, CNE, SFR, MBA
Century 21 HSK and Associates Austin
9020-1 N. Capital of Texas Hwy., Suite 210
Austin, Texas 78759
512-797-9167 (cell)
512-264-3446 (home)
tom.cantalini@gmail.com
thomas.cantalini@century21.com
0 votes Thank Flag Link Fri Mar 22, 2013
Tina is spot on with her answer. I would just add this: Based on your figures $300k purchase with $80k down.
15 year w/ 80k down puts you around $1519/mo P&I *180 mo = $273,420 plus down payment is your total amount paid for house.
30 year you would need to put down at least 20% to avoid mortgage insurance, which I would highly recommend. This only saves you $20k upfront. The monthly payment would be around $1111/mo *360 = 399,960 plus down payment is your total amount paid for the house.

The question you need to ask is what is YOUR time value of money? What are the opportunity costs associated with an extra $400/mo. Do you need payment flexibility? If you know you are going to payoff in 15 years then the 15 year term is a cheaper option bar none, however the questions above should help decide if it’s the best option for you.

Sincerely,

Chris Irvin
Mortgage Banker
Brand Mortgage
NMLS 75615/465546
678-251-7889
cirvin@brandmortgage.com
http://www.chrisirvin.com
0 votes Thank Flag Link Fri Mar 22, 2013
Kevin,
Purely a personal decission in the end. Loan terms can be almost and duration you want 30, 25, 20 15. 10. Interest is paid heavily in the early years. Making a shroter term "locks" you into making the higher payment while a longer term allolws you to pay extra when you want or not. A good question to ask yourself is "What would I do to put the extra money (down payment & extra for higher monthly) to work earning more money." Finding a comfortable balance is the key. Many factors to consider.
Bill
0 votes Thank Flag Link Fri Mar 22, 2013
Kevin

The million dollar question is how much can you afford comfortable monthly. Allow me to give you a breakdown of 3 different scenerio so you can see exactly what that would do to your budget.

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Start the process right 1st by talking to a Licensed Mortgage Professional to determine who much home you can afford and whether you are credit wordy and is there an ability to repay the loan.

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0 votes Thank Flag Link Fri Mar 22, 2013
Kevin, without knowing what kind of payment you can afford, etc. Tina is correct that it is really up to you. However, if you can afford to do a 15 year note you will have lower overall interest and there is still no prepayment penalty on that loan as well. Therefore if it was me, I would do the 15 year note, put down at least 20% to avoid mortgage Insurance and have anoverall lower cost of the money.

If you're not yet working with a buyer's agent and would like some excellent free professional assistance, please contact me and I will do all I can to assist you. I am in the greater Austin area, but I have a large referral base of top agents all over the world.

Joe Jarusinsky, Realtor/Master Instructor, Keller Williams Realty, Austin's #1 Real Estate Company, Ranked #1 by Buyers and Sellers (JD Power & Assoc. 2012) Call 512-261-4415
0 votes Thank Flag Link Fri Mar 22, 2013
On a pure financial cost basis, you'll pay less interest with the 15 year option. However, you gain additional cash flow flexibility with the second option. As for which is better, that's up to you.
Web Reference: http://www.archershomes.com
0 votes Thank Flag Link Fri Mar 22, 2013
thank you.
Flag Fri Mar 22, 2013
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