Homeowners taking out 10-year mortgages

Wall Street Journal ^ | June 2, 2003 | RUTH SIMON

[NV_Chuck]

That financial advisor is a little bit impersonal IMO.

I understand the concept of having other assets than your home, but all things being equal, having your home paid off is a great feeling and I don't buy that your home "is just a place to live".

Ideally, you would have other assets as well as own your home outright.

[Dog Gone]

Well, I ran the numbers, and I'd save almost $100,000 if I go to a 10-year note at 4.5%. However, it would cost me about $400 more per month.

That's a little less than $5,000 per year. Kinda thinking out loud as I'm typing, that's paying $50,000 early over 10 years to save $100,000, or a 200% return on my investment. Annualized, that's 20%, something which I never got during the stock market boom of the late 90s.

I realize that there is a present value component to that which I'm not considering (i.e., $400 today is worth WAY more than $400 ten years from now), but since the same is true about interest savings, maybe it's a wash. I'll have to think about that, or maybe someone can enlighten me.

[Eric in the Ozarks]

Do it tomorrow. You're spending more than two or three nice steak dinners each month for the extra interest.

[McGavin999]

Do it! I bought my house on a 15 year note and it'll be paid off 3 years before I retire. That'll allow me 3 years of savings to make sure I can have the roof redone, replace the A/C, and possibly rewire. Ought to make for a relatively worry free retirement.

[Dog Gone]

Yes and no. My disposable income goes down because my monthly payments go up. But at the end of 10 years, I can have a steak dinner every night.

[SamAdams76]

Owning your own house is financial freedom (provided you don't have credit card or auto debt). If I had my mortage paid off in full, I wouldn't be worried about layoffs anymore. I could take a job at much lower pay and still meet expenses. Or I could sell my house and buy a double-wide trailer in Alabama (like my parents did), a pick-up truck and still have enough left over to be set for life.

[P.O.E.]

Make sure to figure not just your interest and cashflow savings.

Remember, you are resetting your amortization clock - the early years of a mortgage are mostly interest - you may just be throwing away all the payments you have already made.

Each case is different.

[P.O.E.]

Oh, and one more thing. Make sure not to over-leverage.

If the real estate market goes down, you could get caught with negative equity.

[oust the louse]

get to your mortgage company now...no time or money to waste!

[mylife]

I dont think I'll Listen to rick edelman...Im no financial genious but if the over all cost of financing a home is 250,000.00 less and you have full equity in half the time, it seems to me that you are better off.

But I agree with NY_Chuck that you may not want to pay a mortgage early if the extra liquid money you have as a result can be used to get YOU 12% return on an investment while you pay on a 5% mortgage...You are up 7%

[FreeperinRATcage]

Our plan here is somewhat different...we're going to take those 15 years to use the shorter time to build up good equity in the house...say over the next 10 years. After that, its retirement time (I can collect my pension at 50 years old), move out of the city, buy a nice house down south in the country, and settle in. Of course, gettign another job is definately in the plan.

[Atlas Sneezed]

"I wonder what Rick's problem is? If a person pays only the required monthly payment on a 30 year mortgage, at the end of that 30 years, he will have paid at least double the selling price."

That's the time value of money. Take the difference in the payment and invest it each month. You will come out ahead, and have the option to pay off the mortgage with the nest egg when the house would have been paid off with the accelerated payments. When interest rates rise, your investment return can increase, while your payment stays low. Also, you should avoid holding too much equity in your home, for asset protection purposes.

Here's Ric's explanation:

http://www.ricedelman.com/planning/home/rule21.asp

[justlurking]

Remember, you are resetting your amortization clock - the early years of a mortgage are mostly interest - you may just be throwing away all the payments you have already made.

Not with a 10-year mortgage.

Hypothetical example: $100,000 loan, 4.5% interest, 10 year term:

The first payment is $1,036.38, $375 in interest, $661.48 in principal.

[AmericaUnited]

I agree. It's best to have the low monthly payment of a 30 year and just prepay it if you have the extra dough. At least then, if you hit a rough spot, you're not stuck with a killer high monthly payment.

[Skywalk]

I think NY Chuck's point is something similar to what Rick Edelman was saying.

Perhaps I misrepresented his point, but he was making the case for a general situation and he laid out his argument in great detail(I'd do it if I had the time..might do it anyway lol) as to why most people should get a 30 year mortgage and invest wisely with the money.

Also, with that plan you are making the same payments all the way through, and while your wealth is building those payments will take up less and less of your money. On top of that, investments undertaken with the money you aren't using on the mortgage each month will earn you 8-12 percent meaning you can have between 500K to 2 million(depending on what your specifics) at the end of that 30 years.

On top of THAT, inflation means that the payments you're making in years 15-30 will actually be significantly less than you would if you pay it off in 10 years. And once again, all the other money you have for investments because you aren't spending your last dimes on mortgage or mortgage-related financial crunches.

[Skywalk]

Thanks Beelzebubba. I was actually going to spend time typing out his arguments. lol

[mylife]

After Reading Edelmans column, I agree and therefore agree with Edelman. DOH

[Skywalk]

That's yet ANOTHER aspect. If you DO hit rough spots, a huge monthly IS going to get your house taken from you.

[Mary-Bayou]

"15 yr loan at 4.75%..."

Where did you find that rate? I am shopping around. Sounds good!