- #30 year mortgage should i pay it down for free#
- #30 year mortgage should i pay it down how to#
- #30 year mortgage should i pay it down plus#
#30 year mortgage should i pay it down for free#
Related: Compare homeowners insurance quotes online for free with Policygenius.Īlthough you do pay more in interest (even after taxes) as a result of the 30-year mortgage’s higher rate, the outcome could be exactly the same if your investments pay off. That security brings with it quite a bit of value.
If something comes up and you absolutely need to use the money elsewhere, though, you can. Sure, the smartest thing would be to invest that money monthly and watch it grow. What happens if you lose your job, suddenly have unforeseen expenses, etc.?īy choosing the lower monthly payment, you have given yourself a safety net. Think about if you were to choose a 15-year mortgage with just enough income to make the monthly payment work. However, you might instead use the money to clear out credit card debt, pay off school loans with rates above that of your mortgage, or take care of other high-interest debt.Īll of these examples offer a better use of the money than paying down a low rate, tax-deductible mortgage.Īlso, unless you have a significant amount of wiggle room in your budget, opting for a 30-year mortgage can offer your family an added sense of security. In our example above, we focused on investing the extra money you'd have each month with a 30-year mortgage.
With long-term stock market returns of 8%, assuming an average 6% return is reasonable (although nothing is guaranteed). You have the luxury of liquidity with that extra money each month: a choice between investing, spending, or prepaying your mortgage. You now have the option to invest (or spend) anything left over every month. By taking out the 30-year mortgage, though, you have given yourself the flexibility that comes with lower payments.
Sure, you could stretch your finances a bit and pay off the note sooner. So, why would you go to all the trouble of doing this? The answer is simple. Not all lenders allow this without a prepayment penalty, though, so be sure to check with yours. You should note that in these calculations, I am ignoring all fees and assuming that the mortgage terms allow you to pay it off early.
#30 year mortgage should i pay it down plus#
If you averaged an 8% return a year (compounded), your savings would increase to $203,393, made up of the same $104,040 in deposits plus $99,353 in investment returns. You'd have more than enough to pay off your mortgage balance completely! Plus, you would also have paid $89,328 of your $250,000 mortgage principal, bringing the balance down to $160,672. You’d pay 15% capital gains on those returns. Let's also say that over 15 years, you averaged a 6% return each year (compounded).Īt the end of 15 years, you’d have $171,129 in savings, made up of $104,040 of your deposits, and $67,089 of investment returns. Let's say you invested the entire $578 each month (how disciplined of you!) into a low-cost index fund. But what if you kept the extra $578 a month by sticking with a 30-year mortgage term, and decided instead to invest it? This is the opportunity cost comparison. If your marginal rate is, say, 30% (federal + state), the real difference is about $76,134 after taxes ($108,763 x (1 0.3)). For example, a comparison of the 15-year and 30-year options above shows a difference in total interest paid of about $108,763. You will generally get a tax deduction equal to your marginal tax rate times the mortgage interest you pay. It misses a couple of key factors, such as taxes and opportunity costs.
#30 year mortgage should i pay it down how to#
Related: How to Buy Your First Home A Different Perspective If you can afford the increased payments, you would fare much better with a 15-year mortgage.
That's 263% more!īased on this, the answer seems pretty clear-cut. However, with the 30-year mortgage, you would have paid $175,533 in interest.