Re: Pay off the mortgage?

 
[I have no idea what chart this is supposed to refer to]


Presumably this second description should say "for 15 years", unless
you mean "get a 30-year mortgage with no prepayment penalties, then
pay it off on a 15-year schedule".  But this overlooks another
advantage you can obtain from a shorter-term mortgage:  The rates
are lower.  For instance, interest.com shows today's (20 Oct) rates
at 5.75% for zero-points 30-year conventional conforming loans,
and 5.125% for the zero-points 15-year versions.

This drops the monthly payment from $1,660.82 to $1,594.64; the
interest paid over the 15 year life comes to just over $87,000.
The advantage is even greater for 10-year loans, which are still
somewhat rare.  But I have one: an existence proof, as it were,
that they can be had.

(Of course, if one is concerned about the ability to cough up almost
$1600/mo, vs the $1170ish number, over the long term, one might
decide to go for the 30-year loan after all.  One can then make
extra principal payments whenever possible, and pay the smaller
number at other times.  But this is another individual decision
each mortgagee must make.)


Provided, of course, that you have the cash flow to manage the
15-year amortization.

If you are in a combined (Fed+state) 35% tax bracket[*] in the US,
and if you are already at or over the standard deduction (as noted
elsethread), the $220k in interest payments are offset by $77k in
tax relief, so that you pay out $143k over the course of 30 years
(but note that the deduction starts large and decreases over time).
The 15-year's $87k nets just under $30.5k in tax savings, so that
you pay out $56.5k over 15 years.

[* high, but hardly unheard-of for folks living in California]


If you already have the rest of your debt in order (or nonexistent)
so that you are not, e.g., paying 20%+ on credit-card interest, it
usually *is* the right answer.  But nothing is ever *quite* that
simple.  For instance, if you can borrow $200k at 5.75% pre-tax,
obtain a tax deduction on the mortgage, and put the $200k into
(say) an 8% return device, then you should do that instead.  Of
course, nobody is going to guarantee you 8% -- at least not in a
legally-enforceable, non-fraudlent way -- today.  (In the early
1980s, you could get 18% even in a money market account.  Of course
you could not get a 5.75% mortgage then. :-) )

All of this also assumes that you intend to stay in the place for
the full 15-or-30 years.  The actual average is on the order of 7
to 10 years.
--
In-Real-Life: Chris Torek, Wind River Systems
Salt Lake City, UT, USA (40°39.22'N, 111°50.29'W)  +1 801 277 2603
email: forget about it   http://67.40.109.61/torek/index.html  (for the moment)
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