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Posted by Jeff Strickland on June 7, 2007, 9:10 pm
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>>
>>
>> > We are a married couple... both 45 years old, with mortgage
>> > questions....
>> > What are the pluses and minuses to consider regarding 40 or 50 year
>> > notes
>> > versus conventional 30??
>> > Isn't it good to have the interest deduction for as long as possible,
>> > even
>> > though it means (possibly) not ever paying off the note?
>>
>> Yes, it is true that you might enjoy the interest deduction.
>>
>> Assuming it is true, why not get a 30-yr fixed with the first 10 being
>> Interest Only, then doing a refi in 10 years to the same kind of note.
>> When
>> you get to be 65 and have no income to speak of, sell the property and
>> take
>> the equity, and move to Montana where you can buy a house for cash and
>> enjoy
>> a reasonably low property tax rate.
>>
>> On a 40- or 50-yr note, you are not going to make much of a dent in the
>> principle reduction anyhow. Pay 10 years on an interest only note, then
>> refi
>> the same Remaining Balance to another 30-yr fixed with the first 10 as
>> Interest Only. By this time, your LTV should be below 65%, and ten years
>> later it should be below 50%. After 20 years, sell the dump and take half
>> the proceeds to another house that is smaller and demands less of your
>> efforts, and pay cash for it.
>
> OR....Why not take a 30 fixed and think about that retirement which is
> 15-20 years away.
>
> Because at that point, if your ducks are not in a row, you're stuck on
> a possibly lower income which is FIXED, at which case you will need to
> REFINANCE again and take that mortgage with you to the grave if not
> pass it on to any living relatives.
>
> or, if you want to get risky, take a 1% program for 5 years, with
> negative amortization, which is an interest deduction, and invest the
> excess capital into mutual funds or bonds or something of that sort,
> and then refi 2-3 years in to minimize that horrible negative am and
> move into a 30 yr fixed...and have some nice security.
>
> Here is an example:
> $150,000.00 mortgage for 30 yrs at 6.75% is 972.89
> $150,000.00 mortgage payment for 5 yrs at 1% is approx. 482.45
>
> That's $490.44 extra to invest...
>
> Average gains for a mutual fund is 10.3%-21.6%
>
> in one year you can invest 5885.28...
> based on a bad scenario, you will earn $606.18 on that investment.
> which gives you 6491.46
>
> the following year you add an additional 5885.28 to that 6491.46
> which gives you 12376.74 to gain interest on... lets say you gain less
> than 10%...like 7.5 percent.
> that's an additional $928.25 in interest...
> now add that to the 12376.74
> thats $13304.49 in approximately 3 years, not including your $5885.28
> for that 3rd year, which would bring it to $19189.77
>
> You can now switch out of that neg am loan and into a 30 year loan
> with $19K cash in the bank and have decent payments of about $1100 a
> month.
>
> Just something to marinate on.
>
I don't see the calculation on where the LTV is going during all of this,
and if the neg am is eating up the equity -- assuming there is equity and
not negative equity.
If one is making the Minimum Payment -- 1% -- then he is surely enduring a
negative -- he is adding to principle. Now, if one is adding to principle to
the same degree he is squirrling money away in a mutual fund, then all he
needs is to have the fund outperform the addition to principle and the loss
of equity due to a down market.
If one is making the Interest Only payment, and squirreling away the
difference between the interest only and the fully amortized payment, he
gets nearly the same result, but does not add to principle. In this
instance, all one has to worry about are the market conditions.
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