Home buying thread

Khane

Khane

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As another data point:

Total Interest paid over the life of the $218k loan on a 30 year fixed term at 4% is $156,675.52
Total Interest for the 10 year is $37,632.98

Interest paid in the first 10 years on the 30 year loan is the aforementioned $78,640.86. More than double what you would have paid on the 10 year. Amortization is no joke fellas.

By the way someone check my math. I'd hate to have made some 3rd grade level mistake and be completely wrong about all this after all these posts.
 
Deathwing

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I'm not sure that's the right way to compare them. 30 year and 10 year loans are structured completely different, much more of the initial payment goes toward principle and you have different rates. And I don't think a 10 year loan is worth discussing, the large majority of home owners cannot afford a 10 or 15 year loan, but they can reasonably afford a 30. If you put a 10 year requirement for mortgages, you'd destroy the real estate market.

I'll have to double check my own numbers, it's saying investment wins easily over early repayment. Maybe I shouldn't be using a compounding interest(annually) with monthly deposits as a stock investment calculator?
 
Khane

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If you ask me it's the best way to compare them because that's the real life, true opportunity cost. There is no point in getting a 30 year fixed and paying down early if you can afford to do so. Interest rates are always lower on a 10 year fixed so always go with the shorter term because you'll get better rates. You could also do a short term ARM (like a 5/1 or 7/1) but you'll still only be probably matching the rates on a 10 year fixed even if you go with a 5/1 ARM.

What I am saying is, if you cannot afford a 10 year fixed, you cannot afford that house. And if you can't afford to pay down your mortgage early then this discussion isn't for you, because you can't afford to invest either.

This whole discussion revolves around being able to afford to pay down your mortgage early vs letting it ride out the full 30 year term because you think that money is better spent in the market (it isn't)
 
Deathwing

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The granularity on the loan market doesn't allow for you to pick and choose which loans to get to a fine enough degree. I can afford a 30 year loan AND I can afford extra payments on it. I can't afford the next step up, 15 years. If you think 10 year loans is the requirement for home ownership, you're full of shit.

My numbers still aren't coming out in favor of your very rare scenario. Gonna probably have to dust off the statistics text book because I'm betting assuming a certain number for the loan amount is probably a bad idea.
 
Cad

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Khane_sl said:
OK Here we go. I used this mortgage calculatorMortgage Calculator. As a reference and put 0% for taxes and 0% for PMI because we are only concerned in the difference of interest paid vs stock market gains.

Since I've been mortgage shopping I used my own mortgage as the example:

218,000 loan amount, no PMI (never get a mortgage with PMI, it's throwing money away for no good reason)

The following makes some assumptions:

1) You're in your "forever" house, meaning you don't plan on moving 5 years after you buy the place (that's an entirely different discussion)
2) You can actually afford the house, therefore you could afford to choose between a 30 year fixed and a 10 year fixed

4% was the lowest interest rate I was quoted in recent weeks for a 30 year fixed at my loan to mortgage value which is at roughly 75%.
3.25% is what I actually locked in at for the 10 year fixed I will be switching to at that loan to mortgage value

30 year fixed at 4% gives a monthly payment of $1040.77. This is just principle and interest.
10 year fixed at 3.25% gives a monthly payment of 2130.27. Again, just principle and interest.

That's a difference of 1089.50 a month or for simplicity sake $13074 a year.

Investing that difference of $13074 (instead of paying down your mortgage in 10 years) and getting 7% gains over the course of that 10 years gets you $62540.62 in investment profit. ($13074 the first year gains $915.18, add that together and add another $13074 for the next year and you gain 1894.42 in year 2, etc). Now that's at a VERY good 7% return rate year in and year out for 10 years. That is much better than your average investor.



Source:Why The Average Investor's Investment Return Is So Low - Forbes

Meanwhile, you've spent $78640.86 in interest over that same 10 year period on your 30 year loan. So you've spent $16100.24 more in interest than you've gained in investments had you invested that extra monthly income rather than paying down your mortgage. Not only that but you'll have to pay taxes on your investment gains (though if you're investing in index funds you'll be earning some dividends on those investments as well). And that's if you beat average rate of return on investments by almost 5% per year.
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I don't think there's anything wrong with your numbers per se; but you're ignoring the part where the 30-year would shine, and why you let it ride. Once you've been investing that money for 10 years (and not paying early) you'll have a huge corpus to invest with (and earn interest on) for the remaining 20 years of the loan. Whereas on the 10 year note, you will be stuck with an asset you cannot leverage and cannot earn interest on. It is a slowly depreciating in most cases fixed asset that you own completely and get no income on since you live in it.

You're also lowballing the stock market return a little (historical average is about 9%) and specifying a somewhat higher interest rate than I would take for a 30.

Look at this:

30 year guy invests 13074 a year @ 9% for 30 years = $2.016M
30 year guy pays $156,675 in interest for a total benefit to the loan of $1.859M.

10 year guy invests $26,148 a year @ 9% for 20 years (after he pays off his 10 year) = $1.467M
10 year guy pays $37632 in interest for a net benefit to the loan of 1.429M.

10 year guy is worse off by over $430k after 30 years, which is ~23% of the total corpus.

Get it now?

The lower you make the stock market returns the closer these 2 scenarios will get.
 
Khane

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Cad, 9% is not the average investors rate of return. I linked a Forbes article showing that average rate of return for the average investor has been 2.6% over the last 10 years
 
Intrinsic

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This is a pretty helpful discussion. Was going to make a post in the SYGSEMLA thread and ask this same question, combined with other options I was considering. So please continue with the back and forth and analysis. Need to figure out what to do with this extra dough and there's only so much ale and hookers.
 
Cad

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Khane_sl said:
Cad, 9% is not the average investors rate of return. I linked a Forbes article showing that average rate of return for the average investor has been 2.6% over the last 10 years
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https://personal.vanguard.com/us/fun...tExt=INT#tab=1

Eat shit with your flawed forbes article to be honest.

rrr_img_84852.png
 
Khane

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Dude, like I already stated, I'm talking about average investors and the advice they're given. And as I already stated most people don't even know about vanguard funds and even less invest in just one or two like you do. Why are you so pissed off? This whole discussion, for me anyway, has been about the average person, that takes average financial advice. The Forbes article isn't flawed, it's what most people earn on their investments. You seem to be missing the point I'm making, and that is you have to do very well and be savvy. Also, the stock market is never a guarantee, whereas paying your debt down is. Yet you're acting like you can guarantee a 9% ROI for 30 years. You might be smart but you're not a prophet.
 
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May be a dumb question and further reinforce my lack of knowledge on all this, but how do your calculations play with taxable interest deductions (or whatever the term would be) for your mortgage? I know when we filed jointly last year it made a large impact to the overall return. I feel like that could all be managed through multiple strategies, and maybe relying (not like relying on it for your lifestyle, maybe counting on it? Dunno out of my depth) on your mortgage interest for that reason is a bad thing, but it seems like it'd play in one way or another.
 
Khane

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It would be impossible to model because everyone has different interset rates, is in different tax brackets, claims differently, etc... you'd have to model it for yourself
 
Cad

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Khane_sl said:
Dude, like I already stated, I'm talking about average investors and the advice they're given. And as I already stated most people don't even know about vanguard funds and even less invest in just one or two like you do. Why are you so pissed off? This whole discussion, for me anyway, has been about the average person, that takes average financial advice. The Forbes article isn't flawed, it's what most people earn on their investments. You seem to be missing the point I'm making, and that is you have to do very well and be savvy. Also, the stock market is never a guarantee, whereas paying your debt down is. Yet you're acting like you can guarantee a 9% ROI for 30 years. You might be smart but you're not a prophet.
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You don't have to be savvy to buy an total market index fund, any advisor will tell anyone the same thing.

I sound angry because you are giving bad advice, and if people do what you are saying, they will end up poorer. Then they can't afford my services and I make less money.
smile.png


Besides, whether you say 9% or 7% or 5%, the 30 year guy will still come out ahead since the market return is higher than the % paid to the loan, but the two scenarios get closer and closer the lower you make the market return assumption.
 
Frenzied Wombat

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You also need to incorporate your tax savings from your mortgage interest deduction into any type of comparative analysis, because your tax savings over the course of the mortgage can be huge. Writing off 15-20K per year in mortgage interest is no joke..

That being said, pretty much every article you'll read out there gives the same advice. If the interest rate on your loan is lower than what you can fetch in the market, your money is better off in the market. With interest rates at 4%, plus your tax deduction, it is currently wiser to invest than pay down your mortgage. Now, as Khane mentioned, paying down your mortgage always results in a positive, while investing in the market doesn't necessarily mean the same. However, you can't look at the market in a limited finite window of time, while your mortgage is viewed under a window of 30 years. Your opportunity cost needs to be measured equally. If you are taking money that you would use to pay down your mortgage and invest it, you can't look at the risk or potential of that investment over say a three year period, it should be viewed as an investment with equal length to the alternative, your mortgage. With that in mind, if you compare market performance over the last 30 years to the current interest rate of 4%, then combo it with your mortgage interest rate deduction, the wiser choice (though perhaps less emotionally comforting) is to invest the money instead.

EDIT: I'll add that I have enough money saved/invested that I could pay off my mortgage right now. So I could liquidate my investments and own my house outright instead of having that mortgage over my head, but that tax deduction is probably saving me close to 4K in taxes per year. So yeah, I could "own" my house, but at the expense of whatever interest I'm earning in the market PLUS 4K per year in tax savings. My house's value will (hopefully) appreciate no matter what the balance is on my mortgage, but those market interest earnings plus the 4K a year in tax savings would simply become null and void if I went that route.
 
Khane

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Cad I'm discussing the numbers and having a conversation. Prove to me with numbers that 5% ROI is a better investment with numbers. The very first thing I said was this was a good exercise and for people to check my numbers. And you're too busy throwing a tantrum to be reasonable. It's great that you think every Tom dick and Harry thinks and invests the same way as you do. But that's not the case. You're also looking at the performance of vanguard funds over the past 10 years, which have arguably been the best 10 years ever for investors and extrapolating that as if it will remain that way for eternity. Stop acting as if you can predict the future
 
Khane

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Also I am not giving bad advice. Don't buy more house than you can reasonably afford or need and try not to carry debt never has been and never will be bad advice. Take a risk if you want to, but investing in the market always carries risk. Saying otherwise is the bad advice here
 
Cad

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Khane_sl said:
Cad I'm discussing the numbers and having a conversation. Prove to me with numbers that 5% ROI is a better investment with numbers. The very first thing I said was this was a good exercise and for people to check my numbers. And you're too busy throwing a tantrum to be reasonable. It's great that you think every Tom dick and Harry thinks and invests the same way as you do. But that's not the case. You're also looking at the performance of vanguard funds over the past 10 years, which have arguably been the best 10 years ever for investors and extrapolating that as if it will remain that way for eternity. Stop acting as if you can predict the future
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Look at this:

30 year guy invests 13074 a year @ 5% for 30 years = $910,396.37
30 year guy pays $156,675 in interest for a total benefit to the loan of $753,721.37.

10 year guy invests $26,148 a year @ 5% for 20 years (after he pays off his 10 year) = $898,618
10 year guy pays $37632 in interest for a net benefit to the loan of 860986.

So I guess if you assume 5%, paying down debt would be good, especially 4% debt. I guess that would be right, although for a 30 year timespan to return 5% in the market would have to be apocalypse levels of bad.

You kept acting like it takes some sort of market genius to buy an index fund and let it ride for 30 years. It does not.

Also, last 10 years being the best ever? Maybe the last 3 years. Did you forget the great recession already? Remember when the Dow was at 7000? That was like, 6 years ago.

Thats the thing about the stock market though. It always rebounds if you widen your time horizon. Even if you bought in September 1929 1 month before the worst crash in history, 30 years later you are at 7.8% annualized.

If you bought in 1990 and cashed out in September, you're at 9.98% annualized.

So on and so forth.

Now, what CAN fuck you, is if you have all your money in the market, and right before you're ready to retire, 1929 happens and eats 30-40% of your retirement. If you're less than 10 years from retirement I'd say you need to do something else with your money than just buy index funds. But I'm a long way from not having income, so for me, 9% all the way.
 
Khane

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Conventional wisdom says to move your money from stocks to bonds as you near retirement. And that makes sense. The recession hit hard and then rebounded even harder. The djia has doubled in the last 10 years. The last time it did that was right before the Internet bubble. We live in a very volatile time, and in my opinion something is artificially propping the market up just like the dot Com did near 2000 and the housing market did near 2008. The market has been more active and volatile in the last 20 years than it ever was since the 1920s and look what happened then. It's not as much of a slam dunk as you make it sound and there's a reason the average ROI has been 2.6% the last 10 years. You can lead a horse to water but you can't force him to drink. Look up the wealth disparity. All the gains being made right now are by the wealthy, i.e. people like you. History has taught us when wealth distribution swings too far in favor of the top 1% the market crashes.
 
Khane

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I misspoke, the dow hasn't doubled in the past 10 years, I was thinking of the lows after the crash in 2008, but in 2004 it was at about 12k. So it went up roughly 46%.

But here's a graph of the last 100 or so years for the dow.

Dow Jones 100 Year Historical Chart | MacroTrends

Since 1995 the market has been crazy. It was relatively stable for almost 80 years, and then the last 20 or so have been nuts. Lots of money was made for sure and people who didn't pull out of the market after the 2 crashes have won big. But I'm just a little averse to the fact that it seems like the market is due for a big correction.
 
Khane

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And of course rates are moving down aggressively since I locked in. Seeing 15 year fixed at 2.875% today
 
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Khane_sl said:
And of course rates are moving down aggressively since I locked in. Seeing 15 year fixed at 2.875% today
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Unless you can predict the future then just be happy with whatever savings you already locked in. I get so many people, mainly Indians, that cry like bitches over rate movement after their lock but if I could predict where it was going to go I sure as shit wouldn't be talking to them.
 
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