10 year mortgage?

[ScrimpAndSave]

Most of you know that I have perpetual housing fever even though I won't be buying for about another 2 years (if I know what is good for me!).

I was originally planning to budget for a $300,000 house on our $110,000 income...but I am starting to think of how cool it would be if we went with a more modest home and go with a 10 year mortgage.

That means we would have our home paid off by the time we are 40!

I'm thinking of maybe something in the ballpark of $225,000 with a $45,000 downpayment...but I am not sure if we could swing a $2200 PITI. Our gross income would be $110,000...no CC debt, but we will have his law school student loan debt of $120,000 (monthly payment estimated at $800-$900).

There are plenty of houses here that are around 1,200-1,500 sq. ft. We don't want to have kids so I think that is plenty big...

Just something to think about. It would free up money while we are young!

[gamecock43]

1,200-1,500 sq ft but yeah- 10 yr mortgages are great. I myself plan on a 30 yr mortgage to be able to get the house I really want.

[noppenbd]

I think when the time comes to buy the house you will have to see what the interest rate savings would be for a 10-yr mortgage vs a 15-yr vs a 30-yr. If you are not getting much of a reduction in rate then you might be better off just paying extra in principal each month but keeping the loan term longer (i.e. get a 15 but pay it like it's a 10). Then if you needed the extra liquidity for some reason you could just go back to paying the regular payment temporarily.

[ScrimpAndSave]

Noppenbd...that is a good idea. As of right now, I do not see a large difference in interest rates...we will have to see what they are like then.

[noppenbd]

Currently, Bankrate.com shows 30 yr mortgages at 6%, 15 yr at 5.65%, and 10 yr at 5.75%. It looks the current situation is kind of anomaly though, and you would usually save about 0.10% by going with a 10yr. Not worth it in my book. Saving 0.35% with a 15yr is probably a good deal if you are comfortable with the higher payment.

[MiikeB]

I think when the time comes to buy the house you will have to see what the interest rate savings would be for a 10-yr mortgage vs a 15-yr vs a 30-yr. If you are not getting much of a reduction in rate then you might be better off just paying extra in principal each month but keeping the loan term longer (i.e. get a 15 but pay it like it's a 10). Then if you needed the extra liquidity for some reason you could just go back to paying the regular payment temporarily.

It is a bit more complicated than that though due to ammoritization. You are paying that extra 5 years of interest during the first 10 years.

[FrugalFish]

We have a 30 year mortgage that should be paid in about 10. We added extra principal regularly- mainly to get MIP removed from the loan as early as possible.

Earlier this year I had some misgivings about the economy and decided that a bird in the hand was worth 2 in the bush, so started keeping more money on hand, rather than prepay the mortgage. I'm happier with this arrangement, even though we will lose a little more to interest over the long run. I feel better knowing that there's quite of bit of money on hand should we have an emergency, but when things get better and that account balance meets the mortgage principal, we will have the option of paying the mortgage off in one shot.

[MonkeyMama]

I agree with noppenpd.

The mortgage on our first home was a 15-year loan, which was fine and dandy because we both worked.

But we refied to a 30-year when we bought our current home, in anticipation of living on one income.

We have recently talked about going back to a 15-year-note if we could save interest. Now that we are on better financial footing.

The interest savings is not substantial, and we have come rather accustomed to the 30-year-term. If you ever have a job loss or hardhsip, you would appreciate the flexibility to pay it longer. BUT while times are good you should always be able to pay down extra. That is the perspective you tend to gain with age. Particularly with these interest rates!

We will probably pay off our mortgage 20 years from our first home purchase date. That is our goal for now. But I prefer the 30-year option. In case we hit a bump in the road. You are young too so I'd say that plays into why I'd feel this way. If you take 30 years it would still be paid before retirement...

[noppenbd]

It is a bit more complicated than that though due to ammoritization. You are paying that extra 5 years of interest during the first 10 years.

I don't think that's true. The mortgage company will recalculate your amortization schedule each time you send in extra principal payments. For instance, payments on a $200K, 6%, 10 yr mortgage are $2220 a month (1000 interest, 1220 principal the first month). On a $200K, 6%, 15 yr mortgage, it is 1687 a month (1000 interest, 687 principal). If you pay 533 extra on the 15 yr, you will pay it off in exactly 10 yrs, and the amortization schedule will look identical to the 10 yr.

Try it for yourself on this calculator:
Mortgage Prepayment Calculator: Extra Monthly Payments

[Joan.of.the.Arch]

This may take your thoughts off in a different direction, but if I were buying in your area, one of the things that would weigh heavily on my mind would be buying a house that I could afford to heat in winter. I think heating costs are going to be horrible in the next few years. That might mean a smaller house, but it might mean a new house with the top most insulation, efficient furnace, doors and windows. It might mean a smaller older house that could be insulated to the max--something which is near impossible to do with certain older homes (like mine, urrgh!)

When we bought our house, we did ask first to see utility bills. I think that would be all the more important nowadays. By the way, for sale by owner homes were always prepared with their utility bills (and lots of other proof of repairs, maintenance, & updates such as the roofing, furnace, electrical, a/c) before I even asked. I never asked to look at them for homes represented by a real estate agent, until the one I eventually bought.

[MonkeyMama]

Excellent point Joan.

We have a fairly large home but since it is new and very energy efficient, our bill is nowhere what it used to be to heat our last apartment on the nights and weekends. (We now keep the house comfortable 24/7 for a fraction of the cost).

Quality of construction will generally matter more than size. Because the cost savings comes from better insulation than anything.

[kork13]

I don't think that's true. The mortgage company will recalculate your amortization schedule each time you send in extra principal payments. For instance, payments on a $200K, 6%, 10 yr mortgage are $2220 a month (1000 interest, 1220 principal the first month). On a $200K, 6%, 15 yr mortgage, it is 1687 a month (1000 interest, 687 principal). If you pay 533 extra on the 15 yr, you will pay it off in exactly 10 yrs, and the amortization schedule will look identical to the 10 yr.

Do I understand this correctly to mean that if I have a loan and I want to repay it early, you actually gain very little advantage? That you still pay just about the same interest anyway, because they just make you pay all of the planned interest earlier than originally planned? ....somehow i've become confusticated...

[noppenbd]

Do I understand this correctly to mean that if I have a loan and I want to repay it early, you actually gain very little advantage? That you still pay just about the same interest anyway, because they just make you pay all of the planned interest earlier than originally planned? ....somehow i've become confusticated...

Depends on the loan, I believe. But for mortgages, as I understand it, you gain an advantage by repaying it early. The mortgage company recalculates your amortization table so your interest is reduced for the remainder of the loan.

[jIM_Ohio]

You will be better off going with a 30 yr fixed, then making the 10 year payment.

You can download ammortization tables (I downloaded mine from microsoft) and play with the numbers.

If I remember correctly your income will be high real soon, you may find you want the mortgage because it is one of the few tax deductions not phased out by income.

Might sound silly, but my mortgage allows me to contribute to a Roth at 15% tax bracket when my gross income is approaching the 28% tax bracket. Deductions rule.

If a person is in 10% or 15% bracket, the deduction does not save them much ($10 for every $100 spent or $15 for every $100 spent depending on bracket). Plus these brackets have numerous other deductions (child credits, dependant credits). Most of these are phased out if AGI approached 120k. Mortgage interest does not. It can make a huge difference while you start investing.

I am not suggesting keeping the mortgage for 30 years, but I am suggesting you might want to realize that getting some tax advice before you make a debt decision might be wise. Not that many people here deal with the level of income I think you will be making, and I know of only 1 or 2 accountant/ tax types which post here on occasion (meaning go somewhere else for tax advice or wait for me to finish taking my tax course- LOL).

[ScrimpAndSave]

Jim...thank you for the info. I will check it out. I am going from $50,000-$85,000 in 5 years...and will be marrying in a year and he is a lawyer starting out at $42,000 - then who knows what...


I hope we do ok.

It's just the $120,000 in law school loans that I don't know if we should let die a slow death or kill off early. I think the interest rate will be around 7% (half are private loans and half are federal).

Thanks!