Mortgage – To get the longest term or not

The basic premise of this post is this:

You should get the longest term mortgage that you can get. Say, 30 years.

You should try to pay it off much faster. Say, 10 to 12 years.

Note: If on the 30-year mortgage you were to pay every month as if you were paying a 15-year mortgage, you WILL NOT be able to pay off your 30-year mortgage in 15-years.

It will take you a few more payments, depending on the rates of each mortgage. That is the premium you would be paying for having a greater rate of interest, but lower monthly payments.

But, let’s suppose, you were to pay your 30-year mortgage as if it were a 10-year mortgage, you WILL pay it faster than if you took out a 15-year mortgage and paid the standard calculated mortgage payment every month.

As an example, let’s work with the following numbers. Here is the link to the Google sheet that lays out the numbers …in all their gory details 😀

(Rates are from about 5 months ago)

Principal mortgage amount: $300,000

Rate on a 30-year mortgage: 4.5%

Rate on a 15-year mortgage: 3.875%

If you were to take out the 30-year mortgage, and if you were to make the full 360 payments, you will end up paying $247,220 in interest on your $300k loan.

But we don’t want to do that. This is the control option. We want to know what the interest number is but we will not be following this option.

If you were to take out the 15-year mortgage, and if you were to make the full 180 payments, you will end up paying $96,057 in interest on your $300k loan.

Now …the scenario we want to focus on.

In this scenario, you are paying your 30-year mortgage as if you were paying down your 15-year mortgage – i.e. you are rounding off your monthly payment to what would amount to if you were paying a 15-year mortgage, an extra $680.26 that goes directly in reducing your outstanding principal every month. In this case, you end up paying $120,893 in interest, and you pay this over 192 payment.

More than a 50% decrease from $247K to $120K. Voila! But still more than what you would pay for a 15-year ….

Why 192 payments? Because it won’t be 180 payments as less is going towards paying down the principal than if you actually had a 15-year mortgage. This amounts to paying around $96 more in per month for what I call the “premium for safety” that you pay for not taking out a 15-year mortgage.

Whew. Still with me? We have one more scenario to cover.

Now …we come to the scenario that I really want to focus on.

Look into the second sheet/tab in the worksheet.

What if you were to pay down your 30-year mortgage as if you’re paying a 10-year loan (with the rates from the 15-year loan).

You would end up paying only $76,035 in interest and pay off your mortgage in 125 months (still more than 120 payments if you actually took out a 10-year mortgage, but close enough).

I’ll repeat the theme of this post here again: Get a 30-year mortgage. Then pay it down as if you were paying a 10- or 12-year mortgage.

You will pay far less in interest, $20K in our example. But you also have the option with a lower monthly payment if you cannot accelerate fast enough.

There you go. Download the worksheet and play around with your own numbers.

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There is one more scenario which in the third sheet, that tells you what is the optimal number of payments you should aim for if you want to come closest to paying the total interest if you had a 15-year mortgage. In this case it comes out to 148 payments.

Changes in contribution limits to retirement plans in 2019

The IRS came out with a directive on Nov 1, 2018 announcing changes to contribution limits in 2019.

Here’s in a nutshell what is changing.

  • For employer sponsored plans such as 401(k), 403(b) – $19,000 (up from the current $18.5k)
  • IRA – $6,000 (up from the current $5.5k)
  • Roth IRA – $6,000 (up from the current $5.5k), with income phase-out range increasing from $193,000 to $203,000 (up from $189,000 to $199,000) for married couples filing jointly

You can read the original directive here or the technical guidance here.

Cheers to more saving!

Are we Rockstars yet?

Say it to the tune of “Are we there yet?” your kids invariably sing when you’re taking them on a road trip 😅

Our blog was recently added to the Rockstar Finance directory of all personal finance blogs. I had no idea about this aggregator site before a fellow newbie blogger mentioned it.

You can find us at the recently added list or the main list. We clocked in at #149.

Though this means that we’re officially a part of the FIRE blogosphere, we are far, far away from being the rock stars of the demography that preach sensible personal finance. There are giants in this field and we learn and incorporate the portions that applies to us, in this phase of our lives.

Which bring me to the next point. And it is a rant. For which I’m apologizing right now. Having mentioned earlier that this is a judgement free zone, the next portion is going to sound hypocritical. But the incredulity of the stated facts are just too …well, incredible, for me to not lose my mind.

While going through some of the blogs there were recently added to the Rockstar Finance directory, I came across this blog maintained by a lawyer. I will purposely not name this blog nor reveal the gender of the writer. This is not meant to vilify the person behind the blog, nor give them added eyeballs. This is meant to show how stretchable our various aims and goals are.

This person claims that they need access to a gym that charge $893. Monthly.

MONTHLY $893 gym expense. A completely discretionary expense. Let that sink in.

Despite the fact there is a student loan that is more than the average sized mortgage. Despite living in a city with high costs. Despite having a $30k car loan at 3.5%. All the above factors are perfectly fine, even when taken in aggregation. But all these debts, plus a $893 monthly spending habit is another thing.  Not only does this individual have zero qualms about it, the blogger goes on to make an astounding appeal to the readers to not cancel their own expensive gym membership. This is where it got my goat.

I am dumbstruck. I mean I’m sorry that I’m even doing this, but this affects me viscerally.