Thursday, September 23, 2010

Refinance Analysis Part 4

Okay, so Bankrate has a number of questions they ask you in order to determine if a 15 or 30 year mortgage is best for you.  I think this is the best tool out there.  It actually looks at your specific situation in regards to what you will do with the extra money, retirement, investments, etc. etc.

So here's the breakdown:

Your Costs for a $172,000.00 Fixed-Rate Mortgage:

15-Year at 3.80 %
Monthly Payment = $1,255.00
Interest First 5 Years = $28,443.00
Total Interest = $53,917.00

30-Year at 4.25 %
Monthly Payment = $ 846.00
Interest First 5 Years = $34,957.00

Total Interest = $132,609.00

Here's how we got it: Your viewpoint on monthly payments: Your answers indicates that you are concerned about the size of the your monthly mortgage payments. This points in favor of a 30-year mortgage which allows you to have lower monthly payments. Specifically, in your case, based on the numbers you entered during this session, the monthly payments for a 30-year mortgage will be $409 lower than those of the comparable 15-year mortgage (see the chart above).

Your monthly budget: You indicated that you have some flexibility in your monthly budget. This suggests that a 15-year mortgage, which requires higher monthly payments, may be a good choice for you. (In contrast, if you had said that your monthly budget were very tight, that would point in favor of a 30-year mortgage, which allows lower monthly payments).

The type of home you are seeking: You indicated that you don't expect to buy the "most house" you can possibly afford. This suggests that the 30-year mortgage may not be right for you because one of the main advantages of the 30-year mortgage is that it enables people to borrow the most money they can based on their monthly budget. In contrast, a 15-year mortgage is generally better for people who are willing to buy less house than they can afford and want to spend additional money each month to pay-off the mortgage more quickly.

Your investment habits: You indicated that you are a diligent investor looking for the best returns on your money. This points strongly in favor of a 30-year mortgage because a 30-year mortgage allows you to make lower monthly payments that can give you "extra" cash each month to put into investments that can provide a return higher than the 15-year mortgage rate, which you indicated to be 3.80%. Also, you are in a good position to invest relatively aggressively now because you are not yet close retirement, which means you have the time to ride-out the volatility of more-aggressive investments. But note: To make the most of your 30-year mortgage, you need to be diligent about investing the extra cash you'll have each month due to the 30-year mortgage.

Your retirement savings: You said that you are contributing the maximum to retirement savings plans. Good job! That's a great way to secure your financial future, especially for you because you still have approximately 30 years until retirement, which give you lots of years to benefit from compounding interest on your pre-tax dollars. The fact that you are already maximizing your contributions to retirement savings plans suggests that you may not need the lower monthly payments offered by the 30-year mortgage.

Your emergency savings: You indicated that you think you probably have a sufficient emergency fund, which is something you should feel very good about. This suggests that you may not need the lower monthly payments that come with a 30-year mortgage.

Your years to retirement: You indicated that you have 30 years remaining before you plan to retire. In general, the further you are from retirement, the more a 30-year mortgage makes sense for you. Here's why: As you know, the 30-year mortgage allows lower monthly payments which can give you extra cash each month that you can put into investments that can provide a return higher than the 15-year mortgage rate.In your case, you are in a very good position to invest relatively aggressively now because you have a lot of time to ride-out the volatility of more-aggressive investments. (But remember: To make the most of your 30-year mortgage, you need to be diligent about investing the "extra" cash you'll have each month due to the 30-year mortgage.)

SO FINAL ANALYSIS: We think you should go for the 30-YEAR MORTGAGE

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