Mortgage decision killing me

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SciGuy23
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Mortgage decision killing me

Post by SciGuy23 » Wed May 16, 2018 8:06 pm

Hi,

I have read the forums and talked to people, and it seems like there is not a right answer. However - I would love some input on my personal situation. It's my first home purchase, and all of these details are feeling overwhelming.

Home: 1.3 mil
Mortgage: 850k

Age: late 30s, stay-at-home spouse, 2 kids <3 yo
Income: ~480k gross
Savings: 1.4 mil in a brokerage account (not planning on touching this)

I'm planning on staying in the home indefinitely - don't foresee a job change on the horizon, and we like the area. I'm generally a risk averse person, but also don't like the idea of paying extra interest if not absolutely necessary. I would like to try and pay the house down as quickly as possible, but realistically the pace can probably be no faster than 15 yrs.

Offers: 7/1 ARM 3.75% (with 5/2/5 cap), 10/1 ARM 4%, 15 yr 4.125%, 20 yr 4.25%, 30yr 4.375%

I've been told by experienced home buyers, and financial folks, to take the 7/1 ARM, as it's a better rate and chances are there will be recession (and rate declines) in the next few years. At that point, refinance. Also, with the added payments toward the principal that the lower rate allows, even if rates go up I will be in a better position.

I've been told by more modest folks (including my parents), that it is crazy to gamble on an ARM, and that as rates are still relatively low, to take the security of a 30 yr loan and refinance if the rate goes down.

Argh! Thanks in advance!

Big Dog
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Re: Mortgage decision killing me

Post by Big Dog » Wed May 16, 2018 8:09 pm

sorry, but the ARM makes no sense to me. Sure, a recession could be coming, but so could another 5 year economic boom, which raises interest rates.

I'd go with the 30 and pay it down faster. If rates do drop, you can always do a no-cost refi.

LarryAllen
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Re: Mortgage decision killing me

Post by LarryAllen » Wed May 16, 2018 8:19 pm

30 for sure. Gives you flexibility.

likashing
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Re: Mortgage decision killing me

Post by likashing » Wed May 16, 2018 8:24 pm

7/1 ARM for sure. Compared to the 30-year 4.375% fixed, you are saving ~$5000 a year in interest in the early years of the mortgage. Combined to the fact that you have $1.4m in assets, you can pay off the mortgage if the interest rates do not work in your favor after 7+ years.

7/1 @ 3.75% = $3936
30 year fixed @ 4.375% = $4244

If I were you, I would take the 7/1 ARM, and put $4244-$3936 = $308 per month aside, after 7 years it will be $25872 + interest.

If you have time, you can create a spread sheet and run the numbers to 15 years, and see how much the mortgage interest rate needs to rise for you to lose out - 30 year fixed vs 7/1 ARM.

TRC
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Re: Mortgage decision killing me

Post by TRC » Wed May 16, 2018 8:28 pm

Personally I hate 30 year notes because early payments have such minuscule impact on principal. I'd go with the 15.

SciGuy23
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Re: Mortgage decision killing me

Post by SciGuy23 » Wed May 16, 2018 8:32 pm

likashing wrote:
Wed May 16, 2018 8:24 pm
If you have time, you can create a spread sheet and run the numbers to 15 years, and see how much the mortgage interest rate needs to rise for you to lose out - 30 year fixed vs 7/1 ARM.
Thank you! I have seen people talk about spread sheets.. not sure how to do this. Is there one online that you can direct me to?

Goal33
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Re: Mortgage decision killing me

Post by Goal33 » Wed May 16, 2018 8:44 pm

I'd take the 30 year but wish I had the 7/1... :oops:
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AlohaJoe
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Re: Mortgage decision killing me

Post by AlohaJoe » Wed May 16, 2018 8:44 pm

TRC wrote:
Wed May 16, 2018 8:28 pm
Personally I hate 30 year notes because early payments have such minuscule impact on principal. I'd go with the 15.
I don't follow this. If you get a 15 year note on $250,000 at 4% then the monthly payments are $2,236. In the first month that breaks down as:

$833 interest; $1,015 principal

If you get a 30 year note it is $1,581. That breaks down as

$833 interest; $360 principal.

If you send in an extra $655 every month then it becomes:

$833 interest; $1,015 principal.

That's exactly the same as the 15 year note, except you have the additional flexibility to lower payments if you run into financial distress.

How do you see it having a minuscule impact on principal?

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whodidntante
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Re: Mortgage decision killing me

Post by whodidntante » Wed May 16, 2018 8:52 pm

I'm curious why the 15 year and 30 year notes are so close in rate.

ofckrupke
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Re: Mortgage decision killing me

Post by ofckrupke » Wed May 16, 2018 8:53 pm

30y fixed. Getting the +15 year option on extended paydown for only 0.25% on the rate is generous (if these two offers really involve the same closing cost). [What whodidntante said.]
Don't think that much of the ARMs.

If you end up going for the 15y (or either of the variable loans) for whatever reason, then the return on prepayment for the first 100k will be very attractive, because above 750k the interest won't be deductible - so on that 1st 100k, a guaranteed 4.125% post-tax on ~13-14 year duration. Similar reasoning applies to the variable rate loans, just slightly different numbers (3.75% post-tax, 7 year duration or 4%, 10 year duration).
As a matter of fact, it's worth reviewing just how much tax cost you would face to liberate another $100k from taxable account for DP in order to start off with only $750k loan (again, if for whatever reason you are bent on the 15y or either of the variable rate loans that have even shorter effective durations).

There's a gazillion calculators specific to particular either/or decisions at The Mortgage Professor.
But if you build your own, you'll probably be more comfortable with its output.
Last edited by ofckrupke on Wed May 16, 2018 8:54 pm, edited 1 time in total.

Big Dog
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Re: Mortgage decision killing me

Post by Big Dog » Wed May 16, 2018 8:54 pm

Personally I hate 30 year notes because early payments have such minuscule impact on principal.
Get the 30 and pay an additional ~$500/mo. You can always revert to minimum monthly if financial status changes.

Tal-
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Re: Mortgage decision killing me

Post by Tal- » Wed May 16, 2018 9:01 pm

I'm a big believe in the 30 year fixed, but I think a 7/1 is a viable alternative in your situation.

For me, I like the security of knowing what my mortgage payment will be in the future, and I hate having a future bill lingering for the next many years. It's why I don't use ARMs. And, it's why I've avoided commercial real estate...

I also expect rates to increase, rather than decrease over the next 7 years. Ultimately, no one knows, but rates are still very very low in a historical context. And if rates go up, you are left in a position where you need to refinance into a higher rate (maybe a much higher rate), offsetting the benefits gained between now and then.

But, with you having such a big pile of cash sitting on the sidelines, this doesn't concern me as much. If you wake up 7 years from now to find your rate increasing 2% a year, and 30 year mortgages at 7.5% - you can just pay off your mortgage and call it a day.

I still think that a 30 year fixed is the best option, but you are comfortable paying off the mortgage in seven years if rates increase, then I would support you using a 7/1 ARM.
Debt is to personal finance as a knife is to cooking.

arsenalfan
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Re: Mortgage decision killing me

Post by arsenalfan » Wed May 16, 2018 9:03 pm

Try this one
http://www.decisionaide.com/mpcalculato ... ments1.asp

Not enough info. If I were you I'd do the 30 years assuming no prepayment penalty.
We have a very low 30 year fixed rate, and aggressively prepaid principle down. Now we've paid off 60% of the loan with 24 years to run. Other costs have arisen that we think are worth spending on, rather than paying down this housing debt. We recasted the mortgage (still no prepayment penalty).

The flexibility has been nice, especially with changes in the SALT deduction.

random_walker_77
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Re: Mortgage decision killing me

Post by random_walker_77 » Wed May 16, 2018 9:29 pm

This is about comfort with risk. You've got the income, you've got the savings, but do you want the flexibility and security that a 30yr gives you? The 30 yr helps you if inflation charges upwards, but you're paying for that "benefit" with the higher interest rate.

When we bought our original, we went with a 10yr ARM, and that worked out well for us. While we intended to refi or upgrade within 10 years, I also noted that the rate increases were capped and the worst case had we kept it past 10 years was entirely tolerable. Then it turned out that rates dropped, AND we decided to cash out and move to a LCOL, so a 7yr ARM actually would've been even better.

You've got the income and you've already saved a lot. How likely is it that you'll be paying a lot of this loan off early, within the next 10 years anyways? If so, the balance at risk for a higher rate w/ an ARM is lower too, minimizing your downside.

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Watty
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Re: Mortgage decision killing me

Post by Watty » Wed May 16, 2018 9:44 pm

SciGuy23 wrote:
Wed May 16, 2018 8:06 pm
Mortgage: 850k

.....
Savings: 1.4 mil in a brokerage account (not planning on touching this)
The limit on the mortgage interest deduction is only $750K now.

If you are able to deduct the mortgage interest then I would come up with a larger down payment to get down to the $750k limit.

Chris K Jones
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Re: Mortgage decision killing me

Post by Chris K Jones » Wed May 16, 2018 9:50 pm

I'd go with the 15. 30 if you prefer. ARM is foolish. Your parents are right.

VaR
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Re: Mortgage decision killing me

Post by VaR » Wed May 16, 2018 11:47 pm

Although I love 15 year mortgages, the 0.25% difference between the 15 and the 30 is relatively small compared to the historical differential.

The differential to the 7/1 ARM is also relatively small at 0.625%.

Given that, I don't see a compelling reason to get anything other than the 30 year fixed. I will give you a lot of options.

Other thoughts:
1. I wouldn't pay discount points because their benefit is lost when you refinance in the future. And I've refinanced the mortgage on every house that I've owned.
2. I would consider putting a substantial down payment down. Certainly at least 20% but I'd consider more to get the mortgage down to $750k. I'd even consider putting enough down to not have to get a jumbo mortgage and thus access better rates. Another plus to a big down payment is that many of the closing costs are related to the mortgage amount so you pay less.
3. I've had good luck with credit unions and local banks that retain their mortgages rather than reselling them. The two mortgages I've had with them both had a "rate change" program where you'd just pay a 0.5% fee and they'd change the rate on your original mortgage to their currently offered rate. Much cheaper than refinancing.
Offers: 7/1 ARM 3.75% (with 5/2/5 cap), 10/1 ARM 4%, 15 yr 4.125%, 20 yr 4.25%, 30yr 4.375%

gotester2000
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Re: Mortgage decision killing me

Post by gotester2000 » Thu May 17, 2018 12:19 am

I would go with the 15 year fixed mortgage and be at peace. With 480k income and 1.4M savings I am not going to worry myself unnecessarily. There seems no need to pay it off quickly, 15 years is not too long or too short - get tax deductions on interest, invest it and stop thinking about it too much.

denovo
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Re: Mortgage decision killing me

Post by denovo » Thu May 17, 2018 12:38 am

Big Dog wrote:
Wed May 16, 2018 8:09 pm
sorry, but the ARM makes no sense to me. Sure, a recession could be coming, but so could another 5 year economic boom, which raises interest rates.

I'd go with the 30 and pay it down faster. If rates do drop, you can always do a no-cost refi.
What makes you think we can't have a recession and high real interest rates? :twisted: Where have all this forum's old-timer's gone? Either way I vote for the 30 yr fixed too.

Hint, do the hustle (1970's USA).

https://en.wikipedia.org/wiki/History_o ... flation%22
In economics, stagflation, a portmanteau of stagnation and inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
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denovo
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Re: Mortgage decision killing me

Post by denovo » Thu May 17, 2018 12:42 am

Tal- wrote:
Wed May 16, 2018 9:01 pm


But, with you having such a big pile of cash sitting on the sidelines, this doesn't concern me as much. If you wake up 7 years from now to find your rate increasing 2% a year, and 30 year mortgages at 7.5% - you can just pay off your mortgage and call it a day.
Depending on what's in his brokerage and his marginal tax rate, he could end up paying a boatload of taxes to unload his brokerage funds.

I vote for the 30 yr mortgage again.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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Nestegg_User
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Re: Mortgage decision killing me

Post by Nestegg_User » Thu May 17, 2018 12:44 am

I’d echo others: get the 30 year and prepay like it’s a 15 year, you can always “back off” the prepayment but you cannot stop if it’s a 15 year, unless you refinance. ( and definitely not the ARM)

mortfree
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Re: Mortgage decision killing me

Post by mortfree » Thu May 17, 2018 12:54 am

SciGuy23 wrote:
Wed May 16, 2018 8:32 pm
likashing wrote:
Wed May 16, 2018 8:24 pm
If you have time, you can create a spread sheet and run the numbers to 15 years, and see how much the mortgage interest rate needs to rise for you to lose out - 30 year fixed vs 7/1 ARM.
Thank you! I have seen people talk about spread sheets.. not sure how to do this. Is there one online that you can direct me to?
Loan amortization template in excel.

You’ll need to unprotect the worksheet to really play with it.

HEDGEFUNDIE
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Re: Mortgage decision killing me

Post by HEDGEFUNDIE » Thu May 17, 2018 1:34 am

What people often forget about rising interest rates is that they raise your investment returns as well as your investment costs.

The last time mortgage rates were 10-12% (in the 80s), CDs were paying 8-9%.

Get the ARM.

inbox788
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Re: Mortgage decision killing me

Post by inbox788 » Thu May 17, 2018 3:02 am

likashing wrote:
Wed May 16, 2018 8:24 pm
7/1 ARM for sure. Compared to the 30-year 4.375% fixed, you are saving ~$5000 a year in interest in the early years of the mortgage. Combined to the fact that you have $1.4m in assets, you can pay off the mortgage if the interest rates do not work in your favor after 7+ years.

7/1 @ 3.75% = $3936
30 year fixed @ 4.375% = $4244

If I were you, I would take the 7/1 ARM, and put $4244-$3936 = $308 per month aside, after 7 years it will be $25872 + interest.

If you have time, you can create a spread sheet and run the numbers to 15 years, and see how much the mortgage interest rate needs to rise for you to lose out - 30 year fixed vs 7/1 ARM.
OP, I'd be choosing between the 15 year and the 7/1. How much will you be paying a month, and how much extra a year? Given your high income, it's a small decision as to what you do, so don't stress. In the base case, get the lowest interest you can, which given the choices is the 7/1, and apply the savings towards extra payments. An extra $5000 in year 1 will knock off and extra 4.xx% or around 200/year x 15 or 30 years. But comparing to 15 year fixed, it's only about $2k by my rough calculations. Consider the $2k or $5k/year payments to be insurance against rising rates; insurance you don't really need (rates could fall or stay the same and in the even they go up, you have the means to manage it). Getting the 15 year commits you to higher payments, but you plan to pay that much if not more, no? And again, you should have sufficient income (and emergency fund and savings/investments) where that isn't going to be an issue.

You can choose to borrow the max (i.e. 30 year) and statistically arbitrage the 4.xx% return vs. 6.xx? market return. But I prefer to pay off the mortgage and dial up the AA to be more aggressive. If you count all the beans, it works out all about the same. Pick your poison, and enjoy the fruits of your labor.

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mrspock
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Re: Mortgage decision killing me

Post by mrspock » Thu May 17, 2018 3:35 am

SciGuy23 wrote:
Wed May 16, 2018 8:06 pm
Hi,

I have read the forums and talked to people, and it seems like there is not a right answer. However - I would love some input on my personal situation. It's my first home purchase, and all of these details are feeling overwhelming.

Home: 1.3 mil
Mortgage: 850k

Age: late 30s, stay-at-home spouse, 2 kids <3 yo
Income: ~480k gross
Savings: 1.4 mil in a brokerage account (not planning on touching this)

I'm planning on staying in the home indefinitely - don't foresee a job change on the horizon, and we like the area. I'm generally a risk averse person, but also don't like the idea of paying extra interest if not absolutely necessary. I would like to try and pay the house down as quickly as possible, but realistically the pace can probably be no faster than 15 yrs.

Offers: 7/1 ARM 3.75% (with 5/2/5 cap), 10/1 ARM 4%, 15 yr 4.125%, 20 yr 4.25%, 30yr 4.375%

I've been told by experienced home buyers, and financial folks, to take the 7/1 ARM, as it's a better rate and chances are there will be recession (and rate declines) in the next few years. At that point, refinance. Also, with the added payments toward the principal that the lower rate allows, even if rates go up I will be in a better position.

I've been told by more modest folks (including my parents), that it is crazy to gamble on an ARM, and that as rates are still relatively low, to take the security of a 30 yr loan and refinance if the rate goes down.

Argh! Thanks in advance!
Take the 7/1 and pay it down as if it were the fixed. Keep in mind most developed nations have no notion of a 30 year fixed (often without deductability of interest!), yet somehow survive just fine. I have never understood the 30 year fixed obsession here, unlikely I ever will. People love citing the 70s, but fail to recognize that mortgages basically got inflated away to a level which would make you blush.

Anyways, it’s honestly not that big of a deal at your income, immaterial. If you sleep better with the 30, then get that one.

chw
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Re: Mortgage decision killing me

Post by chw » Thu May 17, 2018 4:50 am

I would take the 30 year, given the size of your mortgage. If the mortgage was say equal to 1x your salary or less, I would rec. the 7/1 ARM. You are the sole breadwinner, and while things look rosy now, life events (unexpected job loss, health crisis, etc) do happen along the way, and knowing what to expect with your mortgage payment is worth it. As others have said, you can pay the mortgage down after you have maxed out your 401k, IRA, and other income deferral plans each year.

I'm a retired mortgage originator, and generally feel ARMs are a good choice for some folks, but for the vast majority of borrowers, the plain vanilla 30 year mortgage works best. I tend to shun the 15 year mortgage for the same reasons mentioned above(especially in a single earner household).

I used to tell my clients to go with the mortgage that lets you sleep at night...
Last edited by chw on Thu May 17, 2018 7:11 am, edited 2 times in total.

student
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Re: Mortgage decision killing me

Post by student » Thu May 17, 2018 5:26 am

I think there are good arguments for both options. But you said you are a risk averse person. Then I think 30 years in the better option.

Ninnie
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Re: Mortgage decision killing me

Post by Ninnie » Thu May 17, 2018 6:08 am

30 year. Better to be conservative about this and pay extra as you go. The difference in rates is not enough to sacrifice that extra cushion and peace of mind.

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djpeteski
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Re: Mortgage decision killing me

Post by djpeteski » Thu May 17, 2018 7:16 am

For me I am torn between the 20 and 30 year and probably leaning toward the 30 year.

ARMs are out, the 10 year doesn't give much of a break, and the 7 year is too much risk for 8 more years to pay on a loan in your best case scenario.

The 15 year is out too, because, as you said your best case scenario is to pay it off in 15.

The 20 year is tempting because it gives you five years of flex over your best case, but still starts knocking down the principle right away.

Sure, with the 30 year, you will pay more interest but that smallish amount is a decent insurance policy. I assume that you are very well behaved financially so, you will make extra payments each month and will probably make this behave more like a 17 year mortgage.

So yea, slight edge to the 30 over the 20. All of the others are out.

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djpeteski
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Re: Mortgage decision killing me

Post by djpeteski » Thu May 17, 2018 7:16 am

For me I am torn between the 20 and 30 year and probably leaning toward the 30 year.

ARMs are out, the 10 year doesn't give much of a break, and the 7 year is too much risk for 8 more years to pay on a loan in your best case scenario.

The 15 year is out too, because, as you said your best case scenario is to pay it off in 15.

The 20 year is tempting because it gives you five years of flex over your best case, but still starts knocking down the principle right away.

Sure, with the 30 year, you will pay more interest but that smallish amount is a decent insurance policy. I assume that you are very well behaved financially so, you will make extra payments each month and will probably make this behave more like a 17 year mortgage.

So yea, slight edge to the 30 over the 20. All of the others are out.

Dottie57
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Re: Mortgage decision killing me

Post by Dottie57 » Thu May 17, 2018 8:50 am

I took 30 year mortgage as risk mitigation. Smaller payment to make if I lost my job. But then I worked hard to pay it off. I finished in 17 years and was very happy.

JBTX
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Re: Mortgage decision killing me

Post by JBTX » Thu May 17, 2018 9:03 am

Watty wrote:
Wed May 16, 2018 9:44 pm
SciGuy23 wrote:
Wed May 16, 2018 8:06 pm
Mortgage: 850k

.....
Savings: 1.4 mil in a brokerage account (not planning on touching this)
The limit on the mortgage interest deduction is only $750K now.

If you are able to deduct the mortgage interest then I would come up with a larger down payment to get down to the $750k limit.
Agree with this. Either pay down to 750k, or else make as much additional payments as you can to get to
750k as fast as you can. Go with 30 year. The deductible portion of interest is less than 3.0% after tax.

Glockenspiel
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Re: Mortgage decision killing me

Post by Glockenspiel » Thu May 17, 2018 9:09 am

Since the 15 year rate is so close to the 30 year rate, I'd go with the 30-year rate. The difference between these two rates USED to be nearly 1.0%. I'm not really sure why they have gotten so much closer. You can always send in additional payments towards the principal, as long as there's no pre-payment penalty (I don't think pre-payment penalties are very common anymore). The 30-year offers much more flexibility.

frugalmama
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Re: Mortgage decision killing me

Post by frugalmama » Thu May 17, 2018 9:12 am

Nestegg_User wrote:
Thu May 17, 2018 12:44 am
I’d echo others: get the 30 year and prepay like it’s a 15 year, you can always “back off” the prepayment but you cannot stop if it’s a 15 year, unless you refinance. ( and definitely not the ARM)
+1

Broken Man 1999
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Re: Mortgage decision killing me

Post by Broken Man 1999 » Thu May 17, 2018 9:34 am

Nestegg_User wrote:
Thu May 17, 2018 12:44 am
I’d echo others: get the 30 year and prepay like it’s a 15 year, you can always “back off” the prepayment but you cannot stop if it’s a 15 year, unless you refinance. ( and definitely not the ARM)
That was the strategy we used for our mortgages. Sign for the longer term, then aggressively pay down with extra payments. We used the same idea for car payments, longer term, paid off aggressively.

With longer terms, you can throw extra money towards the mortgage at your convenience. Very nice flexibility. Unexpected higher bills one month, just pay your actual mortgage payment, with no extra payment for the month.

We never actually went to the end of any loan, home or auto, always paying off early.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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neurosphere
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Re: Mortgage decision killing me

Post by neurosphere » Thu May 17, 2018 10:14 am

SciGuy23 wrote:
Wed May 16, 2018 8:06 pm
I would like to try and pay the house down as quickly as possible, but realistically the pace can probably be no faster than 15 yrs.
I think this gives you your answer. You would like to pay off your house quickly. Whether that's a good or bad idea is another discussion. But if you feel you can do it in 15 years then...

I like the 7/1. If you choose the 7/1 you get a lower interest rate which saves you a few thousand a year. Pay off the mortgage as if you are making 15-year payments. After 7 years, the balance will be lower such that the effect of rate increases (if any) will be mitigated. In addition, if life changes and you move during the next 7 years, this was the right decision. The 7/1 also gives you the flexibility to reduce payments as if it were a 30 year mortgage. If income/savings are not as expected you have this "insurance" of sorts not to have to make larger payments. This comes at the cost of interest rate risk though (e.g. a rise in rates, which would hurt extra if it came during a point of financial hardship)

But if you choose the 30-year mortgage, that's fine too. :D
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

johncunningham
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Re: Mortgage decision killing me

Post by johncunningham » Thu May 17, 2018 11:41 am

I was in a very similar place three years ago. Income similar, house, mortgage, age, and savings similar. rates were slightly better. After a fair amount of back and forth, I decided that a 15 year note was a good compromise. I have friends and neighbors that were very focused on "locking in once in a lifetime" low rates for 30 years... I decided that 15 years was long enough, and would coincide nicely with my larger plan of being debt free and financially independent at my youngest child's high school graduation. Three years later, I am still very happy with the choice. There are no wrong answers to your question.

The reality is that with the foundation you have set, you are on track to "winning the game" at a relatively young age.

John

likashing
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Re: Mortgage decision killing me

Post by likashing » Thu May 17, 2018 12:23 pm

inbox788 wrote:
Thu May 17, 2018 3:02 am
likashing wrote:
Wed May 16, 2018 8:24 pm
7/1 ARM for sure. Compared to the 30-year 4.375% fixed, you are saving ~$5000 a year in interest in the early years of the mortgage. Combined to the fact that you have $1.4m in assets, you can pay off the mortgage if the interest rates do not work in your favor after 7+ years.

7/1 @ 3.75% = $3936
30 year fixed @ 4.375% = $4244

If I were you, I would take the 7/1 ARM, and put $4244-$3936 = $308 per month aside, after 7 years it will be $25872 + interest.

If you have time, you can create a spread sheet and run the numbers to 15 years, and see how much the mortgage interest rate needs to rise for you to lose out - 30 year fixed vs 7/1 ARM.
OP, I'd be choosing between the 15 year and the 7/1. How much will you be paying a month, and how much extra a year? Given your high income, it's a small decision as to what you do, so don't stress. In the base case, get the lowest interest you can, which given the choices is the 7/1, and apply the savings towards extra payments. An extra $5000 in year 1 will knock off and extra 4.xx% or around 200/year x 15 or 30 years. But comparing to 15 year fixed, it's only about $2k by my rough calculations. Consider the $2k or $5k/year payments to be insurance against rising rates; insurance you don't really need (rates could fall or stay the same and in the even they go up, you have the means to manage it). Getting the 15 year commits you to higher payments, but you plan to pay that much if not more, no? And again, you should have sufficient income (and emergency fund and savings/investments) where that isn't going to be an issue.

You can choose to borrow the max (i.e. 30 year) and statistically arbitrage the 4.xx% return vs. 6.xx? market return. But I prefer to pay off the mortgage and dial up the AA to be more aggressive. If you count all the beans, it works out all about the same. Pick your poison, and enjoy the fruits of your labor.
I agree. Don't over complicate things. And even among Bogleheads, $1.4m in liquid asset with ~$500k income is hard to fathom for many.

If you can afford a car in cash, why finance unless it is 0%?

Same thing for a house. Mortgage rate is ~4% with some interest rate destructibility. Over a long term (30 years), if you are aggressive and fully invest in stocks, you might earn 8-10%, and that is rate arbitrage. If you are not as aggressive and you have some money in bond or cash, your return will be much lower than 8-10%. That is also the same as taking cash out of your full paid home and invest in stocks. Would you do it if you already own a paid off home? Most people wouldn't. If not, why get a mortgage if you can pay for the house in cash?

If I have to guess, the only reason OP is thinking of getting a mortgage, is he is not comfortable taking $850k off his $1.4m investments to buy the house, and that is understandable. In that case, just get the lowest rate mortgage. It reduces the cost of this "flexibility" by paying less interest vs a 30-year fixed. Also, you might think you will live here forever, but in reality, it is also possible that you will look at something even "better" after 5-10 years. If that happens, the extra interest you paid on the 30-year note over 5-10 years is down the drain.

So in summary, don't over complicate. After 5-10 years, this $850k mortgage will be a small thing on your financial picture given your income and assets, seriously. Since you want to buy some "flexibility" by paying mortgage interest, just get the lowest interest ARM to minimize cost on this flexibility.

Most importantly, I hope your borkerage is not coinbase and your $1.4m isn't in bitcoins. :D

note: ditto on doing $750k vs $850k because you can only deduct up to $750k moving forward.

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Abe
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Re: Mortgage decision killing me

Post by Abe » Thu May 17, 2018 12:43 pm

AlohaJoe wrote:
Wed May 16, 2018 8:44 pm
TRC wrote:
Wed May 16, 2018 8:28 pm
Personally I hate 30 year notes because early payments have such minuscule impact on principal. I'd go with the 15.
I don't follow this. If you get a 15 year note on $250,000 at 4% then the monthly payments are $2,236. In the first month that breaks down as:

$833 interest; $1,015 principal

If you get a 30 year note it is $1,581. That breaks down as

$833 interest; $360 principal.

If you send in an extra $655 every month then it becomes:

$833 interest; $1,015 principal.

That's exactly the same as the 15 year note, except you have the additional flexibility to lower payments if you run into financial distress.

How do you see it having a minuscule impact on principal?
AlohaJoe is correct. A 30 year loan gives the borrower more flexibility. A 15 year mortgage requires the borrower to pay a higher payment in order to pay off the loan in 15 years. With a 30 year loan, the borrowers has the option of paying the 30 year payment or he can make extra principal payments and pay the loan off earlier than 30 years if he chooses that option. I would go with the 30 year loan.
Slow and steady wins the race.

international001
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Re: Mortgage decision killing me

Post by international001 » Thu May 17, 2018 1:44 pm

Abe wrote:
Thu May 17, 2018 12:43 pm

AlohaJoe is correct. A 30 year loan gives the borrower more flexibility. A 15 year mortgage requires the borrower to pay a higher payment in order to pay off the loan in 15 years. With a 30 year loan, the borrowers has the option of paying the 30 year payment or he can make extra principal payments and pay the loan off earlier than 30 years if he chooses that option. I would go with the 30 year loan.

At a higher price. The expectation is that a 30 yr rate is higher than the average of short term rates
If you can tolerate risk, get a variable rate loan

delamer
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Re: Mortgage decision killing me

Post by delamer » Thu May 17, 2018 2:00 pm

Have you figured out your monthly payment if the ARM jumps to the maximum 8.75%? How would that affect your budget/lifestyle, assuming that it would?

As someone who had a 12.75% mortgage back in the 80’s, my recommendation is that you not assume that you will be able to refi into a lower rate (than 8.75%) in 7 years.

So the issue is can you live with the maximum possible payment? If not, then eliminate the ARM option.

welldone
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Re: Mortgage decision killing me

Post by welldone » Thu May 17, 2018 2:02 pm

We did a 15 year mortgage. Very similar situation in that we also think this is the forever house barring extreme, unforeseen circumstances. Rate spread was quite different when we made the choice, our 15 year rate was 3%, the 30 year rate was something above 4% at the time we were buying.

We are three years into the mortgage, the best part of the loan is watching how quickly the balance goes down with each payment. Our real estate attorney told us at closing that he doesn't see that many 15 year mortgages (the vast majority of buyers go with 30 year terms) but that every client of his who chose the 15 year term was really happy with their decision.

If everything goes to plan, we will be done paying our mortgage at the same time youngest finishes up with college undergrad. That was the plan when we bought the place...the idea of being completely debt free at the same time as the last child is launched is very exciting to us.

You have a lot of flexibility in your choices, don't let the idea of making the 'perfect' become the enemy is the good. Figure out which one will give you the right mix of flexibility and low stress.

Rjbutler
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Re: Mortgage decision killing me

Post by Rjbutler » Thu May 17, 2018 2:13 pm

Some lenders also let you re-amortize the loan, so if you make extra payments on the 30 and find yourself in a financial bind later, you can possibly pay a small fee to re-amortize for the remaining life of the loan and lower your payment.

VaR
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Re: Mortgage decision killing me

Post by VaR » Thu May 17, 2018 6:36 pm

Another possibility that I chose once was to get a 10/1 ARM (with 30 year amortization). Here's my thinking:
1. I get the flexibility and liquidity of having 30 year amortization. Payments are low.
2. I have 10 years of a fixed rate. This isn't that much shorter than a 15 year mortgage.
3. At the end of the 10 years, 50% of the time interest rates will be lower or the same so I can just continue my payments. Probably 40% of the time they will be just a little higher so I could just continue to pay the minimum or strive to pay it off in 5 years to net me the equivalent to a 15 year amortization. And 10% of the time rates will be much higher so I'll just bite the bullet and pay off the mortgage with savings.

Also, during the first 10 years I don't actually make any additional principal payments. Rather, I take the extra money and invest it. The idea is that with this and other savings/investments, I will be prepared to pay off the mortgage 10-15 years from now.

NYCguy
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Re: Mortgage decision killing me

Post by NYCguy » Thu May 17, 2018 10:05 pm

I strongly encourage you to consider the 7-1 ARM for two reasons.

1. In seven years you should be able to prepay in excess of 50% of the balance so if there is a rate increase it is on a lower amount and you benefit from a rate cap.

2. You also have substantial others financial assets to pay off the loan if you had to.

Also consider whether your other assets provide a natural hedge in many scenarios.
If your out-go is greater than your income, your upkeep will be your DOWNFALL.

international001
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Re: Mortgage decision killing me

Post by international001 » Fri May 18, 2018 11:49 am

NYCguy wrote:
Thu May 17, 2018 10:05 pm
I strongly encourage you to consider the 7-1 ARM for two reasons.

1. In seven years you should be able to prepay in excess of 50% of the balance so if there is a rate increase it is on a lower amount and you benefit from a rate cap.

2. You also have substantial others financial assets to pay off the loan if you had to.

Also consider whether your other assets provide a natural hedge in many scenarios.

All this advices are misguided for a BH. You should look at the opportunity cost of investing the rest on funds. You can assume different returns. Let's say 3% , 5%, and 7%
If rates are similar for a 30y and a 15y and you know you are going to hold the mortgage for 30y go for the 30y
If you don't know for how long you are going to own the home, use a spreadsheet

WhiteMaxima
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Re: Mortgage decision killing me

Post by WhiteMaxima » Fri May 18, 2018 11:56 am

7 Year ARM as an experienced home owner. When 7 year ends, you do ARM again. ARM is like equity market, fear has built in the rate. 30 year fix is just like bond kind fixed income. ARM is like equity which have risk but with more potential. I will choose ARM so I will min interest and pay down into principal or invest the saving in total equity market.

international001
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Re: Mortgage decision killing me

Post by international001 » Fri May 18, 2018 1:59 pm

WhiteMaxima wrote:
Fri May 18, 2018 11:56 am
7 Year ARM as an experienced home owner. When 7 year ends, you do ARM again. ARM is like equity market, fear has built in the rate. 30 year fix is just like bond kind fixed income. ARM is like equity which have risk but with more potential. I will choose ARM so I will min interest and pay down into principal or invest the saving in total equity market.
Why are not variable interest loans available? They are very common in Europe (e.g. LIBOR + 1% with rate updated every year)

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grabiner
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Re: Mortgage decision killing me

Post by grabiner » Sat May 19, 2018 4:34 pm

international001 wrote:
Fri May 18, 2018 11:49 am
NYCguy wrote:
Thu May 17, 2018 10:05 pm
I strongly encourage you to consider the 7-1 ARM for two reasons.

1. In seven years you should be able to prepay in excess of 50% of the balance so if there is a rate increase it is on a lower amount and you benefit from a rate cap.

2. You also have substantial others financial assets to pay off the loan if you had to.

Also consider whether your other assets provide a natural hedge in many scenarios.

All this advices are misguided for a BH. You should look at the opportunity cost of investing the rest on funds. You can assume different returns. Let's say 3% , 5%, and 7%
The return you should assume for opportunity cost is the return on low-risk investments. See Paying down loans versus investing in the wiki.

For example, if you have a mortgage which is 3% after tax, and a municipal-bond portfolio with a 3% yield and the same duration, you break even; the bonds can make the mortgage payments. If you invest in stocks, you increase both your return and risk, but you can do that whether you take out the mortgage or not; you can sell your existing bond holdings to buy more stocks.
Wiki David Grabiner

md&pharmacist
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Re: Mortgage decision killing me

Post by md&pharmacist » Sat May 19, 2018 5:43 pm

OP, I was in a similar situation to you back in 2006 so I am one of the members of your more experienced advisors, not in the modest category recommending 30 years.

Longer term mortgages are designed for those with more modest incomes, not yours. They have fewer options and often need 30 years to pay off their mortgage as they tend to have a much smaller cushion between income and expenses.

In 2006, we moved into a $1,500,000 home that we had built. Our income at the time was about $450,000 with two infant children. Interest rates were higher at the time. We took out $1,140,000 on a 5 year arm that AMORTIZED OVER 15 YEARS, NOT 30. In early 2007, we sold our first house (paid for) and used $600,000 in proceeds to pay down this mortgage, and paid off the entire mortgage by the end of 2009, or within 5 years of moving in.

At your salary range, you should be taking home $300,000-350,000 after taxes. If you take out the 7 year arm, you should be able to pay the entire $850,000 within the 7 years if you put in about $150,000/year which would still leave you $150,000-$200,000 for all other expenses and saving.

I knew I would feel better with a paid off house. Some feel it's better to keep a mortgage longer term and invest more of the earnings and pay the mortgage interest for deduction purposes. If that makes you feel better, then I would recommend a 15 year fixed. I personally don't see a reason why someone in your financial position needs a 30 year loan. Far less of your monthly payments go toward principal with a 30 year term.

I just built a new office and borrowed $2.3M - 10 year fixed at 3.5% commercial loan. I plan to pay it off within 5 years. My business revenue/take home/NW is much higher now.

I have not compromised retirement savings to pay down the debts quickly, about $3M currently between retirement and non-retirement liquid accounts at current age 45. A good rule of thumb in life is to avoid the urge to buy anything you can't pay off within 5 years. Works well for me.

Good luck with your decision!

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