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Back to UserFriendly Strip Comments Index
| Finance/Investment/Mortgage question |
by DesiredUsername |
2009-03-23 12:52:23 |
If you had the opportunity to invest in something that would give you a guaranteed return of 6-8% (tax free) over the next 15 years, would you do it? Alternatively, do you think that bank savings rates are going to hit >9-11% for a significant period of time in the next 5-7 years?
This refers back to the mortgage question I had on Saturday. I'm trying to decide between a 30yr and a 15yr. The return is guaranteed and tax free because it's the equivalent amount of money that I won't be paying to the lender as interest.
Details
1. Calculate monthly payments for 30yr fixed and 15yr fixed
2. Take the difference between the two as X. X is the amount that I'm paying into my 'house savings account' per month.
3. Calculate the total interest paid for both mortgages after 15yrs
3a. Calculate the present value at 15yrs of the last 15years of interest payments on the 30yr loan. Add this to the interest paid up to 15yrs.
4. The difference between the interest paid on 15yr and 30yr is the 'return' (Y) on my monthly investments of X. Note that eventually I'll get X back, since it went towards principle.
5. Now, using the present value (PV) functions in excel, I can calculate the equivalent interest rate for my 'investment'
5a. FV = Y, PV = 0, PMT = X, nper = 15*12 = 180.
5b. Rate ~= 6-8%.
So that's saying (if I took the 30yr loan) I would have to deposit X/month into a savings account at 6-8% (not including taxes) for the next 15yrs to make the same equivalent amount of money that I'd be paying in interest with the 30yr loan.
If bank savings (comparable guaranteed returns) interest rates hold above 9-10% (to account for taxes) for most of the next 5-7 years, then it's better to put the money in the bank rather than pay off the mortgage faster.
Going with the 15yr loan results in a lower APR than with the 30yr loan + extra principle payments.
P.S. I'll be in and out of meetings, so I may not reply quickly. Thanks for reading this far. :-) |
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[ Reply ] |
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Bank interest rates probably won't hit 9-11%. | by firehawk | 2009-03-23 14:44:45 |
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Cool, thanks! | by DesiredUsername | 2009-03-23 18:09:17 |
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Keep one thing firmly in mind. | by firehawk | 2009-03-23 18:53:53 |
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Found a semi-historical federal fund rate thingy.. | by firehawk | 2009-03-23 19:00:13 |
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Thanks | by DesiredUsername | 2009-03-23 20:08:51 |
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