Home » SAMPLE RECOMMENDATION: MORTGAGE STRATEGY

SAMPLE RECOMMENDATION: MORTGAGE STRATEGY
 
$250,000 Purchase Price
$50,000 Down Payment (20%)
$200,000 Mortgage
 
15 Year Fixed Rate Mortgage: 4.75%, 15 Year, $200,000 Loan
Monthly Payment, Principle and Interest (P&I)
$1,555.66   ($1,556)
Annual Payment
$18,672
Total Interest Paid Over 15 Years
$80,080
 
30 Year Fixed Rate Mortgage: 5.00%, 30 year, $200,000 Loan
Monthly Payment, P&I
$1,073.64   ($1,074)
Annual Payment
$12,888
Total Interest Paid Over 30 Years
$186,640
 
Difference in Payment Amounts and Interest, 15 Year Compared to 30 Year
Monthly Difference
$482
Annual Difference
$5,784
Total Interest Difference
$106,560

 

 
INVESTMENT ACCOUNT
 
30 Year Mortgage, First 15 Years
Pay 30 Year Mortgage Payment, $1,074, to Bank
Invest $482 Difference per Month in Side Account, “first” 15 Years of Mortgage
Average Side Account Returns of 10% per Year
 
Projected Side Account Value at the End of 15 Years:
~$199,775
 
30 Year Mortgage, Second 15 Years
Stop $1,074 Payment to Bank
Stop $482 Investment to Side Account
 
Withdraw $1,074 per Month from Side Account for “Second” 15 Years
Amounts to a ~6.45% Rate of Withdrawal
To Account for Taxes on the Withdrawals, Assume 8% Rate

 

Side Account Still Grows at ~2% per Year, Net, After 8% Withdrawals

 
Projected Side Account Value at the End of the “Second” 15 Years:
~$268,870

 

 
AT THE END OF 30 YEARS
 
1 - Mortgage is Paid Off

2 - Owner Had Mortgage Tax Benefits for the Full 30 Years
($186,640 Total Deductible Interest)

3 - Owner Paid, Over the First 15 Years, the Same Amount as a 15 Year Mortgage

4 - Owner Stopped Payments and Side Investments after 15 Years

5 - Side Account Took Over Mortgage Payments

6 - Side Account worth ~$268,870

7 - Owner had “Fall Back” Protection Compared to 15 Year Mortgage Payment

8 - Fixed 30 Year Mortgage Payments “Shrink” as an Expense, Due to Inflation

 

 
ONE ALTERNATIVE
 
30 Year Mortgage, Second 15 Years:
Pay the 30 Year Mortgage Payments for the Second 15 Years “Out of Pocket”
(Not From Side Account)

Side Account Now Can Grow at ~10% per Year for Another 15 Years
 
At the End of 30 Years:
Will Have Paid Out of Pocket an Additional $193,320
($1,074 per Month)
 
However, Side Account Value:
~$834,510
 
Amounts to ~$641,000 More than Additional $193,320 of Mortgage Payments

Amounts to ~$565,600 More than $268,870 Side Account Value
(If Side Account Made Mortgage Payments for “Second” 15 Years)

Amounts to ~$727,950 More than Additional Interest Paid With 30 Year Mortgage

 
Scott M. Buttfield, CFP®, AIF®