Mortgage Comparisons 15 vs 30 and others

M V · Post by **M V** » Mon Sep 19, 2011 4:36 am

A question about 15 year mortgage vs 30 year mortgage:

The following is often mentioned as a disadvantage of a 15 yr mortgage: "Borrowers pay less total interest on the 15-year fixed rate mortgage, so they lose the maximum mortgage interest tax deduction."

How is that a disadvantage? By choosing 15 yrs mortgage, the borrower is eventually paying less interest over the life of the loan, how can that become a disadvantage?

Sounds to me like saying Macy's had a 50% off sale, and I "lost" some potential savings because I spent only $100?

What am I missing here? I get the other possible disadvantages of a 15 yr loan but not this one.

RRK · Post by **RRK** » Mon Sep 19, 2011 10:06 am

modus_vivendi;410863A question about 15 year mortgage vs 30 year mortgage:

The following is often mentioned as a disadvantage of a 15 yr mortgage: "Borrowers pay less total interest on the 15-year fixed rate mortgage, so they lose the maximum mortgage interest tax deduction."

How is that a disadvantage? By choosing 15 yrs mortgage, the borrower is eventually paying less interest over the life of the loan, how can that become a disadvantage?

Sounds to me like saying Macy's had a 50% off sale, and I "lost" some potential savings because I spent only $100?

What am I missing here? I get the other possible disadvantages of a 15 yr loan but not this one.

MV,
you are correct. This sounds like mortgage seller trying to lure borrowers to go for higher interest loan.
When it comes to taking deduction, I see many think it is free money. The "many" includes investors and also advisors.

realgoogler · Post by **realgoogler** » Mon Sep 19, 2011 11:23 am

Desi;405134USC or OCI does not matter.

The house can be gifted, no problems. You will have to pay the registration fees which are based on the price of the house.

There are no gift taxes involved in this. No gift taes in India and no gift taes in USA.

You may have to fill out IRS form 3520 and perhaps FBAR after the house is transferred to your name.

FBAR is only for financial accounts and property does not have to be declared in FBAR, as far as I know.

realgoogler · Post by **realgoogler** » Mon Sep 19, 2011 11:37 am

modus_vivendi;410863A question about 15 year mortgage vs 30 year mortgage:

The following is often mentioned as a disadvantage of a 15 yr mortgage: "Borrowers pay less total interest on the 15-year fixed rate mortgage, so they lose the maximum mortgage interest tax deduction."

How is that a disadvantage? By choosing 15 yrs mortgage, the borrower is eventually paying less interest over the life of the loan, how can that become a disadvantage?

Sounds to me like saying Macy's had a 50% off sale, and I "lost" some potential savings because I spent only $100?

What am I missing here? I get the other possible disadvantages of a 15 yr loan but not this one.

Also note , All of total interest is not likely to tax deductible. You federal mortgage tax break is only the difference between your interest +property tax minus standard deduction, ( assuming you have no other material deduction), In some years you could go negative and hence you might be better off taking standard deduction.

Desi · Post by **Desi** » Mon Sep 19, 2011 8:18 pm

modus_vivendi;410863A question about 15 year mortgage vs 30 year mortgage:

The following is often mentioned as a disadvantage of a 15 yr mortgage: "Borrowers pay less total interest on the 15-year fixed rate mortgage, so they lose the maximum mortgage interest tax deduction."

How is that a disadvantage? By choosing 15 yrs mortgage, the borrower is eventually paying less interest over the life of the loan, how can that become a disadvantage?

Sounds to me like saying Macy's had a 50% off sale, and I "lost" some potential savings because I spent only $100?

What am I missing here? I get the other possible disadvantages of a 15 yr loan but not this one.

Borrower is paying less interest to the mortgagee bank in a fifteen year loan, this is because he is parting with the prinicipal amount in 15 years rather than in 30. But in doing so, he is also losing interest that he would have otherwise earned elsewhere on that money that he is paying back faster to the bank.

That a borrower will eventually pay less total interest in a 15 year loan is the wrong way to look it because borrower loses the hold on the money (and thus opportunity to earn interest or invest) faster in a 15 year loan as he has to satisy principal payment in 15 years now.

I shall post later what should be the correct way to select between two loans.

okonomi · Post by **okonomi** » Mon Sep 19, 2011 8:26 pm

modus_vivendi;410863A question about 15 year mortgage vs 30 year mortgage:
The following is often mentioned as a disadvantage of a 15 yr mortgage: "Borrowers pay less total interest on the 15-year fixed rate mortgage, so they lose the maximum mortgage interest tax deduction."
How is that a disadvantage? By choosing 15 yrs mortgage, the borrower is eventually paying less interest over the life of the loan, how can that become a disadvantage?
Sounds to me like saying Macy's had a 50% off sale, and I "lost" some potential savings because I spent only $100?
What am I missing here? I get the other possible disadvantages of a 15 yr loan but not this one.

If there is a 50% off sale At Macy's, I would seriously look to spend more money to get what I had been keeping on the wish list.

I see that no one had offered the marginal dollar view of the situation.
If you (say, for example) belong to a 30% tax bracket, your last $1 of income will be taxed at 30¢. So you will get to keep 70¢ of your income.
If you had paid that $1 as interest on a home loan, you would have lost a $1 to the mortgage holder, but would have paid 30¢ less tax, because your income would'a been a dollar less, due to the interest deduction. Overall, you would only be 70¢ down.
Whether you get to keep 70¢ or lose 70¢ of the last dollar of your income would be the difference in paying $1 extra in interest to the mortgage holder.

An aside:
30 yr. versus 15 yr. mortgage is a decision that is usually based on whether the household needs the current cash flow ( 30 yr mortgages will have less total payment per month, although the interest component of the payment will be higher ) for some other expense. The 15yr. mortgagee could easily get a "home equity" loan at a low rate (compared to credit card loans) to accommodate sudden needs for cash.

M V · Post by **M V** » Mon Sep 19, 2011 8:34 pm

Desi;410956Borrower is paying less interest to the mortgagee bank in a fifteen year loan, this is because he is parting with the prinicipal amount in 15 years rather than in 30. But in doing so, he is also losing interest that he would have otherwise earned elsewhere on that money that he is paying back faster to the bank.

That a borrower will eventually pay less total interest in a 15 year loan is the wrong way to look it because borrower loses the hold on the money (and thus opportunity to earn interest or invest) faster in a 15 year loan as he has to satisy principal payment in 15 years now. [/quote]

"Paying off a mortgage faster or as fast as one can is not always the best idea." This is true, and the reason why those who can easily pay off the mortgage still keep a loan. The question was: why is "not able to utilize the maximum mortgage interest tax deduction" listed as a "disadvantage" of 15 yr loan over 30 yr.

[quote]I shall post later what should be the correct way to select between two loans.

That would be really useful. Thx.

M V · Post by **M V** » Mon Sep 19, 2011 9:09 pm

http://www.washingtonpost.com/wp-dyn/content/article/2010/02/25/AR2010022506626.html

If a mortgage broker, who has been doing business in the area for many years and has a good reputation, says he doesn't do GFE's as they are unnecessary paperwork and the calculations in his email serve the same purpose, do we run from such a broker? I am not interested in reporting him or convincing him that legally he now has to give a GFE. Wondering if it could be OK sometimes to go ahead without a GFE. How important is a GFE? It is only a recent requirement...

Thx.

Old-Spice2 · Post by **Old-Spice2** » Mon Sep 19, 2011 9:14 pm

modus_vivendi;410958"Paying off a mortgage faster or as fast as one can is not always the best idea." This is true, and the reason why those who can easily pay off the mortgage still keep a loan. The question was: why is "not able to utilize the maximum mortgage interest tax deduction" listed as a "disadvantage" of 15 yr loan over 30 yr.
That would be really useful. Thx.

Best option would be to take 30 yr loan and make extra payment towards principal when you have spare cash. You can pay off the loan in 15 years and still save on interest. If you are short on cash, then stick with lower monthly payment of 30 yrs loan.

M V · Post by **M V** » Mon Sep 19, 2011 9:24 pm

Old-Spice2;410966Best option would be to take 30 yr loan and make extra payment towards principal when you have spare cash. You can pay off the loan in 15 years and still save on interest. If you are short on cash, then stick with lower monthly payment of 30 yrs loan.

Is the decision so straight-forward? Would it be the same if deciding between 20 and 15 yrs, or between 15 and 10 yrs? Always go for the "more years" option?

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The 'making payments towards principal if one has spare cash' reminds me of the time we are sitting in a broker's office, and he tries to sell us a service that will allow us to make mortgage payments once every 2 weeks instead of once a month, and we effectively will make an extra month's payment every year. I asked him why I couldn't just write a check once a year for that? He said, "You could, but you might forget, this is automated". : )