r2i forum

Desi;8025Paying biweekly towards a mortgage is different than taking a 15 year mortgage.

Any mortgage (15 or 30 year) instead of paying monthly, one can choose to pay biweekly.

Re whether a 15 year is better or a 30 year is better depends upon the interest rate differential and affordability to pay a bigger payment for 15 years.

Assuming that you can make either 15 year or 30 year payment, there are two issues to consider.

1. Should you choose to make a 30 year payment vs 15, what would you do with the extra money (difference in two payment amounts)? Invest it for long haul? A lot depends on your psyche. I prefer to invest it. This in essence becomes a 30 year DCA or a 15 year DCA should you choose to pay out last 15 years of mortgage payments from this or after 15 years pay out a lump sum. These are options to think about.

2. Often a 15 year mortgage will be available at a lower rate all other factors being equal. A few years back I had done some calculations and my rule of thumb is that if the 15 year mortgage is available at a rate that is at least 0.25% less than a 30 year rate, then a 15 year mortgage is better else not.

3. Lastly putting finances aside, a discipline of putting the extra money away is a factor. If that discipline is missing than you may be better off with 15 regardless that it may save you or cost you money.

Desi_by_Nature;8050#1
my 2 cents:
You should take into account how long do you plan on owning this house.

If you think you'll want to be moving out in 3-5 years, then i'd say go for a mortgage that results in lowest monthly payments. I'd say even interest-only loans aren't a bad idea if you've studied the regional market well and think that you can break even in 3-5 years just by virtue of property appreciation (if you're thinking 3-5 years, then you're making that bet anyway).
This is because banks and lenders suck out most of the interest in the first 5 years, so assume that for the first 5 yrs only 10% of your monthly principal will go towards paying off the balance.
Why take a shorter term loan which has higher monthly payments, most of which is interest anyway?

Now if you're planning to stick with this house for 10 years or so, then perhaps a 15 yr mortgage makes sense.

Desi_by_Nature;8050#1

Why take a shorter term loan which has higher monthly payments, most of which is interest anyway? [/quote]


If interest rate is same then the first month's interest for 15 year loan or 30 year loan will be exactly the same. The additional amount in payment goes to reduce the principal balance. Since in 15 year loan your payment is here, the second month in a 15 year loan, you will have a lower balance and therefore lower interest in the 15 year loan.

The way to look at loans is not from a payment perspective (assuming you can handle 15 year or 30 year) but rather from the real cost of money to you.

At the same interest rate for 15 or 30 year, the cost of the money is same, but generally 15 year loans are cheaper and hence better from that perspective. If the interest rate differential is not enticing, then I rather invest the difference and especially if I am going to live long in the house. Short term, you are always better off going with the cheaper alternative from cost of money standpoint. Longer term how much cheaper has to be weighed against alternative investment returns and corresponding risk.

VRG;8018
Are there any statndard rules? Or it depends on one's AAP, tax bracket, R2I date etc.. etc?