From: whoffman@cbnewsl.cb.att.com (william.hoffman)
Subject: Re: Mortgage or retirement
Organization: AT&T Bell Laboratories
Date: Wed, 6 Jan 1993 23:58:07 GMT

< stuff deleted>

> 
> So the question was: Should I put this $266.78 pre-tax dollar in 403(b) or 
> take the $173.41 after-tax dollar and send it to my mortgage banker in 
> exchange for a 15-year?
> 
> PAYING OFF THE MORTGAGE ROUTE
> 
> After 15 years, you owe nothing from mortgage banker, you have no assets in 403(b). Your cash asset balance is 0.
> 
> 403b ROUTE
> 
> After 15 years, you still owe the mortgage banker $80,526.04 (not much less 
> than $100,000), but your $266.78 monthly contribution accumulate at 8%/12 
> monthly rate you have cash balance of $92,317.66. However you only have 
> $92,317.66*.65 = $60,006.48 in your account. Your net cash worth at that 
> time: $60,006.48 - $80,526.04 = -$20,519.55.
> The net effect is that you just lost your children's one year college 
> education fee (at the time you exactly needed).
> 

Not quite true, you have ignored the additional tax savings gained by paying 
more in interest for each of the fifteen years. Total interest on the 30 year mortgage after year 15 is 840.85*180-(100,000-80,526.04)=131879.04. Total 
interest for the 15 year loan after 15 years is 1014.26*180-(100000)=82566.80

So, investing in the 403b and having a 30 year mortgage ends up paying

131,879.04 - 82566.80 = 49312.24 more in interest over the 15 years.
so without adjusting for inflation or growth (which makes this sum even larger)
you would have 49312.24*.35= 17,259.28. (since each years tax refunds can be 
invested or used to pay down the mortgage when refunded, this will probably 
grow by at least a factor of 2)

So, after 15 years you net worth is really 60006.48 - 80, 526.04 + at least
17,259.28 = most likely (no tools handy for me to calculate the actual number)
much greater than -20,519.55, at least -3300 probably + 10,000 or 15,000.

> SOME MORE POINTS:
> 
> A dollar earned in you own mortgage is a sure dollar, while a dollar earned in your 403(b) at 8% may not be so sure (you might do better or worse, the sure thing is that it is more risky).
> 

True

> Generally, it make sense to have more debt at a high inflation period, but not make much sense at current situation. 
> 

True again,

> What about a peace of mind by having less debt? 

Personally, I have more piece of mind by having less debt DUE at a specific
time. A 30 year mortgage is preferrable since EACH month I only have to come
up with 840 not 1014. This depends on incomes and such. Generally I think
there is only a difference if you can cover the 30 year payment on 1 salary
but the 15 year payment cannot be covered on one salary. In this case, the
30 year payment would give me greater peace of mind.

> 
> So the conclusion is obvious: choose a 15-year mortgage. No wonder 15-year mortgage is so popular NOW! 
> 

Not so, it is highly dependent on the rate differential between the 30 and 15.
but in most cases, the 30 will rule out for a 15 year or less time period.
> >
> >p.s.  I'd be delighted if you found a flaw in my argument.  
> >
> 
> The flaw is that you ignored the marginal dollar's ability to bring down the mortgage interest rate. What you owed is compounding at a larger base and what you have is compounding at a smaller base (not speed or rate).
> 
> 

This is true, but you must also account for the tax "savings" of paying more
in interest each year.

Bill

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