Newsgroups: misc.invest.real-estate
Subject: 15 year vs. 30 year loans
From: asylvain@felix.filenet.com (The Chipmunk)
Date: 15 Aug 92 03:53:44 GMT
Reply-To: asylvain@fritz.filenet.com (The Chipmunk)
Distribution: world
Organization: Foundation for the Increased Wealth of Chipmunks

Spreadsheet programs are wonderful, absolutely wonderful.  I particu-
larly like Microsoft Excel, but I'm a Mac look'n'feel fan anyway.

I don't recall the context, but someone at one time was asking about, or
had commented about, 15 year loans.

I made the comment that rather than getting a 15 year loan, you should
compute the difference between the payment for a 30 year loan and a 15
year loan, and pay that towards principle reduction.  On a spreadsheet,
the results prove the same, but you have the option of NOT paying the
extra during rough times.  And lordy knows, times can sure be rough
these days.

Someone sent me some e-mail pointing out that 15 year loans usually
go for 3/8 a point or so LESS than conventional 30 year loans.  Hmmm,
that changes things.  So, I finally found time to go back to that
spreadsheet.

Now, to reproduce this experiment, assume a $100k loan, at 9% annual
interest, 12 monthly payments/year (360 payments).  Use the spread-
sheet's formula for computing monthly payment, or look it up.

Here's the formula:
TMIF=this month's interest fraction
TMPF=this month's principle fraction
TMPB=this month's principle balance
LMPB=last month's principle balance

For each month, until TMPB is $0.00 (paid off):
TMIF = LMPB * monthly interest
TMPF = monthly payment - TMIF
TMPB = LMPB - TMPF

For the loan plus principle reduction, modify the above to:
TMPB = LMPB - TMPF - (difference between 30 year and 15 year payments)

It turns out that a 15 year loan, at the same interest rate, is paid off
in 15 years (of course).  But the payment is higher (of course).  If you
take the difference between the 15 year payment and the 30 year payment,
and apply that towards the principle, it turns out that this loan is also 
paid off in exactly (plus or minus a few days) 15 years.

Now, 15 year loans don't necessarily have the same interest rate.  What 
effect does reducing the interest rate have?

I tried only a few numbers, but, a 1/2 point difference increased the
loan time by EXACTLY ONE YEAR.  That is, if you take the 30 year, 9%
loan, compute the payment difference between that and a 15 year, 8.5%
loan, apply that to principle reduction, you will pay off the loan in 
16 years.

That's right, 12 months longer than a 15 year loan.  WHOO-OO-OO-OOPIE!

The larger the interest difference, the larger the loan extension.  A
3/4 point difference added 18 months instead of 12.  A 3/8 point
difference added 6 months.

The "point" to all this?  (pun intended, sorry)

Despite the fact that 15 year loans sometimes go for a lower interest 
rate than 30 year loans, I STILL maintain it is MORE ADVANTAGEOUS to
just get a conventional 30 year loan.

If you wish the advantages of higher equity accumulation, simply compute
the difference between payments, and apply that to the principle.  The
results will be ROUGHLY the SAME as a similar 15 year loan, but you have
the option of NOT paying the extra if you need the money for something 
else.

Like food!

-- 
The Chipmunk.
Opinions are mine, void where prohibited, taxed, licensed or regulated.
Baruch's Observation:
    If all you have is a hammer, everything looks like a nail.