vania-janet/multiturn-rag-retrieval-data huggingface dataset:
But the longer the term, the less he will pay each month - at least on a traditional capital-and-interest mortgage. So it is a question of balancing those two competing factors. As long as you do not have a mortgage condition that penalises the borrower for paying off the loan more quickly, it can make sense to have as long a term as possible, to begin with, which can be shortened by increasing the monthly repayment as fast as circumstances allow. In England, we used to have tax relief on mortgage payments, and so in times gone by it did make sense to let the mortgage run the full 25 years, in order to get maximum tax relief - the rules were very complex, but it tended to maximise your tax relief by paying over the longest possible period. But today, with no income tax relief given on mortgage payments, that is no longer a consideration in this country. The practical position is, of course, that you can never tell how long it might take you to pay off a mortgage. It is a gamble as to whether your income will rise in future years, and whether your job will last until your mortgage is paid off. You might fall ill, you might be made redundant, you might be demoted. Mortgage interest rates might rise. It is never possible to say that you ""can"" pay off the loan in a short time. If you hope to do so, the only matters that actually fall within your control are the conditions of the mortgage contract itself. Get a good lawyer. Tell him to watch out for early-redemption penalties. Get a good financial adviser. Tell him to work out what you will need to pay in additional premiums on your life policy if you are considering taking an interest-only mortgage. Try to fix your mortgage rate in the first few years, for as long as possible, so that in your most vulnerable period, with the greatest amount owing, you are insulated against unexpected interest rate fluctuations. Only the initial conditions can be controlled, so it might be prudent to take as long a term as possible, even though a prudent borrower will leave himself room to reduce that term, and a prudent lender will leave room to extend it, in case of unpredictable changes in the financial circumstances.
Matthew -  I'll start with the premise you put enough down that you won't default on an upsidedown mortgage.  There's an order I recommend when considering prepayment: Prepaying a mortgage is a guaranteed return for a fixed investment for the life of the mortgage or ownership of the house. If you have a rate of 5%, and that rate is good for you to invest at, then prepaying is fine. The presumed long term market gain is 8% or higher (12% if you are a disciple of Dave Ramsey, but I digress) and at the 15% cap gain rate, a 6.8% post tax return. Your 5% rate after tax (if it's all taken on Sch A) is about 3.75% if you are in the 25% bracket.  This difference of 3% or so is not guaranteed year to year, not even for the long term. For some, the desire to pay off the mortgage is enough to focus on it. Others see the 3% compounding over time, and likely to occur over the coming decades.
Absolutely never.Even in a hot market, it's like picking up dimes in front of a bulldozer.  It's just plain stupid. If you can't afford a 20% down payment and a 15 year mortgage, just rent.
"Can is fine, and other answered that. I'd suggest that you consider the ""should."" Does your employer offer a matched retirement account, typically a 401(k)? Are you depositing up to the match?  Do you have any higher interest short term debt, credit cards, car loan, student loan, etc?  Do you have 6 months worth of living expenses in liquid funds?  One point I like to beat a dead horse over is this - for most normal mortgages, the extra you pay goes to principal, but regardless of how much extra you pay, the next payment is still due next month. So it's possible that you are feeling pretty good that for 5 years you pay so much that you have just 10 left on the 30 year loan, but if you lose your job, you still risk losing the house to foreclosure. It's not like you can ask the bank for that money back.  If you are as disciplined as you sound, put the extra money aside, and only when you have well over the recommended 6 months, then make those prepayments if you choose.  To pull my comment to @MikeKale into my answer - I avoided this aspect of the discussion. But here I'll suggest that a 4% mortgage costs 3% after tax (in 25% bracket), and I'd bet cap gain rates will stay 15% for non-1%ers. So, with the break-even return of 3.5% (to return 3 after tax) and DVY yielding 3.33%, the questions becomes - do you think the DVY top yielders will be flat over the next 15 years? Any return over .17%/yr is profit. That said, the truly risk averse should heed the advise in original answer, then pre-pay. Update - when asked,in April 2012, the DVY I suggested as an example of an investment that beats the mortgage cost, traded at $56. It's now $83 and still yields 3.84%. To put numbers to this, a lump sum $100K would be worth $148K (this doesn't include dividends), and giving off $5700/yr in dividends for an after-tax $4800/yr. We happened to have a good 4 years, overall. The time horizon (15 years) makes the strategy low risk if one sticks to it."
Say one makes $60k/yr. The net gain is that half these funds are received about 2 weeks prior. To keep the math simple, let's assume a 12% return per year on the funds during this time. $30K * 12% is $3600. But 2 weeks is about 4% of a year, so $144. That's at a 12% return. In an offset mortgage the return will be closer to 4%, a $48/yr benefit.  With short term rates at or below 1%, we're really looking at a gain of $12 or so for the extra time with the funds.
The advantage of having a mortgage rather than borrowing money in other ways is that it is cheaper because the loan is secured against the value of the property.  If you stop paying then the bank take the house and can sell it keeping what they are owed and returning any excess. If you have enough money to pay it off then you do not need the mortgage.  They normally run for 25 years.  It is a lovely day when finally you realise that you own the whole house and no longer owe anything to the bank and the charge against the house is removed and the record of it removed from the land registry.   When you sell a house with a mortgage the buyer has to check that the bank has been paid off before they accept the property.
"There is no formula to answer the question. You have to balance return on investment with risk. There's also the question of whether you have any children or other heirs that you would like to leave money to. The mortgage is presumably a guaranteed thing: you know exactly how much the payments will be for the rest of the loan. I think most annuities have a fixed rate of return, but they terminate when you both die. There are annuities with a variable return, but usually with a guaranteed minimum.  So if you got an annuity with a fixed 3.85% return, and you lived exactly 18 more years, then (ignoring tax implications), there'd be no practical difference between the two choices. If you lived longer than 18 years, the annuity would be better. If less, paying off the mortgage would be better. Another option to consider is doing neither, but keeping the money in the 401k or some other investment. This will usually give better than 3.85% return, and the principal will be available to leave to your heirs. The big drawback to this is risk: investments in the stock market and the like usually do better than 3 or 4%, but not always, and sometimes they lose money. Earlier I said ""ignoring tax implications"". Of course that can be a significant factor. Mortgages get special tax treatment, so the effective interest rate on a mortgage is less than the nominal rate. 401ks also get special tax treatment. So this complicates up calculations trying to compare. I can't give definitive numbers without knowing the returns you might get on an annuity and your tax situation."
For the mortgage, we enter 10 years for the period, 3.6% (if that is the applicable rate) for the after tax return, $100,000 as the present value, and we obtain a future value of $142,429. For the alternative investment, we do the same except we enter 5% as the return, and we get a future value of $162,889. However, taxes are now due on the $62,889 of interest, which reduces the future value to $137,734. The mortgage repayment does a little better. So if your marginal tax rate is 30%, you have $10k extra cash to do something with right now, mortgage rate is 5%, IRA CD APY is 1%, and assuming retirement in 30 years: If you want to plug it into a spreadsheet, the formula to use is (substitute your own values): (Note the minus sign before the cash amount.) Make sure you use after tax rates for both so that you're comparing apples to apples. Then multiply your IRA amount by (1-taxrate) to get the value after you pay future taxes on IRA withdrawals.
If you blow through that number, you hit 25%, I agree, but why pay 25% now, for sure, to avoid 'maybe' hitting 25% later? You have decades of opportunities for conversion, and even more when the funds are transferred to IRAs if you have a job change. (And the conversion discussion has multiple layers when the IRA is involved) Say you are 'too' successful. You are hitting $2M before age 55. If you retire post-55, you can withdraw from the 401(k) penalty free. But, you have 15 years before you'd start to take SS benefits. 15 years to use conversions, even if pushing into 25%, to reduce the impact of SS taxation. My advice is not a set-and-forget solution. It's an annual evaluation of the plan for the coming year. Further notes on my choice of ""15% Solution"" - This is the 2017 tax table for singles - I note that median individual income is ~$30K which puts that median single at ~20K taxable. This is where the analysis begins. This earner might have upward mobility, to reach the 25% bracket and begin to save pre-tax. The goal would be to have a mix of pre/post tax money, so that over the course of their life, the 25% bracket was avoided, perhaps completely. In general, my writing tend towards the second highest quintile, the 60-80% slice of the population. The numbers might appear arbitrary, but, in the end, the discussion has to start someplace. The concept I described here is best implemented by the single or couple who is still at 15%, but soon pushing higher than the 15/25 line. This enables them to start by saving in the Roth, and slowly shifting towards pre-tax. The final mix at retirement depends on that timing as well as their opportunities for conversions along the way. Part of my focus on that line is that the differential is greatest in bracket shifts between 15 and 25%. Much of the benefit in the whole IRA/401 discussion is in that shift, depositing at 25%, yet withdrawing at 15%.
I'll preface this with saying that I'm not a finance or real estate professional, this is just how I understand the situation and what I'm doing:  We just got a 30year/FHA mortgage, there's no prepayment penalty, and no fees associated with paying it biweekly. In fact (Wells Fargo), while the payments get withdrawn biweekly, they don't actually post to the mortgage until there's enough for a full payment.  So essentially here are the benefits I'm realizing:
I will just explain the time value of money in general, descriptive terms and save the math for someone else. Imagine: You have half a million dollars. I'd like to borrow it all from you. I'll pay it all back, every penny, but no more. And I'll pay it back in about, oh, thirty years or so. (Imagine also that you can be 100% sure that I'll pay it back.) Does this sound like a good deal? Not really. Why not? Well, you could do something with that sort of money. With that sort of money, you could do a lot of things for 30 years. You could buy a nice house and live in it for 30 years and save yourself from spending a lot of money on rent during that time (or save money on interest by paying off a mortgage early) even if the price of the house goes nowhere. If you already had a house, you could do some home improvement, like insulate the place better (to save on heating bills) or even just on something that you're going to enjoy for part of those 30 years (a patio in the back yard). If you were feeling entrepreneurial, you could take that money and start a business. Or you could invest that money in the stock market, and get a lot more back.... and if that's too risky for you, just start a savings account and earn interest. And finally, in 30 years, the value of the dollar will be lower because of inflation, so it won't buy as much now as it will then. That's the time value of money. It's the opportunity cost of the best of the things that you could have done with that money during the time it was gone. When you take out a loan, your interest payments will depend in part on the time value of the money you're borrowing: the people making the loan could be investing that money somewhere else, like government bonds. (It will also depend on factors like the risk of default on the loan - this is why credit card debt is more expensive than debt like a mortgage that's backed by a big fat asset like a house which can be seized and sold if you happen to default.) This is how the Federal Reserve can affect interest rates across the economy by just buying or selling government bonds.
Lets do the math, using your numbers. We start off with $100K, a desire to buy a house and invest, and 30 years to do it.  Scenario #1 We buy a house for $100K mortgage at 5% interest over 30 years. Monthly payment ends up being $536.82/month. We then take the $100K we still have and invest it in stocks, earning an average of 9% annually and paying 15% taxes.  Scenario #2 We buy a house for our $100K cash, and then, every month, we invest the $536.82 we would have paid for the mortgage. Again, investments make 9% annually long term, and we pay 15% taxes.  How would it look in 30 years?  Scenario #1 Results: 30 years later we would have a paid off house and $912,895 in investments Scenario #2 Results: 30 years later we would have a paid off house and $712,745 in investments Conclusion: NOT paying off your mortgage early results in an additional $200,120 in networth after 30 years. That's 28% more. Therefore, not paying off your mortgage is the superior scenario.  Caveats/Notes/Things to consider Play with the numbers yourself:
$30,000 sounds like a lot of money, but it really isn't. The median household income is a little over $50,000, so the median emergency fund should be something like $25,000 on the income standard. On the expenses standard, the emergency fund should be at least $15,000. The $15,000 remainder would buy a cheap new car or a good used car. The $5000 remainder from the income standard would give you a decent used car. I wouldn't recommend taking out a loan because you don't want to get stuck paying a loan on a car you can't drive because you deployed. Note that if you are out of contact, in the hospital, or captured, you may not be able to respond if there is a problem with the car or the loan. If you pay cash, you can leave the car with family and let them take care of things in case of a deployment. If you invested in a Roth IRA in January of 2016, you could have invested in either 2015 or 2016. If 2015, you can invest again for 2016. If not, you can invest for 2017 in three months. You may already know all that, but it seemed worth making explicit. The Thrift Savings Plan (TSP) allows you to invest up to $18,000 a year. If you're investing less than that, you could simply boost it to the limit. You apparently have an extra $10,000 that you could contribute. A 60% or 70% contribution is quite possible while in the army. If you max out your retirement savings now, it will give you more options when you leave the service. Or even if you just move out of base housing. If your TSP is maxed out, I would suggest automatically investing a portion of your income in a regular taxable mutual fund account. Most other investment opportunities require help to make work automatically. You essentially have to turn the money over to some individual you trust. Securities can be automated so that your investment grows automatically even when you are out of touch.
"I've heard that the bank may agree to a ""one time adjustment"" to lower the payments on Mortgage #2 because of paying a very large payment. Is this something that really happens? It's to the banks advantage to reduce the payments in that situation.  If they were willing to loan you money previously, they should still be willing.  If they keep the payments the same, then you'll pay off the loan faster.  Just playing with a spreadsheet, paying off a third of the mortgage amount would eliminate the back half of the payments or reduces payments by around two fifths (leaving off any escrow or insurance).   If you can afford the payments, I'd lean towards leaving them at the current level and paying off the loan early.  But you know your circumstances better than we do.   If you are underfunded elsewhere, shore things up.  Fully fund your 401k and IRA.  Fill out your emergency fund.  Buy that new appliance that you don't quite need yet but will soon.  If you are paying PMI, you should reduce the principal down to the point where you no longer have to do so.  That's usually more than 20% equity (or less than an 80% loan).   There is an argument for investing the remainder in securities (stocks and bonds).  If you itemize, you can deduct the interest on your mortgage.  And then you can deduct other things, like local and state taxes.  If you're getting a higher return from securities than you'd pay on the mortgage, it can be a good investment.  Five or ten years from now, when your interest drops closer to the itemization threshold, you can cash out and pay off more of the mortgage than you could now.   The problem is that this might not be the best time for that.  The Buffett Indicator is currently higher than it was before the 2007-9 market crash.  That suggests that stocks aren't the best place for a medium term investment right now.   I'd pay down the mortgage.  You know the return on that.  No matter what happens with the market, it will save you on interest.  I'd keep the payments where they are now unless they are straining your budget unduly.  Pay off your thirty year mortgage in fifteen years."
Much of the value of the 401(k) beyond the match is the tax differential, i.e. depositing while in the 25% bracket, but withdrawing the funds at retirement, hopefully at 15%. It doesn't take long for the extra expense and the ""holy cow, my 401(k) just turned decades of dividends and long term cap gains into ordinary income"" effect to take over. Understand this now, not 30 years hence. Last - to answer your question, 'how much'? I often recommend what may seem a cliche ""continue to live like a student."" Half the country lives on $54K or less. There's certainly a wide gray area, but in general, a person starting out will choose one of 2 paths, living just at, or even above his means, or living way below, and saving, say, 30-40% off the top. Even 30% doesn't hit the extreme saver level. If you do this, you'll find that if/when you get married, buy a house, have kids, etc. you'll still be able to save a reasonable percent of your income toward retirement. In response to your comment, what counts as retirement savings? There's a concept used as part of the budgeting process known as the envelope system. For those who have an income where there's little discretionary money left over each month, the method of putting money aside into small buckets is a great idea. In your case, say you take me up on the 30-40% challenge. 15% of it goes to a hard and fast retirement account. The rest, to savings, according to the general order of emergency fund, 6-12 months expenses, to cover a job loss, another fund for random expenses, such as new transmission (I've never needed one, but I hear they are expensive), and then the bucket towards house down payment. Keep in mind, I have no idea where you live or what a reasonable house would cost. Regardless, a 20-25% downpayment on even a $250K house is $60K. That will take some time to save up. If the housing in your area is more, bump it accordingly.
You say that one property is 65% of the value of the two properties and the other is 35%. But how much of that do the two of you actually own? If you have co-signed mortgages on both properties, then your equity is going to be lower. If you sold both properties, then your take away would be just half of that equity. And while the 35% property may be less valuable, if you bought it first, it may actually have more equity. It's the equity that matters here, not the value of the property. With a mortgage, the bank is more of an owner than you are until you've paid down most of the loan. You may find that the bank won't agree to a single-owner refinance. A co-signed mortgage is a lot easier for them to collect, as they can hold either of you responsible for the entire loan. If you sell the 65% property, then you can pay off any mortgage on that property and use the equity payout from that to buy out your relative on the 35% property. If you currently have no mortgage, you'd even have cash back. This is your fewest strings option. Let's say that you have no mortgage now. So this mortgage would be the only mortgage on the property. It's not so much, as 15:65 is 3:13 or 18.75% of the value of the property. That's more of a home equity loan than a mortgage. You should be able to get a good rate. It might reduce your short term profit, but it should be survivable if you have other income. If you don't have other income, then seriously consider selling the 65% property and diversifying the payout into something else. E.g. stocks and bonds. Perhaps your relative would be willing to float you the loan. That would save you bank fees and closing costs. Write up a contract and agree to take assignment of the title at payoff. You'll need to pay a lawyer to write up the contract (paying a modest amount now to cover the various future possibilities), but that should still be cheaper.
Personally, I would split the difference, putting about half into each.  Simply because it balances out the problem and I don't have to fret about whether one or the other will provide a significant difference.  As bstpierre points out, the one which will make you more in the end is the one which you can grow the fastest.  The mortgage payment is locked at 5% growth, which, while modest, is also essentially guaranteed at this point.  The CD in your IRA is likely less than that amount, even after tax consideration. A couple additional points to consider: