Date: Wed, 23 May 2007 12:19:02 -0500
From: "Daniel T." 
Newsgroups: misc.invest.financial-plan
Subject: Re: Why 30 year mortgages?
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"Andrew Koenig"  wrote:
> "Elizabeth Richardson"  wrote:
> 
> > Why would you now want to pay income taxes on
> > the income that  now just goes to pay the mortgage? Wouldn't it have been
> > more prudent to have just paid it off in the first place?
> 
> I don't understand the question.  As long as I'm paying the mortgage, I can 
> deduct that interest from my taxes.
> 
> Here's an example.  Suppose I have a mortgage, and I come into possession of 
> a sum of money that is exactly sufficient to pay it off.

I agree with your summation, but you have changed the scenario. How 
about this instead, suppose you did not come into possession of that sum 
of money.

Assume you are 15 years into a 30 year mortgage, $300K at 8%

The choices are:

A) Continue making payments of $2201.
B) Refinance into another 30 year at 6% and continue to make $2201 
payments.
C) Refinance as above but make $1381 payments and invest $820 in a 
vehicle that earns a 6% return.

[To make this easy, assume that the 6% on the refi and the investment 
are after taking taxes into account. Is that reasonable?]

With option (a) you pay off the house in 15 years (b) you end up paying 
off the house in about 12.5 years (149 months,) with option (c) you pay 
off the house in 30 years and have a $824K nest egg.

Options (b) and (c) are obviously both better than option (a), but is 
one of them better than the other? What if, for example ones income 
decreases sharply 10, 15, or 20 years down the road?

If I'm doing the numbers right, someone who chooses option (c) will have 
enough in his investment to pay off the house in only 8 years, is that 
right? If that is the case, then I'd say that option (c) is still the 
best solution for future proofing ones life.