It may be possible to pay a 30-year (longer) note off sooner than year 15 (shorter note timeframe) assuming you want to have your house paid off - which would be better than a 15-year note. You may change the assumed side fund return and repeat the calculation. Of course, as you increase the side fund return, the time to pay of the 15-year mortgage decreases. |
Assuming you can earn a higher rate of return than the bank is charging you to use their money, you could pay off a 30-year note sooner than 15 years. (use the client’s rate of return on investments not to exceed 12%) If you are going to choose the 15-year note so you could get your house paid off as fast as you can, then choosing the 30-year option and investing the difference may even work out better. However, it is possible to lose money, including principal, in investments that carry market risks. If this were to occur, having a 30-year mortgage while investing the difference would likely not be beneficial. |
The tax advantage in the side fund is calculated as the difference in tax savings of Mortgage One (the 30-year mortgage) minus the tax savings in Mortgage Two (the 15-year mortgage). After 15 years, the tax savings of the 15 year mortgage is zero. Documentation calculations are performed in a series of worksheets defined as follows: The first worksheet is simply the amortization schedule for the longer mortgage. The longer mortgage is the mortgage with the longer term, typically this will be 30 years but it may be any reasonable number. The side fund worksheet includes two sources of funds. First, the difference of the monthly payment between the longer term mortgage and the shorter-term mortgage is treated as a deposit to the side fund. Second, the tax advantage of the longer-term mortgage over the shorter-term mortgage is treated as a deposit to the side fund. There are also difference in payments and tax savings worksheets. These simply isolate the difference between mortgage one and two for clarity. Side Fund Worksheet Column 1: Balance at beginning of month. Column 2: Monthly interest earned: (Column 1 * Investment ROR/12). Column 3: Monthly deposit of difference in payments (E.O.M.). Column 4: Monthly deposit of difference in tax savings (E.O.M.). Column 5: Account balance at the end of the month: (Column 1 + Column 2 + Column 3 + Column 4). |