There are more tax benefits in the first 15 years of a 30-year note than there are in the 15 years of a 15-year note. RE: Taxes Notice the side fund does not subtract taxes. You may adjust the side fund for taxable growth by using an after tax rate of return for the side fund investment return. For example if the before tax return is 10% and the tax bracket is 40%, use a side fund investment return of 6%. |
If you will look with me on this graph there is not much tax difference between the two mortgage options in year one. Let us go out to year 15 and see the difference between the two positions. As you can see, there is significant tax savings involved in going with the 30-year loan even if you want to pay your house off in year 15. The best 15-year option would be to purchase a 30-year mortgage loan and pay it off in year 15 with one check if that is what you want to do. |
Documentation calculations are performed in a series of worksheets defined as follows: The first worksheet is simply the amortization schedule for the longer mortgage - Mortgage One. The longer mortgage is the mortgage with the longer term, typically this will be 30 years but it may be any reasonable number. The second worksheet is simply the amortization schedule for Mortgage Two. 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. Tax Savings Worksheet Column 1: Monthly tax savings for Mortgage One. Column 2: Monthly tax savings for Mortgage Two. Column 3: Difference in tax savings (Column 1 - Column 2). Column 4: Cumulative tax savings for Mortgage One (Summation of Column 1 to date). Column 5: Cumulative tax savings for Mortgage Two (Summation of Column 2 to date). Column 6: Tax savings opportunity value of Mortgage One (Column 1 + (Prior Month Column 6 * (1 + Investment ROR / 12)). Column 7: Tax savings opportunity value of Mortgage Two (Column 2 + (Prior Month Column 2 * (1 + Investment ROR / 12)). |