Short Term Mortgage or Long Term Mortgage (With Side Savings)? – – – Version 10/98

All Data Entry cells show up in red.

If your goal is to pay your mortgage off in 15 years, you basically have a choice to make. Conventional wisdom says to buy a 15-year mortgage, however one needs to consider the fact that there may be a more efficient way to accomplish the same goal. This calculator compares the use of a short-term mortgage with a longer-term loan coupled with a side savings account. It is true that purchasing the 15-year loan may help one who lacks the necessary discipline to invest on the side. Many popular financial strategies require discipline to implement successfully, for example buying term insurance and investing the difference.

In this model you will enter the term of each loan. The most common comparison will be a 15-year loan to a 30-year loan, however you can examine any term loan you wish.

Data Entry:

Term: Enter the number of years in each respective loan.

Rate: Enter the interest rate on each loan. Keep in mind the 15-year loan will not have the same rate as the 30-year loan. You should be able to look up averages for the 15 and 30-year mortgages in the newspaper, or use specific quotes from your mortgage company.

Loan Amount: Enter the amount of money you will borrow. You will notice that you only need to enter a value for the short-term loan. This same number will be carried over to the correct slot for the longer-term loan.

Side Savings Entries

% You pay in Taxes: Enter here your tax bracket, or better yet the actual percentage you actually pay in taxes. Usually someone in a 28 % tax bracket, for example, will actually pay something less than 28% in actual taxes.

Pre-Tax Rate of Return: Enter here the gross return you would like to assume for the investment you will select for the side savings. The calculator will then, based on the tax rate you enter above, figure the net after tax rate of return you will achieve on the investment. That rate assumption is then used in the future value calculation of the investment.

Comparison Overview:

You will notice that on the short-term mortgage (for our discussion 15 years) the loan is paid off after the specified term. The calculator also shows the cumulative interest you have paid over the life of the loan. If this mortgage is on your primary residence, and you itemize your deductions, then this number indicates the amount of interest you can deduct if this loan is used.

On the right side of the model the calculator indicates the balance due on the 30-year loan at the point that the short-term loan is completed. In our example this is at the 15-year point. Additionally, the right side indicates the account balance on the side savings account at that same (15-year) point. If the investment performance of the side savings is significant enough, you should have enough in the account to pay the 30-year mortgage off and pocket some extra money. Another point to note is that the cumulative interest paid on the 30-year mortgage should be higher than on the 15-year loan. This means you should have greater tax savings from the long-term mortgage.

In addition to the potential higher tax deductibility of the long-term mortgage, you have obligated yourself to a lower monthly loan payment. In the event of financial difficulty you can stop the contributions to the side savings account and concentrate on your mortgage payments. On the 15-year loan you are still obligated to make the higher payments.

Keep in mind that there are many variables that determine the best plan for you. If you do not have the discipline to invest the difference in the side savings, you may need to consider the 15-year loan. In some cases the math will point you to the 15-year loan. This calculator will help you draw your conclusions from real information, as it applies to your specific situation.