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I need advice:

I'm in a condo contract, priced at $175K. I have been looking around for mortgage, and got a quote for a 3.125% 15-year mortgage with 20% down payment (so loan would be 140K).

I was initially thinking that 3.125% interest rate adds only $4300 to the loan. But it adds $36K interest over that 15 years! I was shocked how it is calculated. The interest is very high!

I'm now trying to double think to increase the down-payment. Do you think it is better to pay more cash and less loan? I'm also thinking to go for a 5-year terms to pay less of that interest. Any recommendations? Any advice?

My whole bank deposit is 150K. And I have a six-figure salary.

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    @mootmoot - I appreciate the disclosure. In your opinion, no one with a high income is welcome here? They should be sent to a pro? Not a very welcoming attitude. And, in my opinion, a "tax advisor" isn't the right guy to send OP to, regardless. – JoeTaxpayer Jul 5 at 13:53
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    @mootmoot - indead, and my answer still addressed the tax issue. And respected her relatively low risk tolerance. My answer was targeted exactly to her income level. On the internet, you shouldn't make assumptions about who is richer/poorer, unless they disclose their numbers. – JoeTaxpayer Jul 5 at 14:44
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    @mootmoot Six-figure starts at $100K, not $1M (that would be seven-figure). – void_ptr Jul 5 at 17:18
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    @mootmoot You're greatly overrating a six-figure income. 10% of the US has an income that high. My income is that high. A large percentage of the users on this website have incomes that high. It's not something that requires a professional advisor. – Brady Gilg Jul 5 at 17:38
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    @mootmoot this site isn't just for poor people, and plenty of us here have six-figure salaries—that is very much not "super high-income," and in places like San Francisco, low six-figures qualifies as "low income." If you don't feel comfortable advising someone making more than you, feel free to move on without answering, but that certainly doesn't make the question bad or off-topic, and it's quite rude of you to try and chase off users just because they make more than you. – Kevin Jul 5 at 18:00
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A single person making 6 figures is in the 24% tax bracket, a taxable income over $82,500.

This means a 3.125% interest rate costs you a net 2.375%*. This is less than long term inflation. I understand being 'risk averse'. Only asking you to consider the long term. The difference between being invested in stocks vs cash (i.e. CDs or government treasury bills/bonds) is huge over time.

My recommendation is to put just the 20% down. I won't present any argument towards a 30 mortgage term, I realize that wouldn't end well. But I will suggest that you move in, see what other costs you didn't plan for and only after the place is fully lived in for, say, 6 months, look at what your bank balance is. An emergency fund of 6 full months' expenses is a good idea, so regardless of how you move forward, investing, an available cash reserve is a good thing. You can always make extra prepayments. To Justin's point, I agree that "sleep factor" outweighs any data I can offer.

(I would ask you, are you employed by a company offering a 401(k) and matching contributions?)

  • The standard deduction for a single in 2019 is $12,200. If your state tax (I don't know, is your state tax 5%, like mine, higher?) is about $5,000 and your donations, $7000, you don't itemize now, but any amount over this would turn into a higher deduction. The $4375 in first year interest and the ~$3000 property tax, added to the former, give you a total $19,000+ that comes off you total income before taxes are calculated. James' comment is 100% good as well. My made up numbers may not apply. The punchline is that if, as a homeowner, these numbers push you to itemize your deductions, your cost of borrowing is not the gross 3.125%, but a post tax 2.375%. (3.125*.76). If this needs further clarification, I'm happy to edit again.
  • Yes I have 401K being invested. But can you elaborate more on the 3.125 being converted to 2.375?! If not paying cash, otherwise it will be in my savings account with only 2.5% APR. – Tina J Jul 5 at 14:57
  • @Tina J: If you itemize deductions, you can deduct the mortgage interest from your taxes - always assuming you have sufficient other itemized deductions so that the total is larger than what your standard deduction would be. With this relatively small mortgage at low interest, I would guess that's not going to be the case, or only for the first few years. – jamesqf Jul 5 at 16:32
  • My answer is updated to clarify. To James - I initially assumed a high wage earner would be at the line even while renting. But you are 100% correct (well, maybe 76% after taxes). – JoeTaxpayer Jul 5 at 16:47
  • Now I got it. Because I'm claiming those interests in my tax return, that 3.125 would effectively become 2.375. I just signed the application with 40% down. – Tina J Jul 6 at 0:09
  • Sleeping well? Priceless. Congrats. – JoeTaxpayer Jul 6 at 0:15
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Putting more down will definitely decrease the amount of interest you're paying. From a financial standpoint, though, the question is what would the money be doing if it wasn't part of your down payment? If you're saying that you're keeping 150k in a checking account/ money market account at a bank that is earning less than 3.125% interest then putting more of that money toward the mortgage would make financial sense. If that money is invested in the market (which I hope a lot of it is), then it's a harder call. Over the long run, a decent portfolio of stocks and bonds should do at least 2-3 times better than the 3.125% you're paying on the mortgage. But there is no guarantee of that return while paying on the mortgage is guaranteed. Personally, I'd rather keep most of my money in the market when rates are this low but that's entirely a personal preference.

Of course, there are also non-financial considerations. Some people get really antsy about having any sort of debt or can't sleep well when the market goes up and down and their portfolio value goes with it. If having less debt or a paid off home lets you sleep better at night, that's something that is truly valuable over and above the raw financial numbers.

  • No stocks on that cash; that is only on a savings account with 2% interest rate. But it's more of a financial security. I feel more secure having some real cash in my bank!! – Tina J Jul 4 at 23:37
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  1. That 3.125% is the APR: Annual Percentage Rate, instead of the total percentage paid.
  2. The interest is very high! The absolute number $36,000 is very high! It would be even higher were it for 30 years. But that's the cost of borrowing money.
  3. Do you think it is better to pay more cash and less loan? Always. But being house rich and cash poor is just as bad. It might even be worse.
  4. I'm also thinking to go for a 5-year terms to pay less of that interest. Go for the 15 year loan and pay more every month.
  5. Changing subjects: why do you have $150,000 in the bank?
  • Thanks. So I will definitely go for a higher down payment, say 75k. For number 4, so I can clear the debt sooner than planned, right? Does it mean less interest? – Tina J Jul 4 at 23:39
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    "so I can clear the debt sooner than planned, right?" Correct. "Does it mean less interest?" Correct: less interest paid. In the case of mortgages, credit cards, car loans, etc, the amount of interest paid is calculated based on 1/12 of -- in your case -- 3.125% of the outstanding balance. If you put down $70K, then the initial outstanding balance would be $80k. A 15 year loan would have a monthly payment of $577, and for the first month $349.18 of that would be an interest payment, and $227.82. – RonJohn Jul 4 at 23:50
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    Continuing. Next month, your outstanding balance would be $80,000 - $227.82 = $79,772.18, and the interest portion $207.73. Note how it dropped by $20.09. If you pay an extra money above and beyond the $577, your outstanding balance will drop even faster in addition to your equity increasing even faster. – RonJohn Jul 4 at 23:54
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    "with a 2%interest rate!" Thumbs up to putting it in a high rate savings account. We do hope that you're also contributing heavily to your 401(k) account, instead of "just" saving it all in the bank. – RonJohn Jul 4 at 23:56
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    Unlike some others on this site, I'm in favor of longer mortgages even when you want to pay it off fast because it gives you the flexibility to stop paying extra if Something Large And Unexpected happens. The downside is a slightly higher interest rate. Build that Emergency Fund!! :) – RonJohn Jul 5 at 0:56

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