How to Compare Mortgage Plans

It may be a daunting task to choose a mortgage plan from a vast number of options:

15 year fixed loan at 2.625% with 0.25 point.
15 year fixed loan at 2.75% with 0.30 credit.
30 year fixed loan at 3.25% with no point.
…

What is the best way to compare them?

Rule of thumb: compare them at the same basis. Then the question is, how to choose a base that is fair.

Let’s say, besides buying a house, you also do some investment with your extra money at some expected return, for example, 4% annually. Then any money not used to pay off the principle, e.g., the monthly interest on your mortgage, could hypothetically be put to your investment otherwise. Then it’s simple to come up with an easy way to compare two mortgage plans:

You lose the possible investment returns on any money not used to pay off the principle, which includes the upfront cost, monthly interest paid, etc.
Any monthly differences between two plans in the principle payment could have been put to investment.

For example, let’s compare 15 year 2.75% with 30 year 3.25% at no point and no cost, with a loan amount of $300,000. The monthly payment for 15yr is $2035, for 30yr is $1305. The difference is 2035 - 1305 = $730. It means:

In the first 15 years, had you chosen 30yr plan over 15yr, you would have the extra $730 to invest somewhere else.
In the next 15 years, because 15yr plan would have already been paid off, had you chosen 15yr plan over 30yr, you would not have to pay the $1305 monthly, which could be put to investment.

After some math work, you’d conclude that if your other investment return is on average 3% annually, then 15yr plan is better than 30yr; if you can instead make a steady return of 5%, then 30yr is better.

At the top is a little tool to help you with the math. Just fill in the loan amount, the expected return of your other investment, and details of two plans. It’ll plot a graph with expected return for each plan. Note that:

The change in market value of your house is not considered here, which is identical regardless of the mortgage plan.
Only the difference between the two plans really matters here, which can be shown by checking the “Difference Only” box.
The outcome varies according to the expected return of your other investment, which unfortunately is not something one can guarantee.

Lastly, remember that there are other factors in choosing a mortgage, e.g, you want to sell it instead of keeping it for long, or whether you can even make timely monthly payment. So, don’t conclude solely based on what I say here, choose wisely!

This program is made with Fay, Haskell compiled to Javascript, in case you may wonder.