As described in the overview, the objective is to pinpoint the Gain in Borrowing Power against the total Loss of Monthly Withdrawals over 20 years. i.e. Opportunity Loss. The Opportunity Loss is about 6 times the Gain in Borrowing Power.
For many, all they need to know is the “cowboy math,” a 6X tradeoff. For others, they prefer to see the dollars and cents. That’s the purpose of the following calculators.
Unlike the Nest Egg and Monthly Withdrawals calculator, the Tradeoff calculators require several inputs. It takes some messing around, in other words. It’s worth it, however, because knowing your tradeoffs at the outset will make it easier to pay off the mortgage by age 50-55. An example of the calculators would be helpful.
The first calculator is Borrowing Power with three terms. The user input the amounts from the Borrowing Power calculator (See Borrowing Power). The calculator will automatically report the increase.
The second is the Opportunity Loss calculator, which calculates the loss of monthly withdrawals. First, the user inputs the Increases from the previous calculator. Except the increase for 15 years must be calculated by hand. It’s simply the difference in borrowing power between a 15-year and 30-year term. Thus, subtract $126,456 from $186,282 = $59,826. Bingo!
Second, the user returns to the Monthly Withdrawals calculator and hard-inputs the monthly amounts for the three time periods. The calculator will report the total loss.
Users can eyeball the Gain against the Loss, and see that it’s about a 6X tradeoff.
(This process may be more involved, but that’s because how much to borrow and for how long was a personal decision. So, that data must be input for the calculator to inform the user of their effect.)
As you can see, these dollar and cents calculators prove the “cowboy math,” the tradeoff is indeed about 6X the gain in borrowing power. That’s an impressive factor, but not as impactful as real money. The loss of a 6X factor is rather academic to a retired person but the lost of $358,080 would be personal, felt every day for 20 years.
Even so, there’s often no choice but to take the longer term mortgage. Now that homeowners know how much is at stake, they can buy back that time from the amortization schedule by accelerating repayment of principal. They can tie their repayment to the Gain in Borrowing Power, and recapture more time at less cost than repaying the money willy-nilly.
In any event, whatever tact is taken, the more informed a prospective borrower is the better decision they’ll make.
