How to model a home loan
Posted: Thu May 09, 2019 9:56 am
I'm in the process of buying a house and I'm trying to determine how to structure the home loan. I have been trying to use FRP to model the long term impacts of different scenarios. The problem I'm having is that the outcomes tend to be the opposite of what I would expect.
Consider two 30-year loan scenarios: 15% down at 4.5% vs 20% down at 4.375%. I would expect that putting less down at a slightly higher interest rate would yield the larger average Median Ending Portfolio Value and Probability of Success but it's always the opposite.
Here's how I've attempted to model the loan: I've separated out the principal and interest (PI) from the taxes, insurance, and maintenance (TIM). I've modeled the PI as a No-COLA expense for 30 years, and the TIM to track inflation to End of Plan (hopefully this is a forever home). I've also added an expense entry for the sum of Down Payment, Settlement Costs, Prepaids for Start of Plan.
I have my investing style set to Above Average Risk. I would assume that the average returns of the market (9.5%) would more than make up for the differences in interest rates but that's not what I'm seeing.
Is there something I'm missing in my modeling that could account for this behavior?
Consider two 30-year loan scenarios: 15% down at 4.5% vs 20% down at 4.375%. I would expect that putting less down at a slightly higher interest rate would yield the larger average Median Ending Portfolio Value and Probability of Success but it's always the opposite.
Here's how I've attempted to model the loan: I've separated out the principal and interest (PI) from the taxes, insurance, and maintenance (TIM). I've modeled the PI as a No-COLA expense for 30 years, and the TIM to track inflation to End of Plan (hopefully this is a forever home). I've also added an expense entry for the sum of Down Payment, Settlement Costs, Prepaids for Start of Plan.
I have my investing style set to Above Average Risk. I would assume that the average returns of the market (9.5%) would more than make up for the differences in interest rates but that's not what I'm seeing.
Is there something I'm missing in my modeling that could account for this behavior?