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15 Year VS 30 Year Mortgage & Why I Choose Neither - YouTube
Channel: Malcolm Lawson - REALTOR
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- In today's video, I'm gonna
go over the pros and cons
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of a 15-year mortgage
versus a 30-year mortgage,
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and at the end of this video,
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I'm gonna share with you a third option
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which I personally chose
which, in my opinion,
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gives me the best of both programs.
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So let's start off by talking
about the 30-year mortgage
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because despite the fact
that, with a 30-year mortgage,
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you are paying significantly
more money in interest
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over the lifetime of the loan,
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that is still the most popular
mortgage program in America
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and in fact accounts for over
90% or all home mortgages.
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So one of the biggest
benefits of a 30-year mortgage
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is obviously that your
monthly mortgage payment's
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gonna be significantly lower
than a 15-year mortgage
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for the same amount.
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If you were to get a $300,000
loan on a 15-year mortgage
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at 3.75%, your monthly mortgage payment
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would be $2,465 a month.
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Now if you were to take out
that same $300,000 loan,
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and let's say on a 30-year loan,
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and your interest rate is
let's say 4% 'cause typically
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the interest rate on a 30-yer loan
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is higher than on a 15-year loan,
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so at 4%, your monthly mortgage payment
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would be $1,715 a month,
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so that's a difference of $750
a month in monthly expenses
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that you'll be saving by
going with a 30-year loan
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versus a 15-year loan.
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Now, let's say you're actually okay
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making that higher mortgage
payment of $2,465 a month,
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but you still wanted to
use a 30-year mortgage,
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so what that means is that,
instead of a $300,000 loan,
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you could take out a $470,000
loan on a 30-year mortgage
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for the same monthly
cost as a $300,000 loan
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on a 15-year mortgage, and honestly,
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I feel like that is the
reason why most Americans
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actually go with the 30-year
loan versus a 15-year loan,
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not because they crunched
the numbers and determined
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that a 30-year loan is more in line
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with their financial goals,
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but simply because of the
fact that most Americans
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go with the most expensive
home that their mortgage lender
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says that they can qualify for.
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Now, there is another big
reason why you should consider
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a 30-year loan over a 15-year loan,
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and that is opportunity cost,
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and what that means is what
you could have invested
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that money in instead of simply
paying down your mortgage.
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So if you went with a $300,000
loan and went the 30-year
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instead of a 15-year, you're
now saving $750 a month,
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so you have to ask yourself
what else could you have
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invested that money in
and gotten a better return
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on that investment rather than simply
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paying down your mortgage?
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For example, could you have
invested that $750 a month
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in a 401k or maybe starting a new business
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or in buying crypto-currency
or maybe as a mortgage payment
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on a rental property that you purchase?
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Over the last 90 years,
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the S&P 500 has seen an
annual return of 9.8%
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if you reinvest any
dividends that you receive,
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and there are people who
will argue that your money
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is better off investing in the S&P 500
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to get a 9.8% return rather
than paying down your mortgage
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to avoid a 4% interest rate,
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and that may not sound like much,
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but by investing in the stock market,
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you're benefiting from
those two magical words,
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compound interest.
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If you invested that $750 a
month into a S&P 500 index fund,
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and you did see an annual return of 9.8%,
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you would've invested
$270,000 over those 30 years,
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but at the end of those 30 years,
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that money would now
be worth $1.4 million,
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and this is why a lot of
people make the argument
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that you're better off
extending your mortgage
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for as long as possible
so you have more money
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that you can invest in the stock market
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and get a better return on that money.
[211]
Now, another big benefit
to taking out as long
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of a mortgage as you can
is that you're actually
[216]
benefiting from inflation,
and just to recap,
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inflation is deliberately
worked into our monetary system
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to encourage people to
spend and borrow money
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because every single day that
they hold on to that money,
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that money itself is
actually losing value.
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Over the last 10 years,
we've seen an average rate
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of inflation of about 2% a year,
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so every single year your
money is worth 2% less
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than it was the year before.
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So just as an example, if
you borrowed $300,000 today,
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12 months from now, that
loan is gonna be equivalent
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to $294 in today's money
because 12 months from now,
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your money itself is
losing 2% of its value,
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and this really is an
intentional aspect of our money,
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and it's closely monitored and controlled
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by the Federal Reserve.
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If it was the other way
around, if we saw deflation
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and that your money actually
appreciated in value
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over time, people would be
less likely to actually spend
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that money, but since
we know that our money
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is constantly losing value,
we're encouraged to spend
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that money as quickly as
we can and not hold on
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to the money simply in a savings account,
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but you can actually
benefit from inflation
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by taking out a longer mortgage loan.
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If you were to take out that $300,000 loan
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right now on a 30-year mortgage,
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your monthly payment would be $1,715,
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but 30 years from now
on your last payment,
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that monthly payment
is gonna be equivalent
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to $850 in today's money
because money itself
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is depreciating in value 2%
a year for the next 30 years,
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and I know it's a little tricky
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to kinda wrap your brain around this,
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that your money's actually
losing value every single day,
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but that's the benefit of a
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fixed-rate mortgage for 30 years.
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30 years from now, your
mortgage payment's gonna be
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about the same as it is today,
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but that money is gonna be worth far less.
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In fact, it's gonna be
worth almost about half
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of what it's worth right now.
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So taking out as long of a loan as you can
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is one of the few ways that we can
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actually benefit from inflation.
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Now obviously, there are
some drawbacks in taking out
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a 30-year loan versus a 15-year loan,
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and the biggest one being
is that you're going to pay
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a lot more money in interest
on that loan on a 30-year
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than you would if you went with a 15-year.
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So on that same $300,000
loan over 30 years
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at a 4% interest rate, over
that lifetime of that loan,
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you're gonna pay the bank
$215,000 just in interest alone.
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Now instead, if you
went with a 15-year loan
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and you got a slightly lower
interest rate, let's say 3.75%,
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you're only gonna be paying
the bank $97,000 in interest
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over the lifetime of that loan,
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and the reason for that is one,
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your interest rate's gonna be lower,
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but you're also paying the
loan off twice as fast,
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so that's half as many loan
payments that you need to make
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that you're paying interest on.
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So that's a difference of $122,000
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that you're going to be saving in interest
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by going with a 15-year
loan versus a 30-year loan.
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Now, there's another
benefit to the 15-year loan,
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and that's if you actually don't intend
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to live in the home for
the next 30 years or so,
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but let's say you only live in the home
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for the next seven years,
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and that's how you're gonna be building
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a significantly more amount
of equity in your home
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over the seven years on a 15-year mortgage
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than you would on a 30-year mortgage.
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So if you look at it
from that perspective,
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it's almost like you're forcing yourself
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to save money every single month,
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but instead of having
it in a savings account,
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you're saving it in the form
of equity in your property,
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and if you're like most Americans,
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you have a hard time seeing
that money in your account
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and not spending it
and actually saving it,
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so for many people, this could
be a very effective tactic
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to automatically put money
away in a savings account,
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but it's in for form of
equity in your property,
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and you can't touch that equity
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until you actually sell your home.
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So if we go back to our
$300,000 loan after seven years
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on a 30-year mortgage and
assuming that the market value
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of the home has not changed at all,
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you would have built up $41,000 in equity
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over those seven years.
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If you instead went
with a 15-year mortgage,
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over those same seven years,
you would have built up
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$115,000 in equity in your home,
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and that's an additional $77,000 in equity
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that you would have
after living in the home
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for just seven years.
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So the real question is
which of these two options
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is right for you, and why
did I personally not go
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with either of these options?
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So I think it really comes down to
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what your personal financial goals are,
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and if your goal is to get
to the end of your life
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with as much money as possible
in your banking account,
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then yeah, I think that a 30-year mortgage
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is probably the best option for you.
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That way, you can take that savings
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that you're making every single month
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and reinvest it in other investments
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that are gonna give you a
higher ROI on your money
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such as stocks, crypto-currencies,
starting a business,
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or investing in other rental properties,
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but you just need to make
sure that you actually have
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the discipline to actually
save that money and invest it
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and not just squander that money
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or simply buy a more expensive home.
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Now getting to the end of
your life with as much money
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as you possibly can is actually not
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everyone's financial goals.
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For many people, their goal
is to simply get out of debt.
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For a lot of people, the
entire notion of ever retiring
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is hinged on them getting out of debt
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and eliminating that
monthly mortgage payment,
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and by going with a 15-year mortgage,
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you are going to accomplish
that goal significantly quicker
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than if you went with a 30-year mortgage,
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and after you pay off your 15 mortgage,
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there's nothing saying that
you can't now take that money
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that you were putting
towards your mortgage payment
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and now start investing
that in the stock market.
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However, starting 15 years later,
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you're not gonna benefit
from compound interest
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nearly as much as if you were
to start 15 years earlier.
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My personal goals lie somewhere in between
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these two extremes.
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Personally, I wanna
retire by the time I'm 45,
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and I'm 35 right now, so to achieve this,
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I need to do two things.
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I need to increase my passive income.
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Right now, I receive about
$2,000 passive income
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from some rental properties, from YouTube,
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and a few other areas,
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but I also need to decrease
my monthly payments,
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and like many Americans, my
largest payment right now
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is my mortgage payment.
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If I could eliminate my mortgage payment,
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that significantly reduces
the amount of passive income
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that I need to bring in
every month in order for me
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to retire or at least semi-retire.
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And this is why I chose
to go with a 30-year loan,
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but I'm making extra payment
towards the principles
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with every monthly mortgage payment,
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and this is gonna allow
me to pay off my mortgage
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significantly sooner than 30 years,
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and the biggest reason
why I like this option
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is it gives me more
flexibility with my money,
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and for me, that
flexibility is worth paying
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the extra 0.25% in interest that I get
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with a 30-year loan versus a 15-year loan.
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If I'd gone with a 15-year mortgage,
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I'd be stuck with that higher
monthly mortgage payment,
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no matter what my current
financial situation is,
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so if I lose my job or I have
a lull in my income coming in
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or I see a great investment opportunity,
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my money would be tied up in
that higher mortgage payment
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for 15 years, and I wouldn't be able to
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take advantage of those other
investment opportunities.
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So as an example, when
I left the Air Force
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and started my career
as a real estate agent,
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that was very uncertain
times for me financially,
[665]
and I actually stopped my extra payments
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towards my mortgage for
about a year and a half
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when I first started my
career as a real estate agent
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just because I wasn't as
certain that I was gonna have
[675]
consistent income coming in,
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and I wanted to reduce my monthly expenses
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as much as I could,
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but now that I've kinda established myself
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as a real estate agent
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and I'm consistently bringing in income,
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I've actually ramped up my extra payments
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towards my mortgage.
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Another example is that I
currently own one rental property,
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but let's say I saw
another rental opportunity,
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and I knew that I could
make money off of this,
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and I found a great
investment opportunity.
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I could stop making those extra payments
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towards my mortgage and
instead put that towards
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a new mortgage for this
second investment property.
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So for me personally, having
that flexibility with my money
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and making those extra
payments towards my principle
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to pay off my mortgage sooner,
making that optional for me,
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that is incredibly valuable
and absolutely worth
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the extra quarter of a percent
in interest that I'm paying,
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but no matter what your
personal financial goals are,
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if you wanna learn 10 hacks to
pay your mortgage off early,
[728]
click right here to check
out my video on that,
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and if you wanna learn more financial
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and real estate strategies,
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subscribe and hit that
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every time I upload a new video.
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Thanks so much for watching,
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and I'll see you guys
over in the next video.
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