15 YEAR VS 30 YEAR MORTGAGE - YouTube

In this video we're talking about a 15 year versus a 30 year mortgage.

Which one is better?

Stay tuned.

Welcome back to WhiteBoard finance.

My name is Marko and I'm here to help you master your money and build your wealth.

Today we're comparing the pros and cons between a 15 year mortgage and a 30 year mortgage.

Buying a home is one of the biggest purchases you're ever going to make in your lifetime.

So it really depends on what kind of mortgage you get.

The ideal situation is to pay for a home and cash.

But a lot of people don't have that kind of money laying around.

Simply put a mortgage is a loan against your home using the home as collateral.

So if you don't pay that mortgage the bank has recourse and they can kick you out of

your house which is known as foreclosure.

30 year mortgages are the most common with about two thirds of applications being for

30 year mortgages.

And upon final closing the statistics show that 30 year mortgages are used 86 percent

of the time when closing the 15 year mortgage at this point.

Kind of sounds like the ugly duckling of the bunch because the 30 year is so much more

popular but that's not necessarily true.

And I'll show you why.

Let's get right into it with the 15 year mortgage.

Let's start with some of the pros.

The first pro is that the banks will give you a lower interest rate on a 15 year mortgage.

The reason for this is because it's less risky of a loan.

So what does that mean.

And why is it less risky it's less risky because the term is shorter.

So say for example you're a banker and you're lending out someone money to buy a home.

It's less risky as a banker because the term is not as long as a 30 year mortgage there's

less things that can happen to you whether it's job loss sickness.

I hate to say it but even death.

So a shorter term mortgage a 15 year mortgage is looked at as less risky to the banks.

The interest rates are also typically a quarter of a percent to a full percent lower than

a 30 year mortgage.

And you can also pay these off in a shorter amount of time.

You have faster principal pay down as well.

So what this means is the principle of a loan is the amount that you actually borrow.

So say for example you borrow 100000 thousand dollars as a mortgage.

There's going to be interest on top of that 100000 dollars as well.

So you have two parts to the mortgage or two parts to the loan.

You have the principal and the interest with a 15 year mortgage more of your monthly payment

goes down towards the principal pay down which means you're actually paying off the loan

faster as opposed to a 30 year mortgage in a 30 year mortgage in the beginning of it

at least a majority of your monthly payment is actually going towards the payment of the

interest not the principal.

Now that I've touched on some of the pros of a 15 year mortgage here is the one biggest

con and that's actually having a higher payment every month.

So it just makes logical sense if you're still borrowing the same amount of money.

Let's use that hundred thousand dollars for example.

Obviously your payments are going to be lower if you stretch it out over 30 years rather

than stretching it out over 15 years.

It's just math.

However I will get into some of the reasons why some people may actually prefer the 30

year mortgage with a lower payment rather than having this con of the higher payment

of a 15 year mortgage now that we've talked about some of the pros and cons of a 15 year

mortgage.

Let's get into some of the pros and cons of a 30 year mortgage.

The first one being lower payment.

So the lower payment actually allows you to purchase more home than you can originally

afford with a 15 year mortgage again because your payments are stretched out over 30 years.

So this also frees up more funds for you to invest.

So as long as you're earning more interest in your investments than what the interest

is on your mortgage that means you're netting a positive return.

So think about it logically if your interest rate on a 30 year mortgage is say four percent

and your investments are earning you 7 that's a difference of 3 percent over the course

of that 30 years.

But again that takes a lot of discipline to do some investments you can make or in the

stock market you can put it into a 401k with an employer match or you can even put it into

a 529 plan for your child's future education.

Now let's talk about some of the cons of a 30 year mortgage the first one is that it

takes much longer to pay off it's obviously longer mortgage by 15 years.

When comparing it to a 15 year mortgage this could actually last you into retirement.

And if you asked for my personal opinion I do not want to be paying a mortgage into my

retirement.

Also the other con is that it's a slow principal pay down.

So as I mentioned earlier in the 15 year mortgage those principal payday loans are a lot quicker

because a majority of your monthly payment is going towards the principal of the loan

not the interest in the case of a 30 year mortgage.

A majority of your payments are actually going towards the interest first and then the principal.

So you don't.

You're not building a lot of equity in this process.

You've heard me mention multiple times in this video talking about investing the difference

between the two payments of a 30 year mortgage versus a 15 year mortgage.

Let's go through a real life example with real numbers that I did before recording this

video.

Did that just for simplicity.

We're not going to do any math but you'll be astounded at the difference of interest

in a 15 year mortgage versus 30 year mortgage.

So let's take a quick example.

Everyone is buying.

Three hundred seventy five thousand dollars.

In order to put 20 percent down on this house.

We're going to end up putting down seventy five thousand dollars as a downpayment.

So if you take seventy five thousand dollars that you're putting down your mortgage on

this house is three hundred thousand dollars.

The 30 year loan is probably going to be right around 4 percent.

Let's just use 4 percent for easy numbers.

The 15 year mortgage is going to be about three point twenty five percent the interest

over the course of a 15 year loan at three point twenty five percent is seventy nine

thousand four hundred and forty one dollars.

OK so you're probably thinking to yourself if I just double that.

OK because a 15 year loan times two the interest rate is just going to be eightieth 79000 times

too.

Right.

Well you're actually wrong.

The 30 year loan interest that you're paying over the course of those 30 years is two hundred

and fifteen thousand six hundred and nine million.

That's a difference of one hundred thirty six thousand dollars guys.

So you have to really ask yourself am I going to be disciplined enough to consistently invest

that difference in order to make up for having such a longer or higher interest payment.

Now if you take the two payments the 15 year loan payment is two thousand one hundred and

eight dollars the same loan on a 30 year payment is going to be 1432 dollars.

That's a difference of six hundred and seventy six dollars.

Now let's go through a real life example if you were disciplined and invested that 676

over the course of 30 years.

So if you remember the difference is six hundred and seventy six dollars.

If you invested that at 7 percent let's just say you're earning the market average of 7

percent over the course of your lifetime.

This accounts for bull markets bear markets.

You know war or tragedy whatever 30 years at 7 percent gets you eight hundred and twenty

nine thousand five hundred and eleven dollars pre-tax.

If you were to put that same amount in a tax free or tax deferred account you're going

to end up with five hundred and fifty eight thousand one hundred seventy nine dollars.

So you see how powerful that is.

I didn't account for risk or anything like that but I just used an average of 7 percent.

So if you have the discipline to invest that difference between your payment of a 15 year

and a 30 year mortgage you're obviously going to net a lot more money over the course of

30 years.

However life happens to everybody and it's pretty difficult to have that discipline.

Like I said earlier that usually ends up in a vacation.

It ends up in a new car.

It ends up in a college education fund.

You name it.

So as long as you have the discipline it makes more sense to take the 30 year mortgage and

invest the difference.

Or you can have the best of both worlds.

So a lot of my friends implement this strategy.

What do I mean by best of both worlds.

What I mean is that you take out a 30 year mortgage and pay it off like a 15.

So you still get into the house that you want when you can afford the payments of a 15 year

mortgage but you choose to take out a 30.

What this enables you to do is pay off the home like a 15 year mortgage but it still

gives you a cushion for when life happens.

So say for example if your car breaks down and that costs you know a thousand dollars

you can take that cushion and instead of paying your mortgage off like a 15 year mortgage

for that month you can decrease the payment.

Still pay for your car and still be on time with your mortgage payment.

That way your credit is preserved and you're getting the best of both worlds.

So hopefully you got something out of this video.

There's clear advantages to both 15 year and 30 year mortgages.

But keep in mind it is called Personal Finance for a reason.

There is no one size fits all.

Personal finance should be personal to your life and your life situations.

In my opinion I like to be mortgage free even though the math makes sense and taking out

a 30 year mortgage and investing the difference.

There's just something about the relief of not owing anybody anything and living in your

home.

Debt free.

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Thank you so much for watching and have a prosperous day.

Okay so.

This 76 difference I can either get Lampel for robbery.

I'm really thinking as you go.

No I think to you goes yeah I'll be good in the winter.