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