Hey, Kyle here with winthehouseyoulove.com.
Today, we're talking about a 30 year versus a 15 year mortgage, what we're
first going to talk about it is the differences then we're going to go
into numbers about how a 30 year loan can actually save you a lot more money
than a 15 year with a certain strategy.
And then at the very end, we're going to talk through three questions that
are going to help you really kind of figure out which option is best for you.
Because we can go into numbers all day long and talk about differences
and opportunity costs and all the things that you can consider in here.
But ultimately, you're just trying to make a quick decision on what's best for you.
So we're going to talk through it, go through the numbers and then help
you make that choice here at the end.
So first let's talk about the differences between a 30 year and a 15.
So a 30 year is the most common.
Most people go with a 30 year loan.
And the reason why is because that payment is lower, right?
When we're talking about the 30 year versus the 15, we're
talking about how long does it take you to pay back that loan?
A 30 year loan is going to be less costly per month than a
15, which is not as common.
Okay.
Now let's talk about the rate differences here.
So in this example, I'm pulling up some notes here on my computer.
What we're going to talk through is an example of a $300,000 house with 10% down.
On a 30 year loan, this would get you an interest rate of about 2.875%.
On a 15 year, you'd be looking closer to a 2.5%.
So you're getting a lower interest rate with a 15 year loan because
it's less risky to a lender.
Now, as far as the payment, you'd be looking at about $1,120 per month.
On a 15 year loan, you'd be looking closer to $1,800 per month.
So that's a difference here of $680 per month.
So you can see that 15 year loan is $680 more expensive per month, which
changes how much you can afford.
If on a 15 year loan, you could afford a $300,000 house, on a 30 year
loan, since your payment is less, you could afford a $400,000 house.
Okay.
So you have more affordability with the 30 year.
You can afford a larger house because the payment is lower.
All right.
So on a 30 year, you can always refinance this or pay extra.
People sometimes forget that you're probably not going to hold onto
that specific loan for 30 years.
You'll most likely end up refinancing it, maybe to drop off mortgage
insurance or to change the loan type or to lower the interest rate.
Now on a 15 year loan, something that's interesting that you can
consider is at the end of 15 years, your mortgage is paid off.
You don't have that payment anymore.
Right?
You don't have that, let's say estimated $1,800 per month payment.
Well, you can now go take the $1,800 and invest it in something instead
of letting that money do nothing.
So with both of these loans, really the payoff is up to you, right?
With a 30 year loan, you can pay it off early, same thing with a 20 year
or a 25 or a 15 or a 10 year loan.
You can pay them off early if you want to.
Something that's really beneficial about a 30 year loan, though is you have a
lower obligation to pay back, right?
So if we're talking about this example, in this example, you are obligated on
a 30 year loan to pay $1,120 per month.
On the 15 year loan, you're obligated to pay $1,800 per month.
So what happens when an event like COVID happens and now all
of a sudden money is tighter.
It's a lot nicer to have a 30 year loan to have that flexibility if you
need it than to have the 15 year loan and not have that flexibility, right.
That's an extra $680 per month that you have as some wiggle
room if you ever need it.
So now let's talk about some of the differences through the years.
And we're going to go into some special circumstances here in a slide or two.
But first just talking about the differences we can see this 30
year is on this big purple line and the 15 year is on the red.
Okay.
So we can see over a period of three years.
So three years up here is a difference of $5,000.
Over a period of 10 years, that's a difference of $25,000.
Okay.
Over 20 years, we're seeing a difference of $66,000.
Okay.
And this is just in the interest cost of these loans.
And then over 30 years, we're seeing a total difference in $83,000.
So you can see the interest savings on that 15 year, on the surface, looks
a lot better, but what's not being considered here is the opportunity
cost when that mortgage gets paid off.
Right?
Because at the 15 year mark, you no longer have a payment.
Well, we could take this money and invest it.
And the same thing on this 30 year, we have this entire 30 year period where
we could take that $680 per month that we would be putting into a 15 year
and actually go in and invest that.
So we're going to talk about those strategies here in just a couple minutes.
But first, before we dive into that, let's have a CalmMoment because it can be really
overwhelming to take a look at all of these numbers, because not only are you
considering 15 versus a 30 year, you're also looking at different down payments.
You're looking at different lenders, different costs and fees, and everything
adds up and it becomes this whirlwind of a bunch of numbers thrown at you.
Okay.
And you don't have to know all the answers.
You don't have to figure all of this out.
Okay.
Just doing what you're doing right now.
The fact that you're going out and looking for more information is putting
you way ahead of everybody else, who you're competing in this market with.
So just know it is perfectly okay to ask questions, ask questions to your
lender, to your realtor, to look up questions online and get a general
sense for what you're going for.
The best thing to do is at the end of everything, try to make simple decisions.
Okay.
They don't always have to be these decisions based off this really
fine, granular, detailed data.
All right.
Because that is just going to drive you insane and make you question everything.
At the end of this video, you're going to get a general idea of, hey,
I think we should go with this option.
I think this option is going to work for us and then stick with that.
You don't have to, you know, crunch every single number in every single
scenario because what that's going to do is create more anxiety than relief.
Okay.
So let's talk about three main options I want you to consider.
Now you're going to see tons of different strategies all over the internet
for how you can set up and pay back your mortgage, because you could do
a 20 year or a 25 year or a 15 year.
The options are endless.
I just want you to consider three main things.
If you're looking at a 30 year versus a 15 year, the first one is
the difference in paying off debt.
So if you have high interst debt right now, like a credit card or student
loans or a car loan, then I want you to look at maybe getting a 30
year loan and then taking that extra savings and paying down your debt.
Paying down high interest debt is going to be way more beneficial to you then
taking that money and investing it or putting it back into your mortgage
or paying it as a 15 year mortgage.
All right.
I want you to take care of that high interest debt before you do anything else.
The second option is looking at taking that difference of the 30 years.
So the 30 year had $680 worth of monthly savings.
What if we took that and we invested it into the mortgage.
So we pay off the mortgage early.
We'll actually pay off the mortgage in 16 years if you take that money
and put it back into the mortgage and then take the rest of your
savings and put it into stocks.
And then we're going to look at too, is the difference of if we do a 30
year and for 30 years, we're going to exclusively invest into stocks.
And the differences here are pretty amazing.
So in this chart right here is a lot of numbers, but stick with me.
I was amazed to see these numbers here.
So what we're doing is we're comparing first is a 15 year loan.
And this is assuming that after the 15 years is done, we're going to invest
the rest of the money into the stock.
So I have kind of a little blurb down here that explains everything.
So this is 15 plus is investing $1,800 per month.
So what our principal and interest payment is into stocks from year 16 to year 30
after the mortgage is paid off, right?
Because you're gonna pay off your mortgage in 15 years.
So let's take what we were paying our mortgage and invest
it into the stock market.
This 30m, this is talking about taking a 30 year loan.
And what we're going to do is invest $680 a month and put it back into the mortgage.
What that's gonna do is it's actually going to pay off your mortgage in 16
years, even though you took out a 30 year term, and then after year 16,
you're going to take that full payment that you don't have to make any longer,
$1,800 per month and invest it into stocks for the remaining 14 years.
And then this 30, I'm calling it 30s, is investing the $680 a
month into stocks for 30 years.
Okay.
So those are the three main strategies that we're going to look at here.
So first in this first column, we have total cost.
This is estimated closing costs, plus interest, plus
estimated mortgage insurance.
So we can see obviously this 15 year has a lot lower cost.
The 30 year when we're investing an extra amount into it each month,
it gets paid off in 16 years.
So it's interest cost is low too.
The 30 year has a really high interest cost because again, we're
carrying all that debt over 30 years.
Now this investment gain is taking these numbers here from the bottom.
And assuming that we invested it into the stock market and
earned a return of 7% each year.
All right.
So, on this 15 year, we're looking at an interest gain of about $236,000.
On the 30 year, we're looking at $200,000 and on the 30 year investing
everything in a stocks, you're looking at a gain of $550,000.
And that's because you've been saving $680 and putting it into the
stock market every single month.
You're gaining that compound interest over a period of 30 years to have
an incredible amount of gain.
Now at the end of 30 years, you've also paid off your home.
Okay.
So you have a real estate asset of $300,000, and we're not going to account
for any appreciation or inflation because that kind of muddles things a little bit.
We want to talk about everything in today's dollars so we can make better
and easier to understand idea or decision moving forward right now.
And then down here is your total contributions into stocks.
So we have to remember, like we also, not only do we collect interest on the
money, we put it into stocks, but we also contributed money into stocks as well.
So $324,000 on the 15 year, $300,000 on the 30 year and a little bit less on
the 30 year into the equity, $245,000.
So, when we consider all of these costs, along with the investment
gain that we have here, we can see that when we do a 15 year loan and
we invest after the 15 years is done, we have a total net gain of $798,000.
Okay.
Or total net worth of that property of $798,000 when we do a 30 year.
Okay.
And we pay it like a 15 year and then invest once it's paid off, we have
$730,000, but here's the winning one.
When you take a 30 year loan.
Alright.
And you take what you would pay for a 15 year and then invest it
into the stock market for the 30 years, you're going to come out
ahead with a net worth of $950,000.
Okay.
So you're getting so much more money by going with a 30 year loan.
Right?
I know there's a lot of numbers in here and it can kind of be complicated to
look at, but the long, the short of it is that a 30 year loan paid like a, you
know, take your 30 year loan and see what it would be to change that to a 15 year.
What's the difference in savings that you have there?
In this example, it's $680.
If you took that $680 and invested it into the stock market every single month,
you're going to come out ahead so much stronger than if you do a 15 year loan, or
if you do a 30 year paid like a 15 year.
It's because the rate of return that you're going to get in the stock market
is so much better than the interest rate that you're paying on your mortgage.
Especially when that's compounded over a long period of time, right?
Your interest rate on your mortgage in this example is
running in the high 2% range.
That's what interest rates are coming in around right now, where
your returns in the stock market are going to be closer to the 7% range.
Okay.
So, the short of it is a 30 year loan, investing the difference
into the stock market is going to be so much better than a 15 year.
And it's going to give you the flexibility to be able to, you know,
if you have a month where, hey, you know, things are a little bit tighter.
Things like COVID happen.
You're able to rein things back in a little bit and have flexibility.
You're not obligated to that higher payment.
You only have the obligations with the lower payment.
Everything else that you choose to do on top of that is extra and optional.
So some questions to ask yourself if you're considering 30 versus
15 and still on the edge about it.
The first thing is, do you have high interest debt that you need to pay off?
Because you need to do that before you consider investing because
your credit card is probably hovering around 20% interest.
You need to pay that off before you look at getting 7% interest
in an investment account, alright?
Also is the 15 year payment comfortable?
So if you're looking at a home and let's say it's a $1,000 per
month, but the 15 year payment is coming in around $1,700 per month.
If $1,700 is too high for you, then maybe you want to look at a lower purchase
price home, because you're not going to be able to do these investment strategies
if you can't afford the 15 year payment, even if you take the 30 year, if the 15
year payment is too high, then you won't be able to invest like this strategy.
So if the payment is comfortable, are you comfortable with investing
into equities and stocks?
Are you comfortable learning how to use things like an index fund and
taking that money and investing it?
And if you're not, there's tons of resources available on YouTube and, you
know, if you research on Google, but, um, if this is something you're considering,
make sure you're comfortable saying, hey, if I'm going to take $680 and put
it into the stock market, you know, and are comfortable with how that works.
And when you invest in the stock market, keep in mind that, you know,
this isn't like Wolf Of Wall Street.
You don't have to be picking single stocks and speculating.
A very common strategy that works really well is to look at mutual funds or index
funds, something like an index fund is going to track a large group of stocks.
So what you're doing is following a whole group of the economy instead
of you speculating on which stocks are going to do well, which is closer
to gambling than it has investing.
You're going to track the economy as a whole.
And what we've seen over a long period of time is historically the
stock market performs very well hovering around 7% to 10% gain.
Okay.
So you want to learn more about buying a home, a really great video
for you to watch is understanding the typical downpayments of home.
You can watch this video right over here.