Mortgage #5 - 15 Year Mortgage vs. 30 Year Mortgage

[PBowyer123]

You say inflation lowers the value of money, but is it not correct that price inflation and wage inflation move at more or less the same pace? And even with the residual difference of these inflations, would the nominal loss of paying 30 years of interest as opposed to 15 not outweigh the differences between price and wage inflation? Thanks

[YesYouNeedJesus]

@PBowyer123 Inflation has increased an average of 2.5% since 2000. According to the Census Bureau, incomes have not increased at all since 2000. So no, they do not move at the same pace. If they did, it still does not affect the issue at hand. To compare apples to apples, both the 15-year mortgage holder and 30-year mortgage holder would see wage increase. So that's a moot point. This isn't about paying 30 or 15 years of interest. Properly designed, the 30-year mortgage holder stops paying...

[YesYouNeedJesus]

@PBowyer123 ...interest around year 13 of the 30 year time frame. Why? Because they invested the difference between the 2 payments.

[mountainfinancial]

Pretend we had the exact same scenario during those few years when you were paying off your mortgage. I made the same payments but to myself. We both lose our job at year two: who can whether the storm longer "when life happens"? I could easily be in your situation by simply writing a check to the bank but you could not be in my situation.

[mountainfinancial]

Felix - again, great point but from the banks perspective. Liquidity always wins "when life happens". Money being dumped into a house is not liquid. The person with the cash always beats the one without the cask. Your position is far riskier than mine...I can prove it with simple math NOT concept.

[felix1177]

How about the fact that I paid the bank back within just a few years, they didn't make much of a profit, but at the same time, I'm sure that they are happy because they got their money back and didn't get another foreclosure in their hands. The best way is to avoid the bank altogether. You leave out another equation, bad things can happen in your lifetime. RISK. Loss of job, an accident, etc. You don't know what the future holds, so if you have a paid for house, the bank can't take it.

[felix1177]

I also firmly believe that all forms of debt are bad. There is no good debt/bad debt.

A mortgage is normally the largest monthly payment. Once it is gone, you have the power to save and invest/buy with cash anything you want.

[mountainfinancial]

@felix1177 I fully understand your position as it is held by so many; however, I have yet to find anyone who believes that banks have a faulty model of making money. Why would they give me the incentive (lower rate) to go with the 15 year over the 30 if they make more money on the 30? Doesn't make sense. The reason is because they actually profit about 10 fold on the 15 and not the 30 and that's why they give you the incentive. It has nothing to do with which one costs you more interest.

[YesYouNeedJesus]

@felix1177 There actually is good debt and bad debt. Just because Dave Ramsey says there isn't, doesn't make it so! Talk to any successful business owner in this country. Each one will tell you about the "good debt" that helped them launch their business and career. Every successful business in this country started out with a business loan. That's how businesses are launched. A mortgage is another "good debt." Continued in the next post...

[YesYouNeedJesus]

@felix1177 Doesn't Dave Ramsey say to look at what wealthy people do and follow suit? Well, all wealthy (except Ramsey) have mortgages. Why? Because they understand money. When you calculate the tax credit back into your mortgage payments, your cost of borrowing is lessened. That's pretty simple. The interest rate you pay on a 4-5% mortgage is really only 3-4% because of it's tax favored status. Can you earn a spread on 3-4%? Ramsey says you can. Continued in the next post...

[felix1177]

@YesYouNeedJesus I don't get all of my ideas from Dave Ramsey, I came up with a lot of them on my own. I never heard of him until after 2 years into having a 15 year mortgage. The "oh so wonderful" tax deduction on mortgage interest is no bargain. I figured out that donating the bank a dollar in interest to save a quarter from the government is not an advantage at all.

[mountainfinancial]

@felix1177 The comment you made here is viewed by so many as accurate but it's the wrong thing to focus on. You see, it has nothing to do with how much in interest you pay compared to how much in tax you save. What you must understand is that your tax deduction lowers your cost to borrow. If my mortgage is at 5% and my tax deduction is 30% then my net cost to borrow is 3.5%. If my money is earning 3.5% or higher then why would I ever pay an extra dime to my principle? Seriously.

[felix1177]

@YesYouNeedJesusThe "extremely low" interest rate of 4-5% or whatever the case may be is PER YEAR. So 30(years) X 4=120% or 30 X 5= 150% plus the original loan amount 100% So 220% to 250% of what the house cost me doesn't make me jump for joy. Dave Ramsey went to school in the Real Estate business and learned the same things you did, but it doesn't make it right. You can go ahead and pay 2- 3 times what you bought your house for and get your "Tax Advantages," I will just simply not join you.

[mountainfinancial]

@felix1177 Just to clarify, Ramsey has never done what we teach..that's why he got so screwed up in the first place. He totally out-leveraged himself. He's now got it wrong twice. Felix, why does the bank want your payments as quickly as you can send them in? Think about it. If they don't have your best interest at heart then have you ever took the time to understand why they would want you to pay down your mortgage quickly? It doesn't make sense if they make so much more money on a 30 yr.

[YesYouNeedJesus]

@felix1177 My 9% spread is also PER YEAR. If you and I each had $300,000 and you paid cash for yours and I got a mortgage, who is better off? Well, you will earn a whopping 0% on your $300,000 for the rest of your life in that home. I will gladly pay a bank 3% interest (net cost of borrowing when tax-deduction is factored in) on $300,000 while I earn 12% like Dave Ramsey says I can in mutual funds. You're paying 0% interest to earn 0%. I'm paying 3% to earn 12%. Who is better off after 30 years?

[felix1177]

@YesYouNeedJesus So somehow it makes sense to pay over a million dollars throughout the 30 year lifespan for a $300,000 home while I pay for the house with cash and pay myself the mortgage payments earning that million dollars. Don't use a banker's calculator, use a real world calculator. By The Way...What Would Jesus Do?

[YesYouNeedJesus]

@felix1177 You're missing the point again. We each have $300,000 to start. You pay cash for the house and I get a mortgage and earn a guaranteed spread. My mortgage payment is being made by the investment and the difference is my spread. The difference accrues compound interest until retirement. I will have 6 or 7 figures more than you at retirement in a guaranteed and predictable environment, just from this $300,000! You say that you will pay yourself the mortgage payments, but you forget...

[YesYouNeedJesus]

@felix1177 ...that you are making those mtg payments from your income. I have income too. Remember, my $300k is paying the mtg payments from the interest I earn by my spread. I can pay myself the same you are because we both work. Simple really. You need to realize that mathematically, no matter how you look at it, I will build much more wealth than the guy who pays cash for the house. So if you have a different reason for paying cash, let me know because it can't be to end up with more money.

[YesYouNeedJesus]

@felix1177 You ask What Would Jesus Do? Well, I think He would recommend investing the money. In the parable of the talents, the guy who buried his money because he wanted it to be safe was called "wicked" and "lazy" by Jesus. The others invested their money and they were praised.

[felix1177]

@YesYouNeedJesus I have another question. Would it make sense to borrow money to invest in stock if the house was paid for?

[YesYouNeedJesus]

@felix1177 No, it would not make sense to borrow money to invest in stock if the house was paid for. I say that for 2 reasons. First, I don't invest in the stock market. Too much risk. Second, there's nowhere that I know of, where you can borrow money at a low enough rate to earn a guaranteed spread apart from a mortgage. It's really a beautiful thing. Everyone has to live somewhere, a house is the largest expense we'll ever have, and the rates have historically always been the lowest...

[YesYouNeedJesus]

@felix1177 ...cost of funds available. Not to mention the tax advantages that make the EPR (effective percentage rate) even lower. It's a perfect opportunity to build wealth in the safest way possible. It's really a no-brainer. And instead of paying all the extra money I can as extra principal payments, I invest them in a side fund that's liquid. That's my safety. If I ever lose my job or need money in an emergency, I will have it available. Equity is not liquid and earns 0% interest.

[YesYouNeedJesus]

@felix1177 Dave Ramsey says you can still earn 12% on your money. So why wouldn't I want to earn an 8-9% spread on my money? Banks pay their members 1-2% for their money (CDs, Money Markets, Savings accts, etc.) while they turn around and earn a lot more. Why wouldn't I want to do the same thing a bank does? I will gladly pay the mortgage company their 3-4%, while I keep my money and earn a spread. With the low cost of a mortgage, I can even earn a guaranteed spread and kick RISK to the curb.

[felix1177]

I shouldn't have called your argument lame, I should've said that I respectfully disagree with it. Here is where my math stands.

[mountainfinancial]

@felix1177 Thank you for saying that...I do appreciate it. We will always make great attempts to present an argument based upon sound reason and math NOT emotion and hypotheticals. Everything that has ever been created has had someone who disagrees...that's the beauty of freedom.

[felix1177]

15 year vs 30 year MortgageComparison@7% interest: Monthly Total Payment

15 year $988 $177,840

30 year $732  $263,520

Difference $256 $85,680

Source: "Total Money Makeover" by Dave Ramsey page 191 The 15 year mortgage is a huge saving over the 30 year mortgage

[mountainfinancial]

@felix1177 I'd like to show you the "other side of the coin" here. You see, the math you laid out about the interest payment differences between a 30 and 15 are TOTALLY irrelevant. It's the wrong thing to focus on. Dave is making a HUGE mistake here. Here's why: it has NOTHING to do with the interest paid but instead it has everything to do with the "net-cost-to-borrow". You MUST learn the difference because it means far more than $85,680 to you! Far more. Take the time, we'll show you felix.

[felix1177]

If you pay your home off within the first 5 years of owning it and investing the money you would've spent in a mortgage for the next 25 years, then how is that riskier? With compound interest you will have so much more money even accounting for inflation.

[mountainfinancial]

@felix1177 - Your response seems to make logical sense and I'm sure would be accurate in some other setting with other forms of debt. Unfortunately, that's not the setting with mortgages. The necessary response cannot be made with the limited amount of characters here. Google "Owning a Home: The Most Misunderstood American Dream #4 (and #5)". There's a detailed analysis of the math for you. Your subjective claim of "you will have so much more money" is not accurate..and 8th grade math proves it

[mountainfinancial]

@felix1177 - Challenge me. I'm ready. Look, if it means hundreds of thousands of dollars to you then why not? If it means you can prove me wrong and have some satisfaction doing so since no one has been able to yet, then sweet...have at it. ~ Kelly

[mountainfinancial]

@felix1177 - I removed my first response because I'm curious what you believe our "argument" to be. Also, it's math that can prove to you that a 15yr mortgage is FAR riskier than a 30yr, accelerating your payments if FAR riskier than maintaining control of your money, and a paid for home is FAR riskier than a mortgaged home. Again, it's not me, it's math. It's not concept or product, it's math. You can call us lame but you can't deny math. Those who deny math need to get their head checked.

[felix1177]

Wow what a lame argument. How about the loss of risk, you do lose something with a 15 year mortgage or paying the house off sooner. It's called RISK. If you have a PAID FOR HOUSE, the bank can no longer take it from you. If you didn't go way over your head and buy a house you couldn't afford, then you have the opportunity to pay for it in a few years. I challenge anyone to pay their house off. If they just cannot stand living in a paid for house, I suggest getting their heads checked.