Greg Cowart on Zillow
Greg Cowart - Mortgage Broker or Lender at The Securus Group
Greg Cowart - Roseville Loan Guy

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Being seduced by a 15 year mortgage?

Mortgage rates are sitting at record lows. If you haven’t refinanced lately, maybe you should consider it. And when you do, don’t be tempted to obtain a 15-year mortgage. Instead, stick with the 30 year fixed. Let me tell you why…

We’ll say you’re refinancing a $250,000 mortgage and you have two choices, a 30 year fixed and a 15 year fixed…

With the 15-year loan, it LOOKS LIKE you will save $144,614 in interest by paying $539 more each month.

But that just isn’t the case. This illustrates the interest you’d pay over 30 years compared to the interest you’d pay over 15 years. It is more accurate to compare what happens with each loan after the first 15 years.

Sooo…. For the first 15 years of a 30 year mortgage, you’ll pay a total of $151,280 (or 68% of your payments) in mortgage interest. That means 68% of your payment is tax-deductible. With the 15-year loan, only 26% of your payment is interest — meaning MUCH less is tax-deductible.

And what does that mean to you? Assuming you are in the 25% tax bracket…

At The End Of The 15 year Loan:

Not only does the 15 year mortgage force you to pay an extra $539 a month, money that you can’t use on anything else during the month and you’ll have ZERO flexibility with if you need the cash, you’ll also spend an extra $116,077 out of your pocket! 

I know what you’re saying, “but now my home is paid off, it was worth it.”

Well, if you were to invest that $539 difference in monthly payment at a conservative annual return of 7%** you’d accumulate $170,843 — enough to pay off the $169,710*** balance that’s left on your 30 year mortgage with, and pocket the extra $1,100, anyways.

But you wouldn’t do that because then you would see the folly in the 15 year mortgage. Not only does the homeowner lose HUGE in the tax department, they didn’t benefit from paying that $539 a month because they have enough to pay off their mortgage if they wanted to. And now it’s 15 years later and your income will probably be much higher and your fixed rate mortgage, with 15 year left, will be a much lower percentage of your income, so it’s much easier to pay.

When weighing whether to refinance or purchase new home, contact a professional mortgage consultant to help you make the right decision. As the above demonstrates, the best choice is not always obvious.

I have learned a lot about planning for the future and using one’s mortgage as a financial tool to build wealth and attain real financial security rather than a debt to be gotten rid of as quickly as possible by reading Ric Edelman’s books. For more information on this strategy as well as Ric’s 11 Reasons to Carry a Big, Long Mortgage, read the newly revised edition of The Truth About Money, available December 21.

*Assumed interest rate and monthly payment are for illustrative purposes only.
**Assumed 7% rate of return for illustrative purposes only.
***Assumes a federal tax bracket of 25%, no withdrawals and no dividend reinvestment.

2 comments to Being seduced by a 15 year mortgage?

  • brian

    Where can you get a guaranteed rate of return at 7%

  • Brian,

    I would never say anything is guaranteed, nor am I licensed to give specific investment advice or direct anyone toward one investment or another. However I can direct you to a number of financial services professionals that can help you find these sort of investments/returns if you would like a referral. 7% is pretty conservative right now based on what I am seeing (and getting on my personal investments).

    Sincerely,
    Greg

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