15 YEAR VS 30 YEAR MORTGAGE

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 Marco, 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 in 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% 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 paydown as well. So what this means is the principal of a loan is the amount that you actually borrow. So say, for example, you borrow $100,000 as a mortgage, there's going to be interest on top of that $100,000 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 paydown, 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's 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 $100,000 for example, obviously your payment's 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 4% and your investments are earning you 7, that's a difference of 3% over the course of that 30 years. But again, that takes a lot of discipline to do. Some investments you can make are 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 a longer mortgage by 15 years when comparing it to a 15-year mortgage. This could actually last you until retirement. And if you ask 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 paydown. So as I mentioned earlier in the 15-year mortgage, those principal paydowns 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'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. I 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. The house that we want to buy is $375,000, okay? In order to put 20% down on this house, we're going to end up putting down $75,000 as a down payment. So if you take $75,000 that you're putting down, your mortgage on this house is $300,000. The 30-year loan is probably going to be right around 4%. Let's just use 4% for easy numbers. The 15-year mortgage is going to be about 3.25%. The interest over the course of a 15-year loan at 3.25% is $79,441, okay? So you're probably thinking to yourself, if I just double that, okay, because a 15-year loan times two, the interest rate is just going to be $79,000 times two, right? Well, you're actually wrong. The 30-year loan interest that you're paying over the course of those 30 years is $215,609. That's a difference of $136,000, 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 $2,108. The same loan on the 30-year payment is going to be $1,432. That's a difference of $676. 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 If you invested that at 7%, let's just say you're earning the market average of 7% over the course of your lifetime. This accounts for bull markets, bear markets, war, tragedy, whatever. 30 years at 7% gets you $829,511 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 $558,179. So do you see how powerful that is? I didn't account for risk or anything like that, but I just used an average of 7%. 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, but 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 $1,000, 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 on 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. If you guys got any value out of this video whatsoever, I'd really appreciate it if you click the subscribe button with the little bell. That way you're notified every time I put out a new video. And be sure to answer the question of the day down in the comments below. Engagement and liking these videos really helps with the rankings, and I'm working really hard on these videos, guys. Thank you so much for watching and have a prosperous day.