Is A 15 Year Mortgage a Bad Investment?

Podcast Description:

Thanks to the death of private pensions, the devaluation of Social Security benefits and other undeniable retirement factors such as inflation and increased taxes, America is now in a retirement income crisis. Personal Pension Radio show is focused on helping you pack your bags for both halves of the retirement journey. Kraig’s mission is help you build & protect your wealth and lifestyle today and generationally.

Optimizing Retirement income does not happen with a product. Life insurance, real estate, or annuities by themselves will not help you optimize your retirement income. You must have an integrated approach.

Full Transcription:

Kraig: Alright. That's my cue. I am the Income Engineer. Broadcasting from the Personal Pension Radio workshop here in Southern California. My mission - to deliver the retirement dream that Wall Street promised. This idea that the answer to retirement savings has been dictated by Wall Street for many, many years. And unfortunately, it is just not working/ It's absolutely not working. So my goal is to fight the conventional wisdom. To teach you, to encourage you to break away from the herd. To break away from this herd mentality following this conventional wisdom about retirement planning and especially to help you avoid the bad advice from financial entertainers. 

So, what is a financial entertainer? A financial entertainer is someone who is giving out financial advice with no oversight, no regulatory monitoring, nobody really watching out for the general public to make sure that advice is sound in any way. They are giving out financial advice under the umbrella of the first amendment because much like the individual that I'm going to focus on today, they have given up all of their licensing as financial advisors so that they don't fall under the regulatory oversight of any government agencies, so now they can just give out advice and say whatever they want without any consequences whatsoever. 

So, conventional wisdom about retirement planning has been one-sided. I like to use the example of climbing a mountain. If you haven't heard this in a while if you're a regular listener and you haven't heard it a while, it's always good to remind you but also if you're brand new to the show, I want you to picture that mountain. Picture going on a big hike or an adventure, climbing a mountain. What is the ultimate goal of climbing a mountain? Most people, the immediate thought is to get to the top, to see the sights, to take the pictures, to have a story to tell. The real answer, the truth of it when you stop and think about, what is the ultimate goal of climbing a mountain? It's to get back down safely. To return home safely. I like to go a little further and say look if you've got kids, let's say you've got a 10-year-old son or daughter and you're about to head out the door for an adventure that day. What does your spouse tell you is your number 1 priority with that 10-year old? To bring them home safely, right? Keep my daughter, my son safe. Bring him home. 

So the ultimate goal of climbing the retirement mountain is not just to get to the top because it's a two-part journey. Saving and accumulating and investing for retirement is that first half. That's getting to the top. Coming back down the mountain is the distribution phase. The distribution phase of your journey is completely different economically than accumulating and saving. And the way that Wall Street has thought it for 30 plus years is the answer to retirement and maximizing retirement is to save and invest more money.

Now, that is truly important but it is not the answer. Optimizing retirement income does not happen with more investments, more products, more life insurance, 401Ks, real estates, annuities, Roth IRAs. None of those things by themselves actually help you optimize your retirement income. All the way to the max. You've got to have an integrated approach that crosses all of those things in the right ratios, in the right order. That's where maximum income comes from. 

So, my goal, my hope is to give you hope for retirement. To give you hope that there is light at the end of the tunnel. You just have to be willing to step out of that line with the rest of the herd and stop following conventional wisdom. Now, quick disclosure. I am not an attorney, I am not a certified public accountant, I am a certified financial planning professional. Please even though that I believe that I am highly qualified to sit here on this microphone, alone in my workshop, giving out this information, please don't act on things that you hear on my show as if you heard advice for your personal situation. Meet with a qualified financial advisor, preferably, my opinion. a certified financial planner. Someone who has actually gone the extra mile to get that pinnacle of designations and experience and certification to help you. So please, don't act on the advice that you hear from financial entertainers especially. 

Now, let's jump in. Today we're actually going to have another short show. I've gotten some great feedback where people had said, Hey! Please stop the long episodes. I'm trying. I do have so much to go over sometimes. I want to make sure that I cover it, but today, I want to jump right into listener questions again. Now, last week, I did cover this idea of those of you who might still have a pension to look forward to, a government pension or a company pension. Please be careful, don't let anybody buy you out of those pensions without extremely careful consideration. The reason a company would want to buy you out of your pension check is because it is more valuable to them than the money they're going to give you in a lump sum. Remember that. Pensions are extraordinarily valuable. Please be careful before you get bought out of a pension. 

Now, listener question. Because this goes right into actually Watch Your Step. Watch Your Step is my idea around or the idea for the title Watch Your Step in this segment prior, the first segment is just, be careful. I mean the stuff that you hear out there, so much is presented by financial entertainers. These are folks again, who have no licensing, that have really no business giving out financial advice and yet they're out there and there's just thousands and thousands of things that you've got to watch out for. So, I like to take a look and just keep you abreast of those ideas and maybe help you avoid a couple landmines along the way. 

Now, today's section 2, segment 2 is a listener question that actually is really watch your step. Now, last week, I covered my opinion on CryptoCurrency. So if you want to take a look at the last or go back and listen to the last episode, I give you my take on CryptoCurrency, Bitcoins and such. This week, listener question, they start by saying this, Thank for your show.

Well, you are welcome. I appreciate that. 

I listened to several podcasts including your favorite person Dave Ramsey. (laughs) I like that intro. My favorite person, Dave Ramsey. My wife and I have been working on buying a home and we're wondering if we should do a 15 or a 30-year mortgage. Dave Ramsey tells people that they should wait until they can buy a home with a 15-year mortgage and always avoid a 30-year mortgage. What do you say?

Now, great question I actually heard this on Dave Ramsey's podcast not long ago that he was actually very adamant with someone who had actually called in to ask about getting a house. They probably listened to the same episode I did that he was adamant. Do not buy your house! You must wait until you have enough money to save up and get your 15-year mortgage instead of a 30. 

So, this is a great question. Thank you again for listening. I really appreciate being part of the list of podcast you listen especially considering that Dave Ramsey is the third largest radio show guy in the United States, so I can't complain that you listened to my podcast in addition to Dave Ramsey's, because you know, he's the big dog as far as the broadcast world.

Now, the short answer to your question is that I believe Dave Ramsey is completely wrong about 30[year mortgages versus 15-year mortgages. Totally, mathematically, just protection and safety and risk management wrong. Now, let's do what Dave does not do. Let's review some real numbers with real-world math. Let's also forget the fact that most people move every 7 years and do that 3 or 4 times or more before settling down into their forever home. So that's a  really important piece. Most people as their families grow, they move every 7 years or so and they might move as many as 3 to 5 times over the course of family life. Before settling in into a forever home. So we're going to suspend and forget about that even though it is mathematically, critically important to this comparison of 15 versus 30, 30 versus 15. But let's just go with those assumptions. 

Now, we're going to do a 30-year mortgage versus 15-year mortgage. And by the way, the website is still not up because I'm working through... Remember, I have regulatory review issues and all those things that I have to deal with because I am a licensed, certified financial planning professional with all kinds of oversight to make sure that I'm doing the right things by you and by my clients, etc. So, the website is not up but if you want to go through this in detail, if you want to see these numbers in detail for your situation if you're reviewing this, just contact me. Remember, Kraig, K-R-A-I-G @kraigstrom, S-T-R-O-M, dot com. Just send me an email. Happy to get in touch. You can also find me on LinkedIn. 

Now, let's go back to this. 30-year versus 15. We're going to do a $400,000 mortgage, 10% down. Now, I'm going to keep the math the same. Those of you out there who said, No way I can get a 10% down. I got to do 20%. That's fine. All the math works out, we could change that. I did 10% down assuming maybe we get a first time home buying, you know, FHA 10% deal, whatever. It doesn't matter. $400,000 mortgage, 10% down. Let's look at the way the 30-year mortgage breaks out. So a $400,000, 30-year mortgage today, as of this recording, the 30-year mortgage rate is 3.97%. 3.97% means that is a $1902 payment. Now, I am not going to use the change but there's 75 cents change in there. So, let's just say that would be the actual $1902.75. Now, I'm going to go through this assuming that we're just using the $400,000 number. Not going to split hairs on you know, was it a little bit higher number, maybe it was more, we had to put a down payment, just using the $400,000 number, okay?

Now, a 15-year mortgage, current mortgage rate as of this recording was 3.2%. Which gives us a payment of $2,800. Now, that is an $898 per month difference. $898 per month extra to go with a 15-year mortgage. Now, first things, if this is your first home purchase, that means you're probably fairly young and your family, you know, you might be really starting out young, you might have young children. You might have just gotten married, starting a job, building careers. $898, call it a thousand bucks a month, that's a lot of money! That is a lot of money to be dumping into the house which has no rate of return as no liquidity. 

Next question, next thing. Can you pay a 30-year mortgage like a 15-year mortgage? Could you accelerate the payments on a 30-year mortgage to pay it like a 15? Or even like a 10 if you wanted to, right? Yes! You could accelerate the payments on a 30-year mortgage for sure, you could do that. However, can you pay a 15-year mortgage like a 30-year mortgage if you fall on hard times? If your child gets sick, if your spouse gets cancer if you lose your job, can you pay a 15-year mortgage like a 30-year mortgage? No, no, no you can't. I want to make sure to really clarify this. You walk into the bank with a 15-year mortgage and you say, my wife has cancer and I have to be taking off work so that I can drive her to a special cancer treatment center where I have to live in an RV for several days, weeks at a time and it's going to be really hard for us just to make ends meet, could you please refinance our 15-year mortgage to a 30? 

What's the bank going to say? The bank's going to say no. Because banks go off of income and ability to pay. And you go in saying, hey I'm having a little bit of a hard time, could you refinance my 15-year mortgage into a 30? No. No they wont. They won't do it. By the way that's a true story. I actually know someone that went through this. Living in an RV outside in the parking lot while his spouse went to cancer treatment at a specialty cancer treatment center. It's scary stuff but it happes. But can you go into the bank then and get special treatment? No, you can't. 

So now, Dave Ramsey says, you end up with more money because you pay off the house faster and then start investing the mortgage. So, 15 years you pay off the house and now, snap, you start investing that mortgage payment and you're going to have more money. Well, let's test it out. Let's not just say it and blurt it out on the radio with no back up. Let's actually test it out. So a 15-year mortgage, let's also assume that we're going to get a mortgage interest tax deduction and the tax deduction, we're going to invest that at 7%. So, if we pay 180-month, that's 15-year mortgage, and we get a tax deduction on the interest and we invest it, we would end up with $59,367. That's what our mortgage interest tax deduction invested with turn out to be about $60,000 at the end of 15 years. Because we want to take all the money and see what's the benefit of a 15-year mortgage versus 30. 

Alright, so 15-year mortgage, we're going to invest the tax deduction that we get. The mortgage is paid off in 180 months and now we're going to start investing that mortgage payment on top of, remember, on top of $59,000 in mortgage interest tax deductions that we've already been investing, right? So, $2800 for another 180 months because we're going to compare this to a 30-year mortgage, so we're going to do another 15 years of investing. So Dave Ramsey says, pay off the house really quick so then you can start investing. Alright, so now we've waited 15 years and we're going to start hitting the investment $2800 a month for another 15 years at 7%. 30 years later that's $1,062,111. Now, that is a million dollars. Like fantastic, we've got a million bucks, right? 

Now, for the record, we also now have right at the 15-year mark, we now have $504,000 of our cash inside the house. Remember, we paid off the mortgage. So we now have $504,000 inside the house that is illiquid, that is inflexible, that earns no interest, no dividends, no rate of return whatsoever, completely stagnant. So we have a half a million dollars that will sit stagnant for the next 15 years plus. Keep that in mind. Because you do not earn a rate of return on the cash that you have inside your house. 

Now, the 30-year mortgage. Alright, let's do it, 30-year mortgage. Because Dave Ramsey says that 15-year mortgage, so look, you got $1,062,000, that's pretty damn good! Right? Alright now, 30-year mortgage, we're going to invest the tax deduction, the interest tax deduction at 7% as well but we're doing a 30-year mortgage so we have to see how it plays out. 360 months, the interest tax deduction grows up as invested to $339,000. Because you do pay more interest in the beginning on a 30-year mortgage, therefore, you get a larger interest tax deduction at 7% compounded etc., etc., etc. So $339,460 is our interest tax dec=duction invested over time. Now, the difference in the mortgage payment and this is where Dave doesn't go here. And I don't understand why other than it doesn't support his case but the part that I think is always missing is, well the 15-year mortgage cost $898 a month more. So if we got a 30-year mortgage, what could we do from day 1 with the $898 a month? We could invest it.

So let's invest it at 7% for 360 months. Because remember, in Dave's example, we did not invest it for 15 years, we stock it in the mortgage, illiquid, right? No rate of return and then we start investing it for last 15 years. So in the 30-year mortgage, let's take the $898 and invest it at 7% for the entire 30 years. Guess what? That turns out to be $1,102,000. Almost a hundred thousand dollars more investing the difference right up front. Immediately. Now, don't forget, you also invested the tax deduction, right? That interest tax deduction. So you had $339,000 from that deal, so 1.1 million plus to 339, you end up with 1.44 1 million dollars on the 30-year mortgage, let's do the math folks! $1,441,642 minus the 15-year mortgage, that's $379,000 more in your pocket at the end of the 30 years. 

At the end of the 30 years, the 30-year mortgage worked better but not by a little bit, by almost $380,00 better and all the way along the way, the 30-year mortgage is more flexible, you can pay it like a 15 if you want to. You have the investment accounts and more liquidity for emergencies and opportunities, right? And if you're going to sell your house and move every 7 years, you don't have all your money trapped inside the house, right? So if you're thinking about your own personal mortgage choices, please contact me. We can go through the numbers together. Here's my answer again, Dave Ramsey's math is wrong. But more importantly, I believe it is dangerous advice. A young family being told that they should avoid buying a house unless they could get a 15-year mortgage, that's dangerous advice. A 15-year mortgage is rigid. And life happens. It just happens in ways that you never expect. Life can go sideways. You've got examples I'm sure every one of you out there can think of examples of friends or family members that ended up all of a sudden unemployed. They just never saw it coming. And they got sideswiped and they're unemployed. And there you are with a 15-year mortgage, a young family, children, maybe a spouse who doesn't currently work. You can't go to the bank and ask them to change that to a 30-year mortgage. The bank will say no, thank you so much for your house, we will foreclose. That just inflexible. 

And you probably end up moving in 7 years and wish that you did not have all that cash tied up in your home earning zero. Folks, please, do your own math. But don't stop with just the basic numbers and don't just take it as if you know, just standing in line going, Oh I guess Dave Ramsey has a radio show, he must know what he's talking about. He doesn't. He doesn't actually do the financial planning math in depth, in detail for a specific situation and those folks that I heard on his show, get the advice that says, get a 30-year mortgage with your new family and your new baby, just makes me cringe. It is such horrible advice. So, I hope that answers your question. You might tell that I have a little bit of passion for this by the way, so just to wrap this up. The house you live in, not a rental property, the house you live in is not a great investment per say. It is a place that you live in, right? It is not necessarily the best investment when you add up tax, toilets, trash. All of the things that go with the house, maintenance, cost, repairs, insurance bills, it's actually when you look at the Shiller Index report on long term housing valuation on personal property residence, the rate of return is not very good.It's actually less that 2 or 3%. When you look it like a 30-year example of the overall rate of return if you were to compare it to an investment, the house you live in is not a fantastic investment. It's a place to live.

So if you can live there with a flexible 30-year mortgage, that is manageable and you're smart enough to invest the difference. Invest it and live as if you have a 15-year mortgage but invest the difference. Build your liquidity. Build your emergency funds, build your investments, you're stronger for it. And you're safer with a 30-year mortgage. Alright, enough said. Now, don't forget, I am still offering the E-money, free trial. I'm not even going to say that anymore. It's not a free trial, I'm not going to cancel it, I mean. If you want E-money, you should definitely sign up for it. Send me an email at [email protected], subject line: E-money. I'd love to hear your comments and feedback on the show, if you have any other suggestions, please keep them coming. I really do appreciate that. [email protected] and if you haven't heard about the E-money offer, e-money is a fantastic cash flow planning, estate planning goals, base planning. It has a great secure encrypted vault for your documents and important things. E-money is an awesome program, you generally only get access to it when you work with a financial planning association or firm like mine. And I offer it to my podcast listeners. It's just a great tool for cash flow planning, advance budgeting , etc. So give it a try. Check it out. You can send me an email that way. 

Please, take action. Thank you so much for all of you that support the show. Don't forget to head over to iTunes. I really do appreciate some of the additional reviews that have been there. Hit me with your feedback at [email protected] and that will wrap it up for today., Take care. Will talk to you again soon. 

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