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 Marko 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 and
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 percent 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 pay down as well. So what this means is the principle of a loan
is the amount that you actually borrow. So say for example you borrow 100000 thousand
dollars as a mortgage. There’s going to be interest on top of that
100000 dollars 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 pay down 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 is 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 hundred thousand dollars for
example. Obviously your payments are 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 four percent and your investments are earning you 7 that’s
a difference of 3 percent over the course of that 30 years. But again that takes a lot of discipline to
do some investments you can make or 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
longer mortgage by 15 years. When comparing it to a 15 year mortgage this
could actually last you into retirement. And if you asked 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
pay down. So as I mentioned earlier in the 15 year mortgage
those principal payday loans 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 don’t. 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. 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. Everyone is buying. Three hundred seventy five thousand dollars. In order to put 20 percent down on this house. We’re going to end up putting down seventy
five thousand dollars as a downpayment. So if you take seventy five thousand dollars
that you’re putting down your mortgage on this house
is three hundred thousand dollars. The 30 year loan is probably going to be right
around 4 percent. Let’s just use 4 percent for easy numbers. The 15 year mortgage is going to be about
three point twenty five percent the interest over the course of a 15 year loan at three
point twenty five percent is seventy nine thousand four hundred and forty one dollars. OK so you’re probably thinking to yourself
if I just double that. OK because a 15 year loan times two the interest
rate is just going to be eightieth 79000 times too. Right. Well you’re actually wrong. The 30 year loan interest that you’re paying
over the course of those 30 years is two hundred and fifteen thousand six hundred and nine
million. That’s a difference of one hundred thirty
six thousand dollars 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 two thousand one hundred and eight dollars the same loan on a 30 year payment
is going to be 1432 dollars. That’s a difference of six hundred and seventy
six dollars. 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 six hundred
and seventy six dollars. If you invested that at 7 percent let’s just
say you’re earning the market average of 7 percent over the course of your lifetime. This accounts for bull markets bear markets. You know war or tragedy whatever 30 years
at 7 percent gets you eight hundred and twenty nine thousand five hundred and eleven dollars
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 five hundred and fifty eight
thousand one hundred seventy nine dollars. So you see how powerful that is. I didn’t account for risk or anything like
that but I just used an average of 7 percent. 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
when 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 you know a thousand dollars 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 and 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 clicked the subscribe button with the little
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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. Okay so. This 76 difference I can either get Lampel
for robbery. I’m really thinking as you go. No I think to you goes yeah I’ll be good in
the winter.

0 comments on “15 YEAR VS 30 YEAR MORTGAGE”

  1. Marko - WhiteBoard Finance says:

    QOTD: Would you choose the 15 year or 30 year mortgage after watching this video? Why? Answer below! 👇👇

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