15 Year Versus 30 Year Mortgages – Episode 077

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your hosts, bestselling author Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel, and once again, we have bestselling financial author Kim Butler with us today, and we’re actually going to be talking about one of her new books coming out, which is called Busting the Interest Rate Lies. Sorry, was getting one of your other books confused there. Welcome, Kim. Glad to be here. Thank you, Todd. And yes, Busting the Interest Rate Lies is super close and we wanted to delve into

[00:47] today the arena of a 15 year versus a 30 year mortgage. This is covered in depth in the Busting Interest Rate Lies book and it’ll be available on Amazon. It will have, of course, Kindle as well as regular book, as well as audiobook out there. And so if you are curious about this particular aspect, dig into the book because I use the truth concepts dot com calculators to go through this very, very thoroughly. But for those that want the short version or you’d rather just listen to a piece of it instead of the whole book, we thought we’d do a little podcast on it for your benefit as well. Super. Well, we’re going to jump into what is conventional wisdom or traditional wisdom or what is perceived and marketed as traditional wisdom that

[01:38] really and truthfully, I think you’ve exposed is more marketing in benefit of once again, banking institutions versus what is best for our own personal economy. So you mentioned the 30 year versus the 15 year mortgage. Why don’t we start with that question? Yeah, it’s a biggie. And I have to admit that once upon a time, I too believed that a 15 year mortgage or taking out a 30 year mortgage and prepaying it was the better strategy. In fact, I even convinced my parents to do it. I’m embarrassed to admit, but I’m doing so to help everybody realize that mistakes can get made on this. And it’s really easy to let the math help you make the mistake. And so one of the most critical things that is so easily overlooked around

[02:32] the math is consistent timeframes. I’ll explain that in a minute and consistent cash flows, because most often when the conversation will just boil it down to 15 year versus 30 year, even though it could be 30 year prepaid versus 30 year full paid. But the most often times when a 15 year versus a 30 year is compared, one of two errors is being made. And the first is an error in time frame. So, for example, they’ll compare a 15 year mortgage over 15 years to a 30 year mortgage over 30 years. That’s not a valid comparison. We all learned in what about high school econ or even chemistry or any of your physics or sciences. If you’re going to do an experiment, you change one thing only. So you cannot compare a 15 year mortgage over 15 years to a 30 year

[03:29] mortgage over 30 years. You can compare both of them to a 15 year period, or you can compare both of them to a 30 year period, but not one to one and one to the other. So that’s the first mistake is incorrect comparison of time frames. And then the second one is an incorrect comparison of cash flows. And I fell for this so many times. And when we teach other advisors, my husband, Todd Langford and I do what we call truth training for other advisors. I’m always amazed how many other advisors fall for this. And that is the difference in comparing cash flows. So as an example, with a 15 year mortgage payment, you have a higher mortgage payment, and so they want to compare the 15 year mortgage payment

[04:19] and then saving money for the second of the 15 years. In other words, month 181 to month of 360. But that is at a much higher cash flow than a regular 30 year mortgage for 30 years or 360 months. So the second biggest mistake is an incorrect comparison of cash flows because you have a 15 year mortgage payment, which is higher than a 30 year mortgage payment. And so if you compare one, even if you get the timeframes right, you compare them both over 30 years, you’ve got a higher cash flow. So of course you’re going to have more money. And again, that is something that’s parroted out there a lot. It’s a very easy thing to make mistakes on. And something that we need to delve into and get really clear on so that we

[05:13] know what the whole truth of the matter is, not the marketing from the banks. And sadly, this is not something that you can discover with a traditional calculator, correct? That is correct. I’m glad you brought that up. Yes. It takes a financial calculator to get this figured out, meaning either the Truth Concepts calculators, an HP12C, Texas Instrument Financial Calculator, the type of calculator that has future value and present value and rate, like an interest rate calculation and payment is the other one it takes. And HP12C is probably the most common. It takes what’s called reverse Polish notation, which is the way that the HP12C calculates those future values, present values, et cetera.

[06:03] But it’s basically a time value of money calculator or a financial calculator that you’re looking for. And you can get free ones on the web and there’s apps for them that are available to turn your phone into a financial calculator, but that’s the kind that you need in order to really tell the whole truth about this discussion. And for those of you who have iPhones, if instead of taking your phone straight up and down, you turn it sideways, it will turn into a financial calculator. How about that? That’s some fanciness I didn’t know about. Very cool. But even with the financial calculator, you really have to do quite a few calculations to come up with these numbers yourself. That’s why having something that’s more of an Excel-based program where

[06:47] you just simply plug in the numbers and let a spreadsheet run in front of you like Truth Concepts is so much easier than trying to do these yourself. Absolutely. So the Truth Concepts software has a loan analysis calculator and actually anybody can download it for free for 10 days. So if you’re really curious, help yourself. You can go to truthconcepts.com and in the support area, there’s a free download for 10 days and it works on any computer. It’s not a web-based program. It’s to actually work on your computer. There is a web-based version of it, but that’s for purchase. So anyway, you can help yourself on the loan analysis. But what we’ll do today is just go through a couple things. And I want to point out a critical third aspect.

[07:33] So we’ve got consistent time frame. So we generally use 30 years or 360 months. We’ve got consistent cash flows. So you’ve got to pick your payment that you’re going to talk about. Are you going to talk about the 30-year payment or the 15-year payment? And then we’ve got to have consistent interest rates. And again, this is where a lot of banks and other people that talk about this make a mistake. And that is that they want to compare a 15-year mortgage at what is typically a lower rate to a 30-year mortgage at a higher rate. And while I acknowledge it out in the marketplace, that is accurate, though it’s minor difference and frankly has no impact at all. But it’s talked about like it does. When you’re doing the analysis, you must have a consistent interest

[08:18] rate throughout your entire discussion. And the fourth critical piece is to have basically a third alternative, which is cash. You know, we get a mortgage because we don’t have cash, but our own money has a cost. And so we have to also look at what could we do if we actually had the cash to pay for that house. And so in essence, three calculations are being made. The cash calculation, the 15-year mortgage calculation, and 30-year mortgage calculation. And then the fifth aspect that I want to bring up is that if you are going to use financial calculators, whether they’re inside Truth Concepts or in a regular handheld calculator, you must have monthly and end of period selected on all your calculations.

[09:10] And again, with the same interest rate. So let’s say we’re going to pick 4%. Well, that means we need to do 4% for the cash account, 4% for the 15-year mortgage, and 4% for the 30-year mortgage. Otherwise, our comparison and our analysis is not accurate. You must have the same interest rate throughout. Now, once you get all of your work done, if you want to go back and change the 15-year mortgage payments interest rate, because it’s likely going to be, well, if your 30-year mortgage is four, your 15 might be three and a half or something like that. That’s fine. You can do that. But the first run through all interest rates must be the same. So use 4% for your savings, your alternative savings account, which

[09:54] is going to be your cash account also, and then 4% for the same interest rates, or excuse me, the same mortgages, the 15 and the 30-year mortgage. While we’re on that subject, it is interesting that according to our analysis, in order for a 15-year mortgage to be as financially equivalent as a 30-year mortgage, the interest rate has to be almost half. In other words, if 30-year mortgages are at four, you would need to be able to find a 15-year mortgage interest rate as low as 2%, which I don’t think you could find. And still, it would only be equivalent to a 30, and then this brings up the sixth and most important point, and that is that even if financially the 15-year mortgage was equivalent, there are so many other ways that

[10:53] the 30-year mortgage is more effective that we must take a look at. And that important point goes further to say that this is a financial discussion, and there are so many times that peace of mind overrides proper financials. In other words, let’s say that we prove to you financially that a 30-year mortgage, no extra payments, is the best thing. Okay, financially, you can get that. But if in your head or in your heart, the peace of mind in your head and heart only is dictated by having a paid-off home, and you are determined to prepay the mortgage or maybe even have a 15-year mortgage and prepay that, then that’s a peace of mind decision. And I would try to help you understand that peace of mind is

[11:46] actually held more secure by having an outside account, typically cash value of life insurance, where that is what is providing the peace of mind. But I will acknowledge that there are some clients that, for whatever reason, their peace of mind or their peace of heart, P-E-A-C-E, is dictated by a paid-off house, and no matter what I talk to them about financially is going to change that, then okay, fine, just understand that that is what’s overriding proper financials. And those first five areas that we talked about are much easier to see visually than they are to discuss via the way that we’re doing it. So once again, that’s Busting the Interest Rate Lies written by Kim, the letter D as in David, H as in Henry Butler, correct?

[12:43] Correct. So you can be looking for that on Amazon. I’ll also invite you to go to Truth, the number four concepts.com. Again, these are some visual areas that can kind of help you to see what we’re talking about because, again, those first five areas, very visual, that sixth area, I think that we can really talk about because if 10 year or 15 years or whatever period you want to talk about, if you want to ask yourself, okay, what happens if I lose my source of income today? And you look at a 30 year mortgage and say the payment on that 30 year mortgage is $1,500 a month, and you have a 15 year mortgage that’s $2,000 a month, and maybe on an interest rate wise, again, you would be able to save money that would make sense if 10 years from

[13:38] now you were to say that you saved that $500 a month or $6,000 a year and had $60,000 in a bank account, assuming that it was just in a cash account, you didn’t have any interest on it at all, and you lost your source of income, and you had to figure out how you were going to make those house payments because under the one, you got house payments for five years, under the other one, you still got house payments for 20 years, but under that 30 year analysis, you have $60,000 cash, and that’s if you didn’t earn anything on it. I would much rather feed my children and make my house payments with $60,000 than to have that money in equity because unless you’re talking about reverse mortgages, lenders are not

[14:26] really allowed to make equity based loans. These loans are based upon your ability to repay, and if you don’t have sufficient income, you don’t qualify for a loan, regardless of how much equity you have in the house. Absolutely, and there have been numerous examples in our client base where having cash, whether it was literally cash in a safe in the house or cash in a checking account at the bank or cash value in a life insurance policy, have saved the family and their home because with that cash, they were able to eat, put gas in the car, and pay that mortgage payment, and that’s so much more valuable than any kind of prepayment activity that you could do on any type of mortgage. So we’re big believers in having cash.

[15:20] We’re big believers in savings as a habit, something that you do on a monthly or annual basis, and also having savings, having liquid monies so that you have the peace of mind and the control for not only emergencies, but also for opportunities, because if you view your emergency account more as an opportunity account, I bet you’ll find some. Super. Well, we’re at about our maximum timeframe here. And Kim, is there anything you want to say before we wrap up? Just a clarification on the Truth Concepts website, it’s truthconcepts.com. So partners number four prosperity.com, you can get some information there. But if you’re looking for the software, it’s truth concepts.com. Got it. And again, the name of the book?

[16:06] Busting the Interest Rate Lies. And that’ll be on Amazon, correct? Yes. Super. Well, again, this is No BS Money Guy Todd Strobel for the Prosperity Podcast. Look for that book, everybody. Take care. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.