What You Need to Know About Mortgages to Get Ahead – Episode 229

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and no BS money guy, Todd Strobel. Today’s podcast episode is from a segment of one of our most popular past recordings. Kim and Todd are going to be talking about what you need to know about mortgages to get ahead. They’ll be talking about the difference of a 15 year and 30 year mortgage, why home equity may not be the right asset for you, and they’ll be talking about interest rates. There’s a lot of information in here, especially in our current real estate and mortgage market, things that you’ll want to listen to.

[00:54] Let’s jump into the recording. Today, we’re going to be talking about mortgages. And wow, what a interesting topic. I can remember the first time that I saw a mortgage dip below 10 percent and thought I had the best thing that had ever been invented. And now interest rates are so low, it’s ridiculous. But we’re going to be addressing two things. We’re going to be talking about prepaying your mortgage and also the idea of going with a 15 year versus a 30 year mortgage. This has gotten really, really popular lately. And the idea is, you know, is building up equity in your house the best place to place your money? So welcome, Kim. Well, hello, Todd. Happy to be here. And it’s so amazing how pervasive this lie is.

[01:51] Every time I turn a corner, I see somebody recommending some form of a shorter mortgage. So whether it’s extra principal payments or using a home equity line of credit to run some more dollars through your mortgage or prepaying in some form or making 13 payments in a year or 26 payments in a year and squishing in that extra one or an extra principal payment here and there. All of these are essentially forms to get rid of what is in people’s minds, their biggest debt, but is in actuality their most efficient debt. And you said it well, you know, the goal is typically to build something called home equity. But we’ve got to remember that home equity is not very usable of an asset. You know, we could even apply our clue acronym that we use against life

[02:54] which is control liquidity, use and equity, meaning we can borrow against it. We could apply that acronym to the concept of home equity. So we’ll just work through this with me. I’ll ask you the questions. Do we control our home equity? I would say absolutely not. And, you know, working in a bank for a number of years, it just absolutely amazed me that, you know, somebody with perfect credit and a great job could come in and borrow money against their house. But if they lost the job the next day and applied for a loan, they would not qualify. And that’s the exact same house with the exact same amount of equity. It makes no sense. And so it should be very clear that we do not control our equity.

[03:46] And of course, we can also all remember in 2008, nine and 10, when home equity lines of credits were canceled because the banks realized that those homes did not support that equity anymore. So that’s the control part. What about the liquidity part? Would you identify home equity as a liquid asset? Well, I mean, the only way that you can technically access home equity, if you’re unable to borrow, is to sell your house. So I assume that, I mean, there is some level of liquidity there, but it means moving. Absolutely. And the fastest fire sale is still 30, 45, maybe 60 days between closing and all that. So I would agree home equity is far from liquid. What about use? Can you use your home equity for anything that you want?

[04:42] I would say that, you know, in theory, if you had a home equity line of credit, which is not guaranteed, you could use that home equity, but there’s much more efficient vehicles that you could use instead of. I mean, if we had an unlimited supply of money, then I would say, yes, everybody should pay off their house. But the problem that I see is, is that you have to make a choice. You have a limited amount of dollars and those dollars need to be used as efficiently as possible and is paying off your house faster, the most efficient use. So if you’re one of the people out here who have an unlimited printing press in your basement, like the government does, and you can print your own money, then I think paying off your house is great.

[05:30] But for the rest of us who are working for a living, I don’t think so. Absolutely. And I agree, it can be used for anything, but is that the wisest thing? It always cracks me up. When somebody puts a car on a home equity line, you’re essentially amortizing a five to maybe 10 year asset over most home equity lines or 15 to even 20 years in amortization. So that’s never a wise use of money. And yet we see it all the time. So we’ve done control, liquidity use and equity, and obviously your home equity acts like equity, but unlike the life insurance loan that you do not have to qualify for or get approved, a home equity line of credit has to be qualified for approved, et cetera, and maintained as we know.

[06:20] So there’s definitely some problems there. One of the other things that I want to bring up in this comparison, which again, it’s prepaying your mortgage or using a 15 year mortgage versus a 30 year mortgage is that how often the information that’s out there in the marketplace talks about the interest. So the bankers will say to you, oh my gosh, a 15 year mortgage has less interest than a 30 year mortgage. And that by itself is an accurate statement. But what they don’t follow up with is that that by itself is only a part of the equation and one of the biggest mistakes that people make when they’re trying to analyze this environment is that they want to compare a 15 year mortgage over 15 years to a 30 year mortgage over 30 years.

[07:18] And anybody that does analyze things like a mathematical equation such as this absolutely knows that you can only change one variable, not two. So if you want to compare a 15 year mortgage over 15 years to a 30 year mortgage over 15 years, that’s fine. Or if you want to compare a 15 year mortgage over 30 years to a 30 year mortgage over 30 years, that’s fine. But you can’t do the 15 year over 15 and the 30 year over 30 to each other because you’ve got two sets of variables that you’re changing the timeframe, as well as the actual amortization schedule that you’re choosing amortization, just meaning what is the actual schedule of a month by month by month dollar figure that goes to interest versus principle in

[08:14] that same month by month by month. So you have all these people, bankers typically out there talking about this 15 year mortgage and how it’s less interest. And again, that statement by itself is correct, but there is a big discrepancy with all of the other parts of that analyzation that are left out. And if you’re super interested in this, we actually have a book that covers it in detail. It’s called Busting the Interest Rate Lies. It’s available on Amazon. There is an audio version. However, I would alert you that this particular book has numerous pictures of calculators in it. And I’ve done the best that I can in verbalizing those calculators and the audio version of the book. But I think you would prefer actually seeing those calculators.

[09:09] So I’m going to recommend if you buy the audio version that you grab the printed material as well. And if by chance you’ve already bought the audio version and you’re frustrated with that, please email us. Hello at partners. Number four prosperity is our podcast email. And I would be happy to send you a PDF of that book. This is Busting the Interest Rate Lies at no charge because I want you to have those calculators. They’re done by Truth Concepts, which is the software that my husband Todd Langford has created. Both advisors and clients use it. And it does a wonderful job of comparing truly and thoroughly the 15 year versus 30 year mortgage discussion. One last thing that I want to say, and Todd, I’m sure you have maybe

[09:57] a couple of wrap up things as well, is that there are times when peace of mind overrides a financial decision. And there have been a few clients of ours that have said, you know what, I get your proof. I totally understand that mathematically and numerically and financially and economically, the 30 year mortgage is better than a 15 year mortgage, but I sleep at night better if I have a 15 year mortgage or if I have a 30 year mortgage and I prepay it constantly. And so if that’s the case, fine, I totally get that. Please do that. But that’s because your peace of mind is overriding pure financial economics and there’s a big difference between those two things sometimes. Thank you for listening to the Prosperity Podcast.

[10:48] To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.