Lies You’ve Been Told About Your Mortgage – Episode 129

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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 host, 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. Once again, we’ve got my co-host and bestselling financial author, Kim Butler, with us. And today we’re going to be talking about mortgages. And wow, what an interesting topic. I can remember the first time that I saw a mortgage dip below 10% and thought I had the best thing that had ever been invented. Now interest rates are so low, it’s ridiculous, but we’re going to be addressing two things.

[00:49] 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. 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

[01:47] 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 insurance, 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.

[02:46] 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 that 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. 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?

[03:40] 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? 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,

[04:33] 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. 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

[05:24] 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. 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.

[06:14] 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. 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

[07:15] 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 time frame, 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 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

[08:13] 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. 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.

[09:01] 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 a couple 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, a 30 year mortgage is better than a 15 year mortgage.

[09:49] 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. I’m thinking of I want to quote your husband, Todd Langford, and I want to make sure I do it correctly. I believe he says there’s lies, damn lies and statistics. Is that correct? Yeah. And I think he’s quoting Mark Twain. Oh, is he? Okay. But I mean, it’s amazing how when you look at this, especially comparing a 30 year to 15 year, I mean, sometimes there’s a hundred, $200,000 difference in the amount of interest that you pay.

[10:37] But when you have a financial advisor that can show you, look, you’ve got cashflow coming in each month, how can we best use that cashflow to prepare for your future, a hundred thousand dollars, whether it’s in a whole life policy or an investment account versus a hundred thousand dollars in home equity, when you actually need it to access it is a huge difference. Isn’t there? Absolutely. In fact, all these guys out there that are showing people how to use a home equity line of credit to prepay their mortgage, I wish they’d use the home equity line of credit to actually buy themselves another asset, a separate asset aside from the home and the home equity that in time, if they wanted to, they could use to then pay off that mortgage in one fell

[11:29] swoop, but there is a huge difference in risk between a paid off home and a partially paid off home. And so to me, you’re not reducing your risk any until you can go all the way on that paid off home. Now me personally, I wouldn’t ever want my home paid off. I think I’m in a much better position of control with less risk with all that equity in a side fund called whole life insurance as a savings account. But there are other people that will choose to completely pay off their home at some point in time and that’s fine, but do it in one big fell swoop, not in pieces and parts. One thing I would challenge our listeners to think about is that if there were two houses sitting next door to each other and they were

[12:12] purchased for $150,000 a piece, one of them was purchased with $150,000 mortgage. The other one was purchased in cash five years from now, which one would be worth more. And the mortgage does not change the value of the house. That’s right. That equity position has nothing to do with value of home position. And that’s an important distinction that is often missed. So, and again, as working for the bank, I can tell you that, you know, if somebody came into us and was having problems making their payments and they owed $145,000 on $150,000 house, we were a lot more easy to work with than somebody who owed $50,000 on $150,000 house. Yep. You got it. So, I mean, it’s just a fact that, you know, again, we’re not

[13:10] saying go out and spend the money, but we’re saying, is there a better place to store that money? And I think that’s the, the remainder of the message is, is that if we’re not going to put the money into paying off our mortgage, where should we put it? Well said. And to me, the best place to save cash and store cash is the whole life insurance. And if by chance you don’t qualify for that, maybe you can find a family member that does, children, grandchildren, for what it’s worth, nieces and nephews don’t work, but if you don’t have children and grandchildren, maybe a business partner, that can always be an option as well. And if none of that works, then put it in the bank, just in a regular savings account.

[13:54] Truly the difference in interest rate today, I mean, there’s mortgages out there at two and 3% deductible. So that’s not that big of a cost. And yes, at a bank, of course, you’re going to be earning, you know, maybe 1% taxable on your money, but if you can do the whole life insurance, you can get that up to three or 4% without tax. One of the calculations that I used to love to do with my clients was what we would call a run rate. And that’s simply taking your liquid assets and dividing them by your monthly expenses and saying, how long could I pay my bills if my income ceased today? And you’ll find that home equity doesn’t contribute to that figure, but the clients who are saving that money, a

[14:42] lot of times are able to say, you know what, I could pay my bills for nine and a half years by keeping my money liquid. And I mean, that is so much more important. I had, I can remember a client in my mind who, you know, cashed out their 401k, paid off their house, wife got cancer within months. And I mean, they literally had to sell the house to pay the medical bills. Yep. It is definitely stronger to be in a position of cash or cash value than in a position of home equity. Super. Well, Kim, I know that we also have a book that you’re offering just to our listeners as well. It is available at partners. Number four, prosperity.com slash ebook it’s called financial planning has failed and it provides quite a bit of

[15:36] information about alternative places to store cash as well as even a couple investments that can be valuable. And if you have a lump sum and you’re debating, making a large prepayment on your mortgage, you might actually prefer to put that lump sum in a place that paid you a monthly amount with which you could then pay your mortgage. That is a much better way to get out of mortgage payments than prepaying the mortgage yourself. I think the most gratifying thing that we get is people asking questions. So we encourage our listeners to keep sending in those questions and to ask those questions in their own mind is so satisfying. That’s why we do this podcast each and every week. And again, this is no BS money guy, Todd Strobel, special

[16:27] thanks to Kim Butler. And we’ll talk to you all again real soon. 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.