Case Study – Part 5: Couple Earning $45k Each a Year – Episode 173

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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 back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have president of Partners for Prosperity and our co-host, Kim Butler with us today. And we’ve been talking about John and Jane and taking them through several meetings is what we call them. Most of these meetings, people picture them being in person, but in our world, we can do everything electronically over the phone and can handle all 50 states. And what we’re trying to do is we’re trying to demonstrate just the plain old ordinary

[00:52] day conversations that people have. And unfortunately, they’re having them with people that have been thinking the same way that has probably not got the person’s best interest at heart. So there’s been a few people that have come up, Kim Butler being most notably one of them, that has come on to see the scene to basically challenge the way that we look at things. And if we can ever give you a gift, it won’t be the knowledge that we give you. It will be the way you look at the world once you get off one of our podcasts. So I’m on my soapbox today, Kim, but welcome. I love it. That was a great intro. Thank you much. So here we are in this fourth step or meeting, as you’ve indicated with John and Jane,

[01:39] and they now want to buy a home. And they are really thinking that they want to try to do only 10% down because that’s all the cash that they thought they have. But then they want to do a 15-year mortgage because they’ve got the cash flow to handle the 15-year mortgage payment. And somebody’s been talking to them about the amazing amount of interest that you’ll save on doing a 15-year mortgage. So first of all, we needed to remind them that their cash value of life insurance was available and that they could absolutely borrow against that money, put it in their checking account, and then show that to the bank as proof that they could do 20% down. So this, of course, then avoided the private mortgage insurance and saved them

[02:24] quite a bit of money. The private mortgage calculation, I didn’t really realize this, but with a little bit of research, the private mortgage calculation is there’s an upfront amount of 0.0175 times your loan. In this case, it was a $225,000 loan. That’s almost $4,000 upfront that they were going to have to pay. And then there’s an annual PMI or private mortgage insurance calculation, which is the amount of the loan times 0.0045. That was another $1,000 a year. That’s just money down the tubes, so to speak. So again, we had them borrow against the cash value, add that to the 10% that they’d already saved and make a 20% down payment. And then we got into the very lengthy discussion of a 15-year versus a 30-year

[03:13] mortgage. Now, our listeners may be aware we have a book that covers this in depth. It’s called Busting the Interest Rate Lies. And if you’re going to grab that on Amazon, I encourage you to get the physical book because there’s pictures of calculators or calculations, both, in the book that you’ll want to follow if this is a challenge for you. But I want to address the comment that the banker made to them about, oh my gosh, you’ll save all this interest. It is true that a 15-year mortgage has lower amounts of interest paid over the timeframe. That’s an accurate statement. But there’s a big difference between interest payment and cost. And so when we compare the two and we do a proper scientific comparison, we are

[04:08] able to prove that the 30-year mortgage payment is more efficient, it puts more dollars in our pocket where we can then save it to do other better things. And where the mistake often gets made is that the mortgage banker or broker is comparing a 15-year mortgage over 15 years to a 30-year mortgage over 30 years. Well, anybody that does scientific comparisons knows that you can’t change two variables. You can’t change both the payment and the timeframe. So you must compare a 15-year mortgage over 30 years to a 30-year mortgage over 30 years. Or you can do it the other way, both of them over 15 years. But it’s just easier to go with the longer mortgage. And when that’s done, you’ll realize that because of the tax deduction and the

[05:03] lower interest in the rate of the payments on the 30-year mortgage, you actually are in a better situation. And again, that’s kind of hard to get your arms around just here verbally in our podcast. But let’s just run this decision real quick through the seven principles of prosperity. So let’s say you’re going to make a 15-year mortgage payment, which means you have no extra savings. So Todd, we’ll play with me here. How does that help you think from a prosperous mindset if you have no extra savings? Well, it means that, you know, every day, if I don’t feel quite as well, I go to work sick, and I’m constantly reading the job ads trying to see if my particular business is going to be outsourced to another country,

[05:52] maybe not allow my family time or vacations that they would have had otherwise. And I mean, basically, it just kind of destroys your life from the inside out. Yeah, shuts things down, doesn’t it? All right. So let’s look at the C principle, the second one. If we have a 15-year mortgage, that’s where we’re putting all of our extra dollars. And by the way, this would be true if you were thinking about adding extra principal payments. It’s kind of the same thing. That is focusing on just one thing in your life. You are not seeing the big picture. And when you don’t see the big picture and you narrow in, you put those blinders on, and you only look at the mortgage, you are really missing out on some opportunities with your dollars.

[06:38] Now, one of the biggest ones is you can be investing at 5%, 6%, 7% these days very, very easily. And so if you can invest at, let’s say, 6% or 7%, maybe even 8%, depending on the situation, and your mortgage payment has an interest rate of, say, 3%, which is probably deductible. So it’s actually costing you a little bit less than that. That is not the place that you want to put extra money. You want to put extra money where it can get those investments and get that higher rate of return. Thoughts on that? Well, it just goes back to basic economics class again, too, which is also the time value of money. I always want to pay back, get new dollars today, and pay it back with 20-year-old dollars tomorrow.

[07:26] Very well said. That’s a whole additional element in the essential measurement of inflation. What you’re doing with a 30-year mortgage payment is though the check is going to look the same, the feel of that check is going to be a lot less because of the impact of inflation, and of course, a lot larger impact on a 30-year than a 15-year. So yeah, good point. So we’ve got think, see, measure. Of course, opportunity costs a great example for putting it into the home. You can’t eat equity. This is a great saying from Jimmy Vreeland of Join Ops Properties in St. Louis, which is a favored bridge loan provider of ours. And you can’t eat equity is such a great reminder that building up equity in your home, which is essentially what a 15-year mortgage

[08:11] payment is doing, it’s also what prepaying your mortgage does, is not the most efficient thing to do. So we’ve got think, see, measure, flow from a cash flow standpoint. This is always interesting. There are times when I will admit that it’s maybe better that somebody take out the 15-year mortgage with those higher payments because if they took the 30-year mortgage with lower payments, they would waste the money. But hopefully our listeners are astute enough to know that flow and the ability to save and cash flow out is critical to their financial success. And they’ve installed ways to make that discipline happen. And of course, one of the easiest ways is to have a life insurance premium that has to get paid.

[09:02] And that way that flow won’t get spent. Thoughts? We’ve talked about this so many times in calculating your run rate, and that’s to take your monthly expenses and divide them by the amount of savings that you have. Now that can be savings in whole life policies. That can be savings that you have in checking accounts. Home equity doesn’t count because it’s not necessarily yours to control. But if you have $100,000 that is liquid and in savings somewhere, and you have $1,000 a month mortgage payment, the way I like to look at it is, is you now have, what, 100 months that you can continue to run with the existing money that you have now. And whether it be an illness or a job opportunity, a job issue or

[09:55] something, that’s almost 10 years, correct? Yep, you got it. That’s great. Very peace of mind-oriented calculation to do and helpful. So think, see, measure, flow, control. Again, the equity is not controlled by you. It’s controlled by the bank. And you want to have control on your side of the table. We’ll pick up move. If you have a 30-year payment, you’re in essence able to take that other difference that was the 15-year payment that you’re going to put into the mortgage and move it on through into something else, cash flow, life insurance, bridge loans, whatever. And then, of course, that is going to have a multiplier effect because now you’re building up an asset that you control. You’re building up more emergency opportunity fund.

[10:41] You’re building up a bridge loan that’s going to provide cash flow in, which by the way, a lot of our clients that do that use their cash flow in from the bridge loans to make their life insurance premiums with. So you’ve got a great, very synergistic environment there that just makes it crystal clear to me anyway that the 30-year mortgage is the way to go. And then there’s one last very factual thing that I’d like to share that I think is interesting. And that is that if you look at the 15-year versus 30-year mortgage, normally there’s an interest rate reduction for the 15-year mortgage. Now, when we first do the analysis, we keep all the interest rates the same under the guise of scientific experiment, only change one thing at a time.

[11:28] However, after we’ve done all that, it’s fun to go back and look at how much lower the 15-year mortgage rate would need to be in order to get the same benefit and cost of the 30-year rate. So let’s just put some numbers on this. Typically, if your 30-year rate was like 4%, Todd, what would you guess the 15-year rate would be? Maybe 375, 375, three and a half. Yeah, it’s not a lot of difference. The bank dangles it out there as a carrot, but it’s not a big difference. So are you ready for this? Sure. In this example, it needed to be as low as 2.1 in order to have the cost be the same on the 15-year mortgage as it was on the 30-year mortgage. Almost half the interest rate cost. No bank is going to offer that big of a carrot.

[12:31] Nope. I can’t say at least none that I’ve seen anyway. Well, thanks again so much to our listeners. And again, we invite all of you to ask questions. And Kim, is there something you wanted to add? Just the Busting Interest Rate Lies book if you want to see it proved out. And then, of course, also, if you need to see it in a video, it won’t be the exact same case study, but something similar. Shoot us an email. Hello at partners4prosperity.com and we’ll take care of that for you. Super. Again, so generous for Kim to allow those to be out there. Utilize the tools. Also, Todd’s tools available at truthconcepts.com. Don’t want to forget those. Check those out as well. This is No BS Money Guy Todd Strobel.

[13:14] Special thanks to our listeners and Kim Butler. Thank you. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partners4prosperity.com. If you liked this episode, make sure you subscribe and leave a review.