15 vs. 30 Year Mortgage: Myths About Paying Off Your Mortgage
When it comes to paying off your mortgage, the 15 vs. 30-year mortgage question can stop you in your tracks. Chances are, you’re probably trying to figure out how to get a better interest rate, pay less interest, or get out of debt sooner.
But to make the decision that puts you in the most financial control, you have to fully understand what’s at stake. And to do that, you have to peel back and peer under layers of pretty compelling myth and misinformation.
It sounds harder than it is.
You just have to be willing to see things for what they are, ask questions, and challenge popular assumptions. If that seems scary or hard or strange, when did taking the easy path of shortcut thinking ever create your finest moments? (Like never.)
Unfortunately, mainstream financial thinking has millions of Americans making decisions that take away their control.
There’s an unspoken rule that’s seeped into our psyche. It’s that smart people pay off their mortgages quickly.
But could our bondage to what we feel we ought to do be turning our American Dream into our American nightmare?
In today’s conversation, we’ll uncover the biggest myths about paying your mortgage. We’ll show you why the focus on paying it off quickly will handicap your cash flow and control. After we’ve unpacked the facts, you’ll know with confidence and clarity what’s best for you and be able to make mortgage financing decisions without second-guessing yourself.
Where Paying Off Your Mortgage Fits into the Cash Flow System
Owning a home requires paying for it. And paying for anything, no matter how you do so, affects how much of your money you keep. Making the best financing decisions gives you more to keep and put to work. But no matter how much money you keep, it’s just one small part in the bigger picture of building time and money freedom.
That’s why we have created the 3-step Business Owner’s Cash Flow System, your roadmap to take you from just surviving, to a life of significance, purpose, and financial freedom.
The first step is keeping more of what you make by fixing money leaks, becoming more efficient and profitable. Then, you’ll protect your money with insurance, legal protection, and Privatized Banking. Finally, you’ll put your money to work, increasing your income with cash-flowing assets.
Paying your mortgage happens right here in The Money Finder step of your financial foundation. When you find, recover, and keep more of the money you’re making, you put more gas into your cash flow machine.
Where We Got the Idea That You Should Pay Off Your Mortgage Quickly
Many Americans are so focused on paying off their mortgages for a variety of reasons, many of which they probably are not aware of
During the Great Depression, mortgages were typically 5-year notes that were “callable.” This meant that, at any time, the bank could ask for the remaining balance. If you couldn’t pay up, the bank would foreclose, taking the house and property.
Consequently, many people personally experienced losing their home. That generation has, in turn, instilled the mindset and expectation in their children and grandchildren that they need to pay off their mortgage as quickly as possible.
Mortgages today are no longer “callable,” but many people are making decisions based on what happened during the Great Depression and what most “Financial Experts” are telling them.
Myths and Truths About Paying Off Your Mortgage
Myth 1: Having a Mortgage Means You Are in Debt
Truth: Having a Mortgage Does Not Mean You are In Debt
Debt is a function of net worth, which is calculated as follows:
Assets – Liabilities = Equity or Net Worth
Debt is a position of negative equity, where your liabilities exceed assets, and you owe more than you own. Yes, avoid debt.
However, simply having a liability – in this case, a mortgage – doesn’t put you in debt. It just means you have a liability.
If you do have negative net worth, there are two ways to right the equation and get “out of debt.”
One is to reduce or remove your liabilities.
The other is to increase your assets.
Most people focus on paying off liabilities, but the far safer path is to increase your assets. When you have sufficient assets that you could pay off your liability if you wanted to, you are debt free.
However, either way you achieve it, debt freedom is not financial freedom.
Financial freedom is a position where your income from assets like real estate and businesses more than covers your cost of living. And on the path to create that, you first need cash to be able to invest in those cash-flowing assets. You’ll get there much quicker by saving and investing, than by making all your liabilities disappear.
Myth 2: Your House is a Great Investment
Truth: Your House Is Not an Investment
I know, it sounds entirely un-American to dare break the news that your house is not a good investment. But I’ll go one step further: your home is not even an investment at all.
The reason we get it mixed up and started thinking of our a home as an investment is because 1) most Americans have the majority of their net worth inside the four walls of their home, 2) real estate is a legitimate asset class, and 3) over time, usually real estate, including your home, appreciates in value.
Truth: Your House Is an Expense
However, investments make money. Expenses use up money. Your home is the latter. It’s a “cost” of living.
Housing is a basic human need. You have to live somewhere, and that “somewhere” costs money.
More honestly, housing is a part of your lifestyle that consumes pretty darn good chunk of your resources.
If your home were an investment, you’d buy the property based on mathematical analysis and calculated returns. But in actuality, you buy based on sentiment, school districts, or “falling in love with” your “dream kitchen.”
If your home were an investment, you’d expect your house to make you money.
Truth: Appreciation on Your House Isn’t Great After All
We know that the house we live in doesn’t hand out paychecks. But if my house appreciates between my purchase date and when I sell it, doesn’t that mean I made money?
If you make a few quick calculations with a time value of money calculator, you’ll see why appreciation on your house isn’t much to write home about.
Consider a $700K house. To have earned a 10% rate of return over 30 years, the property value would have to have gone up to a whopping $13,186,180. Now while property value going from under a million to over 13 million in 30 years isn’t completely impossible, it’s definitely not the overwhelming
For a more achievable 5% return, your $700K home would still need to be worth $3,025,359.66 at the 30-year mark.
In fact, if your $700K home wound up appraising at $900K 30 years later, your home itself would have only earned 0.841%.
Truth: The Opportunity Cost of Paying Off Your Mortgage is High
If you make one decision with your money, you give up the ability to use your money in another opportunity. The difference in earnings is called opportunity cost.
So, if you could have invested $700K and earned 5% each year over those same 30 years and made $2,325,359.66, but you instead used it to pay cash for the house that increased in value by $200K over the same timeframe, you’ve made a significant error of judgment.
The mistake caused you to lose out on over $2 Million you could have earned but gave up instead.
Truth: You Might Just Be Breaking Even
But even if the property does appreciate, have you really made money at all?
The cost of owning your home is much greater than your purchase price.
Consider all the money you’ve put into your house, including the mortgage payments you’ve made – principal and interest – plus annual taxes, homeowner’s insurance, and then all the maintenance, repairs, and improvement projects along the way. Add in the roof, windows, and AC you’ve replaced. The fence you repaired. The landscaping you’ve done, including weekly lawn maintenance. The kitchen upgrades. Add in labor costs for any contractors you’ve hired contractors. If you’ve DIY’ed, add up the value of the time you spent.
If you think I’m going too far, consider the cost of renting. The owner must pay for all of the expenses mentioned above. They can only calculate profits after accounting for all of the expenses, not just the mortgage. If they’re a wise owner, they’ve likely pushed that cost down to you by charging more in rent than they pay in a monthly mortgage payment.
Likewise, you too, as the property owner of your home, must calculate all the costs of home ownership to discover your real cost before attempting to find the rate of return.
When you consider all the dollars you put in, the inputs are much higher, meaning your returns will be even skimpier, if they exist at all.
Truth: Home Equity Is Not an Investment or Savings
Yes, it’s true that for many Americans, their home is their primary asset of value. Meaning that if you conducted an assessment of where their dollars “live,” you’d find most of them hanging out in home equity. We call dollars that are camped out in home equity to be “in the four walls of the house.”
This wouldn’t be a problem if your home were an investment. But as we just discovered, your home is far from an investment.
This also wouldn’t be a problem if your home were a great piggy bank, where you could put your dollars for safekeeping, and then pull them back out whenever you need them. But money in the four walls of your house isn’t easily accessible. Worse yet, an adjustment in the housing market could cause your hard-earned dollars to evaporate if your property value drops below what you’ve paid in.
Truth: It’s Inconvenient to Use Your Equity
Even if your house is fully paid off and you have maximum equity, if you’re occupying your primary asset, it’s a little inconvenient to access the appreciation. It’s either expensive, time-consuming, or not a guarantee.
If you want to experience the returns by taking out a home equity loan or line of credit, you’ll have to apply and pass the bank’s qualification process first.
To refinance instead, you’ll have to qualify
If you opt to sell, you’ll probably pay for repairs and home improvements before you list, wait for a qualified buyer, and then pay closing costs. Once you’ve sold, you’ll then have to find another place to live, which often costs the majority of what you made in the original house.
So, no matter how you look at it, it’s not easy to get access to your equity if you want to use it for something else.
That means dollars in the four walls of your house are not dollars in your control.
Myth 3: You’re Safer When Your House is Paid Off
Truth: Putting Your Cash into the Four Walls of Your House Means Less to Save and Invest
Most people think they’ll save themselves from money worries and anxiety when their house is paid off. After all, not having a monthly mortgage payment in the future does seem pretty attractive.
That’s the reason for larger down payments, extra payments, and shorter mortgages.
But let’s walk this story out to its end point and see where it takes us.
If your house is paid off, your cash is now inside the four walls of your house. That means you don’t have the money elsewhere to invest or use as you wish.
Home equity is not the ideal storage tool for an emergency/opportunity fund, because you can’t access it easily.
And it’s not the ideal investment, as we discussed earlier.
That means you’ve sacrificed building savings or investing well and ignored two of the main components of wealth building, all because you’ve believed the narrative that you’re safer with a paid-off house.
Truth: The Slower You Pay Off Your Mortgage, the More Cash You Keep
With a longer mortgage, you have smaller monthly payments, and consequently, more cash flow.
With a shorter-term mortgage, the payments are concentrated into fewer years, meaning you pay more each month and keep less of your money each month.
Japan breaks our American mold and offers 100-year mortgages. If given the opportunity, I’d take that option all day every day, because with the payments stretched more than 3X longer, the payment would be far lower, and I’d keep way more of my money.
When you have more cash flow each month, you can store it somewhere outside the asset of your house. And when you decide where you put your cash, you have more control.
Truth: With a 30-Year Mortgage, You’re in a Safer Position During the Entire 30 Years
The thought pattern of the person with the 15-year mortgage is: I’ll chunk my financial goals into two different timeframes. With the cash I have available, first, I’ll pay off my house. Then, after my house is paid off, I’ll save and invest. It’s the process-oriented thinking of popular financial teacher, Dave Ramsey.
The person with a 30-year mortgage can do both at the same time. They start right away paying for the house. But, because they have a smaller payment, they have cash left over that’s not allocated to housing costs. They can begin simultaneously building savings and investments.
Here’s the interesting thing. If both mortgages had the same rate (i.e., 4%), and both people saved in identical accounts earning the same rate (i.e., 6%), both would end up with a paid-off house and equal dollar amounts in their account at year 30.
It looks like either strategy gets the same results from that vantage point.
But if you look at every one of the 29 years, 11 months, and 30 days along the way, the person with the 30-year mortgage had more cash they controlled the whole time.
With more cash in their control, they were in the safer position, because they had reserves they could use. If they had an emergency or wanted to invest in an opportunity, they could do so right away, without having to apply and qualify first.
Truth: Wealthy People Don’t Always Pay Everything They’re Capable Of
If paying off your mortgage early was always the best move, the smartest, wealthiest, most financially savvy and successful people would do it all the time. They would consistently pay off their mortgages as quickly as possible. If they could pay cash instead of getting a mortgage, they would.
But they don’t.
Just because you have the cash to pay in full for your house, or pay it off early, doesn’t mean it’s the best use of your resources.
Well-known billionaire Mark Zuckerberg has a 30-year mortgage on his house, even though he could have easily paid cash. Why would he make that move?
He knows that he can do much more with his money when it’s not locked up in the four walls of his house. He understands having cash that he controls puts him at an advantage. If he knows he can use or invest his capital to earn exponential returns but decides instead to tuck it away into his house where it earns less than 1% return, he’s forfeiting his stewardship and giving up dollars he could have earned.
Truth: Today’s Dollars Are Worth More than Tomorrow’s Dollars
Anytime you pay today when you could pay tomorrow, inflation works against you.
Because of the invisible erosion of the purchasing power of our dollars, our dollars shrink in value over time.
I always remember the story in Little House on the Prairie where Laura and Mary got 2 pennies each for Christmas, and they used their money to buy candy. Even hearing this story when I was a little 5-year old girl, I knew that if I purchased a piece of candy, it would cost way more than $0.01. Today, the same candy probably would cost closer to $2.
Inflation mysteriously works for and against us over time.
Earning $100K feels like less and less, hurting us since we have less income.
But paying $1K each month feels like less and less, benefiting us because usually, our income rises over time (due to said inflation), so we now have proportionally more of our money to keep.
Inflation works in our favor with a mortgage, because it locks in a fixed payment that will never rise during the term of the agreement. This makes future payments seem smaller and smaller.
For instance, a $1K monthly payment, at a generally accepted 3% annual inflation rate will feel like just $412/month when you get 30 years out.
So why would you put today’s most valuable dollars into the control of the bank and mortgage company by paying off your mortgage more quickly than necessary?
Truth: When You Pay Off Your Mortgage Quickly, You Give Up Your Most Valuable Dollars
Any time you pay more today than you must, whether through overpaying each month, having a shorter mortgage than required, or making an extra payment, you are choosing to pay now rather than later.
And when you give up dollars today instead of later, you give your most valuable dollars to someone else. By paying them to your mortgage, you put them into the four walls of your house. This gives control of your most valuable dollars to the bank. If you want to use them later, you’ll need the bank to grant you permission to use your own dollars that will then be less valuable.
Truth: The Closer You Are To Paying Off Your Loan, The Greater the Risk of Foreclosure If You Stop Making Payments
At any point along the path to paying off your house, you aren’t able to make the payments, the bank will treat you differently, based on what they have at stake.
If you’re close to paying off your house, they’ve already got most of the cash. Working with you to stay in your home is a
However, if you have a brand new mortgage, and can’t make payments, losing your payments is of much greater importance. The bank will be much more lenient in renegotiating the terms of the loan to keep you in the house.
Truth: Your Home Value Has Nothing to Do with Your Equity
If you’re still set on grabbing as much appreciation as you can with your home, consider that the value of your home goes up with orwithout a loan.
If you and your neighbor have identical houses with equal property values, and new development in the community raises the value of your homes, the appreciation won’t discriminate based on how much of your loan you’ve paid off compared to your neighbor.
This means that your appreciation has nothing to do with how much you’ve put in.
Stated differently, appreciation is independent of equity. Meaning that even if you pay off your home fully, you’re not going to get any better appreciation or returns on your house than if you still have an outstanding loan.
Myth 4: A Lower Interest Rate Costs You Less
Truth: Banks Set Interest Rates Based on What’s Best for Them
But doesn’t a lower rate mean I pay less interest and keep more of my money?
Here’s the most important thing to realize about interest rates: they are the bank’s incentivizing tactics.
The bank sets rates based on what’s best for them, not what’s best for you.
When you’re earning, you want to get higher interest. That’s why the banks pay more for what benefits them. They’ll pay more on longer-term CDs than on short-term CDs. But to get the higher rate, you have to give up control and liquidity of your money for longer. Giving you a higher interest rate, in this case, means the bank gains control of more money for longer, so they win.
Conversely, when you’re paying, lower rates
In each case, it’s to the bank’s benefit when they control capital, because that’s more money they can put to work.
Controlling your own capital like banks do puts you in the position of advantage.
This is why paying a point less in interest isn’t the top priority. The interest rate deflects your attention from what really matters, which is having more cash in your control.
Keep in mind that mortgage interest is tax-deductible, IF you have sufficient deductions to itemize (more than the $24K standard deduction for a couple), and your mortgage loan is under $750K for new loans since 2017). So, paying more interest may earn you a bigger tax deduction. This means that paying more interest may actually keep more dollars in your pocket than if you’d paid less.
Truth: To Be in Control, Model the Bank
In Be the Bank: The Biggest Thing You Can Do to Increase Your Cash Flow, we talked in-depth about how to increase your cash flow by following the rules of the bank, not the rules they give their customers.
Rather than directing as much cash as possible towards my mortgage, I want to direct as much as I can to cash-flowing assets. In this position, I advance towards time and money freedom.
The American Dream of home ownership can turn into an American nightmare if you pay off your house as quickly as possible, because you lose financial control and security instead of gaining it.
To maintain as much cash flow and financial control, get the longest mortgage possible. You’ll have the lowest monthly payment, and you can keep and control more dollars to put to work somewhere else.
You’re safest having your cash where you control it and can access it along the way.
Math vs. Emotion
As compelling as math and logic are, we humans are not robots or machines. We want to think we make completely rational financial decisions, but money choices are driven primarily by our individual and highly complex emotions, which often lead to entirely different conclusions.
Even with the compelling logic of why you don’t want to pay off your house quickly, make extra payments, or get a shorter mortgage, some people may feel at risk living with an outstanding mortgage. This may create uncertainty and defeat their peace of mind. They may not trust themselves to make wise decisions with the extra cash flow and worry about spending it instead of saving or investing.
Financial choices must be personalized. With that in mind, the mathematically correct decision may not always be the best one for you.
What to Do Next
When should you pay off your house? If you have the cash to be able to pay off your house, you could do so, but only if that’s the best stewardship of your cash at that time. Should you keep the money in savings to maintain the protection of peace of mind? Could you invest the money in a cash-flowing asset you know and control?
If you’re buying a new house or an investment property, are there times to get a 15-year mortgage? It’s better to have lower required payments, pay slowly, and keep as much of your money in your control as possible. However, if emotionally, a 15-year mortgage is the best thing for your peace of mind, then yes.
Are there times to pay off your house early? Yes, only if that’s the highest and best stewardship you can exercise over your resources.
If you already have a 15-year mortgage, what are your options to reduce your payment? You might consider refinancing to a 30-year mortgage but would need to carefully weigh all of your costs first. Your payments will be reduced based on how much equity you have in the home vs. your remaining balance, as well as your credit score and the resulting interest rate on the new loan. You can usually expect to pay closing costs between 2% – 4% of your total loan amount. You may consider taking equity out as well with a cash-out refinance, or simply maintaining your loan amount and restructuring the payments.
Oh One More Thing…
If you really want to know how to stop money flowing out of your control so you can build the time and money freedom you deserve, then book a Strategy Call today.
You’ll find out how to start keeping more of the money you already make, so you can have more to save and invest. And you’ll get clear on the one next thing you need to do, based on your unique situation.
Success leaves clues. Model the successful few, not the crowd, and build a life and business you love.
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