Why I Want a 30-Year Mortgage (Part 1)
Welcome to the very first edition of the Wealth Therapy blog! Your best source for information on how to grow your wealth efficiently, safely, and with more control! Our first topic is one that has been debated back and forth for many years, and has also changed over the years based on the economic environment. I expect this to be somewhat controversial, but our topic today is whether to pay cash (like Dave Ramsey and Suze Orman recommend), have a 15 year, or a 30 year mortgage for your home. I am splitting this into two parts because of the amount of information that will be covered. I am not writing this to crunch all the numbers, but instead, I want to speak to you about this topic conceptually.
There is always misinformation out there, but the first problem usually lies within how the comparisons are being made. You have to do a proper scientific comparison, which requires you to only change one variable at a time, such as interest rate or the time frame. When this is not done and multiple variables are changed, you are comparing apples to oranges! Often, you see the comparison of the effects of a 15 year mortgage over 15 years, to a 30 year mortgage over a 30 year time frame. When this is done, you are changing two variables. Let’s dive right in and get to the bottom of why I want a 30 year mortgage.
1. Opportunity costs:
Dictionary.com defines opportunity cost as, “the money or other benefits lost when pursuing a particular course of action instead of a mutually-exclusive alternative.” In other words, every extra payment that you put towards your mortgage could have been an amount for another opportunity in a safe, interest bearing account (yes, they do exist, and they are not called a savings account, money market account, or a certificate of deposit!). Making the decision to pay cash or have a 15 year mortgage, compared to a 30 year mortgage, will save you an interest payment but it won’t save you an interest cost. If we are able to save the extra cash flow from a 30 year mortgage in a conservative 5% interest bearing account, that will also compound over the same time frame to a much greater value than any interest payment we will have. Too many times, we focus on things from a scarcity mindset (another future article). As Keith Weinhold says, “the scarcity mentality is abundant and the abundance mentality is scarce.”
Whether someone pays cash for their home or takes a 15 or a 30 year mortgage, when factoring in the time value of money, all three scenarios end up costing the same. The difference is that most people are not taking advantage of the conservative 5% interest bearing account working for them at the same time. Mortgage rates are low right now, and there are SAFE investments outside of the stock market that provide higher returns on your money. Not to mention, isn’t it more important to get a return of your money, than a return on your money? Alternative investments can provide that for you. If you want to know what these investments are, reach out to me!
2. Emergency/opportunity fund:
I believe it is extremely important to have an appropriate emergency fund. There are many viewpoints on how much this should be, but the important thing is that you have one in every stage of life, and that it fits your lifestyle. This will help you avoid going into “bad debt”. I also believe it is equally important to have an opportunity fund. You need to be able to take advantage of opportunities that come your way. If you are tying up all your money in equity or extra mortgage payments, how can you expect to have either one of these funds available to you, especially as you go through life? Having the ability to have both of these funds is yet another reason why I would choose a 30 year mortgage.
No matter how you decide to pay for your home, your mortgage is locked in at a certain rate. As you continue to make payments on your mortgage, the purchasing power of your dollar in other areas of your life goes down each year due to a silent wealth killer known as inflation. If I pay $800/month towards my mortgage starting in 2017, I will still have to pay $800 in the last month of my term in 2047. We want to be able to hedge inflation as much as possible. I want to keep as much of my money from a mortgage in debt, because inflation will erode the debt burden I will have.
Now, let me ask you, do you think you will be able to buy the same thing in 2047 at the same price you bought it for in 2017? According to the Bureau of Labor Statistics, the dollar experienced an average inflation rate of 2.59% per year over the last 30 years. Prices in 2017 are 115.48% higher than prices in 1987. In other words, $100 in the year 1987 is equivalent to $215.48 in 2017, a difference of $115.48 over 30 years. If we were paying $800/month for a product in 1987, that same product would be $1,720 today! ($800 x 115% + $800). Why not lock one of the biggest purchases of your life in at a low rate and still be able to grow your wealth at the same time?
Are you convinced yet that a 30 year mortgage is more efficient than paying cash or choosing a 15 year mortgage? If not, continue reading on to part II!