Conventional wisdom tells us that a 30-year mortgages are a safe strategy-but we think they’re kind of expensive. Here’s why.
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Dan and Felisha finished building their dream home near the end of 2018. The proceeds from the sale of their old home were used as a down payment on a 30-year mortgage. The net result was that their new home payment was about the same as their old mortgage. Even though they earn plenty of money, they opted for the 30-year mortgage to keep payments low in case of an unexpected financial hardship such as a loss of income or other catastrophe. Additionally, they had been employing the biweekly mortgage paydown method which effectively adds one extra mortgage payment per year. They were wondering if there was anything they could do to be more efficient.
These folks have an aggressive plan and know a thing or two about investing and growing their money. In this case, no one explained any alternative to a 30-year mortgage. After taking some time to understand the nuts and bolts of their plan we pulled out the amortization schedule. We showed the client how they would pay close to $231,000.00 in INTEREST on their loan if they didn’t pay off the loan early. This is almost 80% of the entire loan amount! Even with the biweekly payment method it would still take 24 years and $184,000.00 in INTEREST to pay off the home.
A 30-year mortgage may seem safe; but, it’s actually just very expensive. One of the concepts we always teach is that the amount of time you spend under a debt load has a much bigger impact on your spend than the interest rate. Next, we showed them interest cost on a 15-year loan; they were shocked to see that the total interest dropped to just $75,000. This is a savings of over $100,000.00 over their already aggressive plan. Saving 100K would make a big difference to helping them achieve their goal of retiring early.
While they were very excited about the potential savings, the were still concerned that the 15-year loan would cost them about $600.00 more a month than the 30-year loan. This is where many folks in the mortgage industry fail to educate the client or provide alternative solutions. We went back to the loan schedule and showed them that 100% of the extra payment went right back into their pocket in the form of equity /principal reduction. We additionally introduced them to the concept of being mortgage safe. They already had a fair amount of equity in their home, so we advised them to take out a home equity line of credit to use as an emergency fund in the case of an unexpected financial hardship. These funds are not to be used for anything other than financial hardship.
Dan and Felisha decided to shorten their term and save $100,000.00 worth of interest. We showed them how to reduce their overall expenses, reduce the time to retire by one year and provided them with a method to compensate for the higher monthly payment in the case of an emergency. We continue to work with Dan and Felisha to strategize on all of their real estate investments.
We chose to work with Kyle Wood and his team as a result of his attentiveness to our financial aspirations and his ability to connect a plan that was in alignment with our short term and long-term goals. Kyle and his team broke down in great detail in easy to understand specifics. He showed us exactly how this would maximize our potential with our family’s biggest investment, this made the decision easy for us to choose him as our mortgage consultant. We are currently working with his team on future opportunities as he has opened several more doors for us to be strategic in the years to come.