You are about to buy something for $250,000.
Your options are to pay $310,000 for this item or $416,000 for this item. Which would you choose?
This thinly veiled example is to show you the difference between a 15-year mortgage and a 30-year mortgage. The difference is a staggering $160,000!
Mortgages used to be 4 years long, now 15 years is about the lowest most people could ever afford to go. And even then, you’ll be shelling out $60,000 in interest (in this example) for the 15-year mortgage. A house is likely the largest purchase you’ll ever make, and the decision of how and when to pay it off is one to really consider.
We, as consumers, have a payment problem. We get so caught up in how much the payment will be that we lose sight of the end balance. You want to max out how much we can afford each month, in exchange for a larger/cooler/fancier house. It’s not about that, though, it’s about how much you’ll have paid at the end of the loan. And also, time. Let’s talk about time. If you get a 15-year mortgage you will definitely pay off your house before retirement. If you get a 30-year mortgage, eh, you might be able to pay it off before retirement, depending on when you start the mortgage. Time is a huge factor to consider. Sure, math is important, but NOT having a mortgage is one of the best financial feelings you’ll ever have.
Here are the arguments I hear often:
I’m going to invest the difference. This is a noble goal, but there is a very small percentage of people who end up following through with this idea. You likely are not one of them.
I’m going to pay extra on my 30-year mortgage. Great, good for you, you might be able to pay it off in 18-20 years, but you’ll still have taken longer and paid more in interest than if you’d just made the effort to convert to a 15-year mortgage.
The payments on a 15-year mortgage are too high. If the payments on a 15-year mortgage are too high for the house you want, you’re basically saying you can’t afford the house. With a 30 year mortgage, you can afford the payment, but the cost of the home at the end will have far exceed what you would have paid with a 15 year.
This comes down to my favorite question: what’s better than a whole bunch of money? Not needing a whole bunch of money. This starts with your mortgage. We want to buy more for less, but what that actually works out to be is buying more for more. It’s a behavior and mindset change. Of course, a 15-year mortgage isn’t for everyone, but it’s for a lot more people than your excuses would have you believe.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.