IT JUST DOESN'T ADD UP!
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CAUTION:
Before you read this section, be aware: You have been intentionally led to believe a number of mis-truths about many aspects of MONEY, FINANCE, and BORROWING. Our mission is to clear that up, but in doing so, you must understand that it will be challenging to accept new FACTS about anything that challenges your current beliefs.
It's called "BELIEF BIAS". It's human nature to want to be RIGHT about anything. No one wants to be wrong.
When we learn something new that challenges what we THOUGHT to be right, psychologists tell us that we will first try to defend our WRONG beliefs...because doing so is less painful than admitting... WE WERE WRONG.
If you're ready to know the TRUTH about why the 15-year mortgage is probably WRONG...read on.
Before you read this section, be aware: You have been intentionally led to believe a number of mis-truths about many aspects of MONEY, FINANCE, and BORROWING. Our mission is to clear that up, but in doing so, you must understand that it will be challenging to accept new FACTS about anything that challenges your current beliefs.
It's called "BELIEF BIAS". It's human nature to want to be RIGHT about anything. No one wants to be wrong.
When we learn something new that challenges what we THOUGHT to be right, psychologists tell us that we will first try to defend our WRONG beliefs...because doing so is less painful than admitting... WE WERE WRONG.
If you're ready to know the TRUTH about why the 15-year mortgage is probably WRONG...read on.
Good for you or them?
(we used bankrate.com to make the calculations in this illustration.)
Is a 15-YEAR mortgage better for the BANK?
Let's take a look at this logically and use the following 4 "RULES" that we hope you agree with:
RULE #1) banks are in the business of making money
RULE #2) banks would prefer to make MORE money not LESS money
RULE #3) banks that don't make enough money risk going out of business
RULE #4) banks need money to make money (they can't make loans unless they have money to lend!)
If a person wanted to borrow $100,000 from a bank they might get a 3% interest over 30 years. The bank would earn a total of $51,777.45 in interest payments (that's their gross profit). The borrower would pay $421.60 per month for 360 months.
If a person wanted to borrow $100,000 from a bank and pay it back over 15 years, the bank might offer them a lower interest rate, let's say 2.85%, for example. The bank would earn a total of $23,010.26 in interest payments (once again, that's their gross profit). The borrower would pay $683.39 per month for 180 months.
Now the bank can either make $51,777.45 or they can make $23,010.26. Hmmm. Rule #2 says they want to earn MORE money. If that's true, why would they DISCOUNT a rate that winds up making them LESS money!?! But a 15 year rate is almost always LESS than a 30 year rate... Doesn't pass the smell test, does it?
The reason is RULE#4.
You see, interest is nice, but unless they get back the BIG money...the amount they loaned out, they won't have enough to make more loans. SO the QUICKER they get their money back, the better it is for them! After 1 year in our 30-year mortgage example, the bank has gotten back a total of $5,059.20. Even with a lower interest rate, using the 15-year mortgage, one year later the bank will have gotten back a total of $8,200.68.
CONCLUSION: Lending money out for only 15-years is a HUGE benefit to the bank! They get your money quicker.
so the next question is...
Is a 15-YEAR mortgage better for THE BORROWER?
To answer this question, we have to use some other rules that pertain to the average borrower:
RULE #1) the average homeowner relocates/refinances about every 8 years. That means mortgages last about 8 years.
RULE #2) interest rates for borrowers for anything other than a home are typically higher than mortgage rates
RULE #3) cash flow is one of the most important factors for most households
RULE #4) the MotleyFool suggests that the average return on 401k investments is between 5% and 8%.
Using the monthly payments illustrated in the previous example, ($683.39 for the 15 year payment at 2.85% and $421.60 for the 30 year payment at 3%), the monthly cash flow benefit on the 30 year option is $261.79. That means, every month, the borrower who opted for the 30-year mortgage, has an extra $261.79 per month that the borrower who uses a 15-year mortgage is obliged to PAY every month.
There are several options that the borrower has for the $261.79 monthly windfall. a) eliminate credit card debt which may have a double-digit interest rate. b) put the money in a shoebox for a rainy day or c) commit the monthly savings to a long term plan.
Here's how it might work out after 8 years.
1) after 8 years, the 15 year mortgage balance would be: $51,985.43
2) after 8 years, the 30 year mortgage balance would be: $81,407.15
3) investing the $261.79 monthly for 8 years at an annual return rate of 6% would result in an accumulated balance of: $32,120 (per bankrate.com)
While the 15-year mortgage reduced the outstanding balance by $29,421.72 more than the 30-year mortgage during the 8 year timeframe, the extra cash flow a borrower would have using the 30-year mortgage might present a number of offsetting benefits.
The fact is this: if the cash flow is AVAILABLE to allow a borrower the opportunity to use a 15-year mortgage vs a 30-year mortgage, the net financial impact of using that same cash-flow OUTSIDE of the mortgage, could potentially result in a modest to substantial benefit in using the 30-year mortgage option.
CONCLUSION: Borrowing money for 15-years will cost MORE on a monthly basis. How the borrower handles the monthly SAVINGS generated by using a 30-year mortgage will be the determining factor in deciding if a 15-year is better or worse than a 30-year mortgage alternative
Unless you have evaluated ALL aspects of borrowing, saving, cash flow, and likely amount of time you will retain your new mortgage, the answer to this question will remain unknown.
REFI NOW WITH US! 513-654-5141
Eliminate the unknowns, the half-truths, the misconceptions, the smoke & mirrors!
Is a 15-YEAR mortgage better for the BANK?
Let's take a look at this logically and use the following 4 "RULES" that we hope you agree with:
RULE #1) banks are in the business of making money
RULE #2) banks would prefer to make MORE money not LESS money
RULE #3) banks that don't make enough money risk going out of business
RULE #4) banks need money to make money (they can't make loans unless they have money to lend!)
If a person wanted to borrow $100,000 from a bank they might get a 3% interest over 30 years. The bank would earn a total of $51,777.45 in interest payments (that's their gross profit). The borrower would pay $421.60 per month for 360 months.
If a person wanted to borrow $100,000 from a bank and pay it back over 15 years, the bank might offer them a lower interest rate, let's say 2.85%, for example. The bank would earn a total of $23,010.26 in interest payments (once again, that's their gross profit). The borrower would pay $683.39 per month for 180 months.
Now the bank can either make $51,777.45 or they can make $23,010.26. Hmmm. Rule #2 says they want to earn MORE money. If that's true, why would they DISCOUNT a rate that winds up making them LESS money!?! But a 15 year rate is almost always LESS than a 30 year rate... Doesn't pass the smell test, does it?
The reason is RULE#4.
You see, interest is nice, but unless they get back the BIG money...the amount they loaned out, they won't have enough to make more loans. SO the QUICKER they get their money back, the better it is for them! After 1 year in our 30-year mortgage example, the bank has gotten back a total of $5,059.20. Even with a lower interest rate, using the 15-year mortgage, one year later the bank will have gotten back a total of $8,200.68.
CONCLUSION: Lending money out for only 15-years is a HUGE benefit to the bank! They get your money quicker.
so the next question is...
Is a 15-YEAR mortgage better for THE BORROWER?
To answer this question, we have to use some other rules that pertain to the average borrower:
RULE #1) the average homeowner relocates/refinances about every 8 years. That means mortgages last about 8 years.
RULE #2) interest rates for borrowers for anything other than a home are typically higher than mortgage rates
RULE #3) cash flow is one of the most important factors for most households
RULE #4) the MotleyFool suggests that the average return on 401k investments is between 5% and 8%.
Using the monthly payments illustrated in the previous example, ($683.39 for the 15 year payment at 2.85% and $421.60 for the 30 year payment at 3%), the monthly cash flow benefit on the 30 year option is $261.79. That means, every month, the borrower who opted for the 30-year mortgage, has an extra $261.79 per month that the borrower who uses a 15-year mortgage is obliged to PAY every month.
There are several options that the borrower has for the $261.79 monthly windfall. a) eliminate credit card debt which may have a double-digit interest rate. b) put the money in a shoebox for a rainy day or c) commit the monthly savings to a long term plan.
Here's how it might work out after 8 years.
1) after 8 years, the 15 year mortgage balance would be: $51,985.43
2) after 8 years, the 30 year mortgage balance would be: $81,407.15
3) investing the $261.79 monthly for 8 years at an annual return rate of 6% would result in an accumulated balance of: $32,120 (per bankrate.com)
While the 15-year mortgage reduced the outstanding balance by $29,421.72 more than the 30-year mortgage during the 8 year timeframe, the extra cash flow a borrower would have using the 30-year mortgage might present a number of offsetting benefits.
The fact is this: if the cash flow is AVAILABLE to allow a borrower the opportunity to use a 15-year mortgage vs a 30-year mortgage, the net financial impact of using that same cash-flow OUTSIDE of the mortgage, could potentially result in a modest to substantial benefit in using the 30-year mortgage option.
CONCLUSION: Borrowing money for 15-years will cost MORE on a monthly basis. How the borrower handles the monthly SAVINGS generated by using a 30-year mortgage will be the determining factor in deciding if a 15-year is better or worse than a 30-year mortgage alternative
Unless you have evaluated ALL aspects of borrowing, saving, cash flow, and likely amount of time you will retain your new mortgage, the answer to this question will remain unknown.
REFI NOW WITH US! 513-654-5141
Eliminate the unknowns, the half-truths, the misconceptions, the smoke & mirrors!