PSA: Why you SHOULDN’T get a 15-year Mortgage

What's up you guys? It's Graham here.

So, this subject gets brought up a lot on my channel, but I've yet to make a dedicated video explaining why I don't recommend getting a 15-year mortgage when you go and buy real estate. So here I am explaining how you can actually be better off getting a 30-year mortgage, even though it appears that on the surface you can be paying a lot more money over the term of the loan than if you just got the 15-year mortgage.

Let's see. It's not until you really understand the dynamics of having a 30-year mortgage do you really get to understand all the benefits associated with that, which I will explain as soon as you hit that like button. But seriously, that make sure to hit the like button. This video probably took me three times longer than it normally takes me to plan out because of how in-depth this video is. So if you hit the like button, it would be greatly appreciated.

By the way, anytime I make a video like this, people treat it as though I'm discussing religion or politics, and they get so triggered. Their feelings get hurt; they write angry comments, they unsubscribe. It's just not a pretty scene down in the comments section.

So, because of that, I'm just gonna be sticking with the unbiased facts, and hopefully you guys enjoy my reasoning. Also, by watching this video until the very end, you're gonna be able to make a more informed choice that could put you in a way better position financially in the future.

So, let's first start with the basics. What are the differences between the 15-year mortgage and the 30-year mortgage? Well, on this side we will have the 15-year mortgage. Now the advantage of doing this is that you get a slightly lower interest rate. So, right now, if we go and check Chase bank's mortgage rates online, you'll see that the 30-year mortgage rate is sitting at 5%, but the 15-year mortgage rate is only at 4.375%. This basically just means you're gonna be paying a lot less interest over the lifetime of the loan.

Now, the next advantage on the surface of the 15-year loan is pretty self-explanatory, and that is you pay off the property in 15 years versus 30 years. Finally, the last advantage here is that you end up building up a lot more equity with a 15-year loan much faster than with the 30-year loan.

But, however, there is a dark side when it comes to the 15-year loan, and that is in order to pay off the home in 15 years, your payments will be significantly higher. This means if you have a rental property, that's less money in your pocket every single month, and also more money that you just end up tying up in the. Also, because you end up having a higher payment, a lender is going to qualify you to buy less real estate than if you did a 30-year loan because they have to take into account the higher mortgage payments to pay off the home in 15 years.

Okay, but now what about the advantages of going with a 30-year loan? Now, the most typical one is that you have a lower monthly payment because you now have an additional 15 years to pay off the property. This means you're gonna have more money left over in your pocket every single month for possibly higher yielding investments than what you're paying for a mortgage.

Finally, especially when it comes to investing in real estate, because you have a lower payment, you're gonna be able to qualify to buy more real estate, and chances are this means you will just end up making more money. But unfortunately, no good mortgage goes unpunished, and there are a few downsides with the 30-year loan. Namely, number one is that your interest rate is going to be slightly higher. Like our last example on the 15-year loan, you'd be paying 4.375% interest over 15 years. On the 30-year, that's going to cost you 5%.

That also means that you're going to be building up equity a lot slower when you go for the 30-year mortgage versus the 15-year mortgage. And because of that, it's gonna take you a lot longer to pay off the property in full. I mean, this is all self-explanatory stuff here, but obviously it takes you 30 years to pay it off versus 15 years to pay it off on this side.

But you know what? Let me tell you a little secret. Because that might not actually be a bad thing; it's actually a good thing. Let me explain. See, in order to understand firsthand why a 30-year mortgage is actually the better superior option over the 15-year, let's take a real-world example of a $300,000 loan.

Let's first start with the example of a 15-year mortgage option at 4.375% interest for $300,000. Every single month, that means your payment is going to be $2,372 per month. I can't believe I memorized that.

Now, anytime you have a mortgage, it's broken up into two categories: the first one is interest; the second one is principal. As you can see here, in the first few years, half of that $2,372 payment for a 15-year loan is interest on your total loan balance, and the other half is principal by paying down your loan.

Now, because you end up aggressively paying down the loan balance, you end up paying less interest over time. Because of that, you end up paying off your home much faster in the fifteen year. This means that over the lifetime of the loan, you're gonna be paying $127,000 in interest over 15 years.

Now let's take that same loan example and just assume you got a 30-year mortgage. Now, with this, your monthly payment is only going to be $1,610 every single month. That is $762 less than if you went for the 15-year mortgage. So obviously, just like our last example, we should then break it down for principal and interest.

As you can see, in the first year, you're gonna be paying $14,900 in interest and only about $4,400 in principal. Now, because you're paying down a lot less principal early on, because you're making a much smaller monthly payment, it means you're gonna be paying a lot more interest over the lifetime of that loan. This means that over the lifetime of a 30-year loan, you're gonna be paying $279,000 in interest when you go and take out a $300,000 loan.

Now it's at this point that this video actually gets interesting, where I explain how this isn't really the case because most people see this and they just think, "Wait a second, you guess I'm paying double for my lab? You spend this, it makes no sense. You guys, Graham lied to us because he’s trying to sell us houses because he's a real estate agent and a real estate investor, lying to get us all the five mil thing." This bike unser.

But when you actually think about it and really break it down, it becomes very obvious which is the better option, and that is the 30-year mortgage.

Now, let's first start with the number one surface-level argument that people make, which is when you get a 30-year mortgage, you end up paying much more interest over the lifetime of the loan than if you just took the 15-year mortgage. Yes, you know what? On the surface, this appears correct because on a 15-year loan, you end up paying $127,000 in interest. On the 30-year loan, you're paying $279,000 of interest. And when you take the difference between the two, you're paying $152,000 more for getting the 30-year mortgage on the surface.

The thing is when you look into this further, you'll understand why that doesn't quite make sense.

Now, what most people end up forgetting here is inflation, and with an average inflation rate of about 2% annually, your money in the future is going to be worth a lot less than the money you have right now, today. This means the total figure that you see at the very end is not adjusted for inflation, meaning the total amount of interest you pay is considerably less than what you think it is thanks to inflation.

What many people don't seem to realize is that towards the end of the loan, you're paying down the loan in today's dollars with future dollars value, which, as we all know, thanks to inflation, is going to be considerably less. Imagine it as though I said to you, "Hey, here's one dollar that you can borrow, just pay back 30 years from now and give me back the one dollar." You know what? Okay, so when you pay back the one dollar thirty years from now, it's really the equivalent of only paying fifty-four cents in today's money. And you end up profiting the difference thanks to inflation.

Now, obviously, that's a very oversimplified example just to prove my point, but you get the concept here.

Now, this is where the 30-year loan really begins to shine.

Even though on the surface, like I said, you pay a lot less interest with a 15-year loan, you reap the advantage of inflation by holding on to that loan for 30 years, thereby lowering the amount that you have to pay in today's money in the future.

But now, let's discuss the payments between the 15 and 30-year mortgage because you don't pay off a property in 15 years for free.

In our last example, the payments on $300,000 for 15 versus 30 years is going to be $762 more every single month for a 15-year loan. That's basically how you can pay it off in 15 years because you're paying an additional $762 every single month towards principal.

Here's where I see the main downside of this: because your payment is a lot higher, that is $762 a month less in your pocket that you can use for other investments that perhaps generate a much higher return.

Now consider this: when you have a 4.375% mortgage interest rate and you itemize your deductions, or it's a rental property, that full amount is a write-off against your rental income. This means that if you're in a 22% tax bracket, your effective interest rate is reduced by that amount, meaning that the effective amount that you pay in interest is really more like 3.4%.

Then, of course, you have to add on your 2% inflation to that number, which really brings that mortgage interest rate down to 1.4% effectively after inflation and with your tax write-offs.

Then, thinking is why make extra payments towards our home equity with a larger monthly payment with equity you can't really utilize when you're only paying 1.4% adjusted for inflation after tax write-offs? You could pretty much get a higher return investing your money anywhere else than paying down your mortgage early.

Now, on our 30-year loan example, the numbers are pretty similar. You're paying a 5% interest. If you're in a 22% tax bracket, this brings it down to an effective 3.9% interest rate after your tax write-offs. Lower that again by 2% inflation annually, and you are paying effectively 1.9% interest on a 5% mortgage versus on this side 1.4% interest on a 15% mortgage.

But on this side, you have to pay an additional $762 every single month that you are obligated to.

Now, I know I'm going pretty heavy with examples here, but consider this because the results of this are actually pretty shocking. I had no idea it would be this big of a difference between the two scenarios.

One, that you're gonna have a 15-year mortgage that you're gonna pay off in 15 years, $300,000 at 4.375% interest. Then after that 15 years are up, you're going to continue making the exact same payments as you would on a mortgage, except you're gonna put that into an investment that yields 7% after inflation, which is historically what the S&P 500 has averaged over the last 100 years. That means that after 30 years, you're gonna have a paid-off property and almost $732,000 invested, which isn't bad. I mean, that sounds pretty good, right?

Then we're gonna have scenario two right here: $300,000 loan that you pay off over thirty years at a 5% interest rate. But the difference here is that your payment is a lot lower, and you will invest the difference. You're still gonna spend the same amount every single month, $2,372, except you're going to invest the difference starting on day one of $762 every single month averaged at a 7% return annually.

But guess what? Here are the results: after thirty years, you're gonna have finally a paid-off property, and you will have $941,000 invested. Even though it appears that on the surface you ended up paying more money for that loan and a higher interest rate than when you did the 15-year mortgage, this means that you ended up making $200,000 more by taking the 30-year loan and investing instead than paying off your home in 15 years and then investing after that.

Now, the other advantage of doing a 30-year loan is that because you have a lower monthly payment, you can qualify to buy more real estate, which, if you're investing in real estate, usually just means you're gonna end up making more cash flow, getting more real estate, and then making more money.

Know what? A 15-year loan, because your payment is going to be $762 higher, this means you can qualify for $135,000 of less real estate than if you had the same payment on just a 30-year loan.

See, the thing is lenders don't really care how much equity you're building up in a property or how fast you're gonna be paying it off. All they care about is what is your monthly payment every single month. This just means the higher the payment you have, even though you'll have that payment for half the time, the less you're going to be able to qualify for.

Now, with that $762 that you have on this side, you can qualify for an additional $140,000 worth of a mortgage, which means that instead of getting a $300,000 mortgage on this side with a 15-year, you would be eligible to get a $440,000 mortgage on this side on a 30-year.

Now, I understand that this was a pretty technical video, and I used a lot of examples, but let me just sum this up. So that if you don't watch any of this video and you just come straight to this, at least I hope this part is going to make some sense.

First of all, number one, there's nothing stopping you from paying down a 30-year loan early. It's up to you if you want to pay it off in five years, ten years, fifteen years, one year, twenty years; it doesn't matter. With a 30-year loan, you can pay it off at any time, and you can apply any amount to principal as you want to.

The advantage that a 30-year loan ends up giving you is really just about flexibility. It gives you the option to pay it off over thirty years, or if you want to pay it off sooner, you can go ahead and pay it off sooner if there's another investment you can go and invest in instead, or you can just save the $762 every single month and just spend it on whatever.

30 years gives you more flexibility. The advantage to doing a 30-year as well is it gives you more leeway on your payments in the sense of let's say you lose your job or your income gets cut in half or something happens, and all of a sudden, this $2,200 a month payment becomes a lot to handle. But you can manage a $1,610 monthly payment.

Well, in that sense, if you're paying it off early, maybe you could just scale back and make the minimum payments on the thirty-year, whereas with a fifteen, you were obligated to pay that $2,200 every single month.

The whole thing is that paying less throughout the term of your loan gives you more flexibility with your money to really decide what you want to do with it.

Now, also having home equity isn't really going to be making you money. Now, this might be a very unpopular opinion, but having money tied up in a property that's not easily accessible for other higher-return investments just means you're gonna end up making less money.

Now, in order to actually get that equity that you have in the property by making higher payments, you will either need to sell your property or do a cash-out refinance, which then just starts the whole mortgage process over again, and that almost just defeats the purpose of getting a 15-year loan to begin with.

Now, with a 30-year loan, you have access to your money when you need it because you're making a lower monthly payment and tying up less money in real estate, allowing you more flexibility to invest or do with your money whatever you please.

It arguably the difference between a 30-year mortgage and a 15-year mortgage, when you account for tax write-offs and inflation, is really such a small number that really doesn't make any difference. So, you may as well just take the 30-year loan, have more cash flow, have more flexibility, and in any example, have $200,000 more if you just end up investing the difference that you would have paid if you just had the 15-year mortgage.

And let me say this for all of the Dave Ramsey fans who live by his advice of only getting a 15-year mortgage: the shortest path to wealth is no debt 100% of the time. I'm convinced of that.

The ideal scenario here is that if you're buying something for yourself to live in, buy something where you could afford to make the payments on it as if it were a 15-year loan, but get the 30-year loan just for the additional flexibility.

This might be a bit conservative, but I really believe that if you're buying a property where you can only afford it if you get the 30-year option, I would argue that you should probably lower your price range a bit. That way, you have a little bit more flexibility, so you're not just tapping yourself out on a 30-year loan with a property you can't really afford.

Now, when it comes to an investment property, always take out the longest-term loan you can because at the end of the day, cash flow is king, and you can use that mortgage interest as a write-off. So it makes sense on any sort of investment to take out the 30-year loan if at all possible.

Now, I will say this: in order for these concepts to actually work, you really got to stick with it and be disciplined with it. If you're just going to get a 15-year mortgage then blow the difference on boats and hoes, this whole thing doesn't make sense, and you should be just better off forcing yourself to pay off the home in fifteen years if you're just gonna blow the difference on stupid stuff.

No, I also definitely have to acknowledge that there is a psychological benefit of also paying down the mortgage and being debt-free, which I should mention.

Well, mathematically, it makes sense not to pay down the mortgage early and take the 30-year loan. For some people, just a peace of mind of being debt-free is going to be entirely worth it at any cost, and that I totally understand.

It really varies from individual to individual, and if you know yourself and you're the type of person who puts more value on being debt-free than trying to maximize the value of every dollar, I totally understand that. And then just ignore this entire video because that is totally different than what I'm talking about here.

Now, with most videos, I really focus on the logic and the mathematics behind it. I don't really try to take into too much emotion, but I really should because people are emotional, and things do come up. People are sometimes impulsive, and they want to spend money differently.

This view really depends on the person, so obviously use all of this at your own risk and know yourself to the point where, if you know you're just gonna blow it on boats and hoes, then just don't. Don't do that.

So with that said, you guys, thank you so much for watching. If you haven't already, make sure to smash that like button, smash that subscribe button, smash that notification bell so it notifies you anytime we post a video, which is three times a week. Also, add me on Snapchat and Instagram; posts are pretty much daily. So if you want to be a part of it, feel free to add me there.

Lastly, I have a private Facebook group in the description for anyone who's interested in real estate. I think we just hit 10,000 members! There we go, 10,000!

So let's go for 20,000! So feel free to add yourself to that great community. The video is too long. Thank you again for watching, and until next time.