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In case you missed my previous scorching hot housing posts that almost certainly had an agenda (\u201cHot Takes on Home Ownership: Keep Renting<\/a>\u201d and \u201cWhen the Math Supports Buying Your Primary Residence<\/a>\u201d) as I grew increasingly more cynical about the home ownership equation, I\u2019d recommend reading at least the second one before launching into this one. <\/p>\n However, you can rest assured that today, we embark on this journey together out of sheer curiosity. <\/p>\n I had seen the numbers before for 30-year mortgages and witnessed firsthand as friends got themselves in over their heads with their housing decisions, finding themselves stretched increasingly thin as unexpected costs piled higher than their emergency funds.<\/p>\n But when someone brought up 15-year mortgages to me, I was intrigued. The obvious initial caveat about a 15-year mortgage is that your monthly payments are going to be higher (since you\u2019ll be paying off the loan in half the time), which means you can probably \u201cafford\u201d less house than you initially thought \u2013 but I wanted to see if the interest saved would help offset the expense of buying a home, because as we saw in \u201cWhen the Math Supports\u2026\u201d linked above, even in a market where your home literally doubles <\/em>in value over the 13 years you live in it (national average), the \u201cinvest and rent\u201d gets you further ahead financially. <\/p>\n For consistency\u2019s sake, we\u2019re going to borrow the numbers from the \u201cWhen the Math Supports\u2026\u201d post (see why it\u2019s so crucial you read that first? I\u2019m name-dropping it everywhere!) and use the following:<\/p>\n A $500,000<\/strong> home<\/p>\n<\/li>\n 20% down payment at $100,000<\/strong><\/p>\n<\/li>\n Mortgaging the remaining $400,000 <\/strong>over 15 years (and 30 years, for context and comparison)<\/p>\n<\/li>\n Interest rate of 3%<\/strong> (lower than the national average of 3.99% as of January 2021, since we\u2019re exploring a 15-year today and usually that means a lower rate)<\/p>\n<\/li>\n Hypothetically based in Dallas, TX<\/strong>, where average appreciation rate is 5.71%<\/strong> (this is a top-10 national figure \u2013 most cities don\u2019t come close, as most housing markets just keep up with inflation, which defies a common misconception about how all real estate appreciates quickly. That\u2019s some 2008 shit)<\/p>\n<\/li>\n Maintenance costs of 1%<\/strong> of the property value per year (on the low end of the national average)<\/p>\n<\/li>\n Insurance costs of 0.6%<\/strong> of the property value per year (national average)<\/p>\n<\/li>\n Property tax true to Dallas, TX at 1.9%<\/strong> of the property value per year (this is higher than the national average of 1%, but since we\u2019re using a home that\u2019s in Dallas and gets Dallas appreciation, we should also use Dallas property tax to be accurate \u2013 this is a departure from the original housing post wherein I used the national average for property tax to give the #MortgageLovers in my DMs a li\u2019l leg up)<\/p>\n<\/li>\n<\/ul>\n It\u2019s a fan favorite because it allows you to pay back a massive sum of money over three decades (making it a little easier to take a fat loan), but the problem with a fat loan is that even a small interest rate has really big implications over time.<\/p>\n Beyond that, when you pay back a mortgage, you\u2019re primarily paying back the interest<\/strong> first \u2013 in other words, the bank front-loads your interest payments in the first several years of home ownership, and you don\u2019t start paying back the principal (the actual amount you got loaned) until later in the mortgage. Since most families don\u2019t live in their homes for a full 30 years, that can mean the bulk of the payments they\u2019re making in the first 5-10 years aren\u2019t doing much to pay down the principal loan balance \u2013 just paying back the interest.<\/em><\/p>\n Take a look at this example from the other post, where you can see that the majority of your payments for the first 15 years (month 180) are majority interest<\/em>. <\/p>\n<\/div>\n (Of course, this is if you pay back the loan the way it\u2019s intended \u2013 I saw a wild personal finance Tik Tok the other day where someone demonstrated you can put 3% down and then put the remaining 17% toward the principal as an extra payment in your first month and absolutely SLASH your interest paid, instead of just putting 20% down upfront, which was a super interesting strategy that I\u2019m intrigued by. I love that I\u2019m learning about mortgage hacks on an app called Tik Tok. Welcome to 2021.)<\/p>\n In order to figure out how a 15-year mortgage impacts this situation, we\u2019ll simply run (a) the numbers for the 15-year as well as (b) the opportunity cost of paying down your mortgage early. <\/p>\n Opportunity cost, you say? Katie, what is this sorcery?<\/em><\/p>\n Well, my friend, when you select a 15-year mortgage, you\u2019re saddling yourself to higher monthly payments, right? <\/p>\n That \u201cextra money,\u201d so to speak, is now no longer free to do #werk for you in the stock market, as it would\u2019ve been if you had taken the 30-year mortgage.<\/p>\n The advantage, of course, is that you\u2019re spending less in interest \u2014 but is it enough to offset the potential gains that extra money could\u2019ve made <\/em>if you had been investing it in the stock market instead?<\/p>\n Let\u2019s take a moment now to align on one thing: The stock market is the most relentless wealth-building machine in the world. There\u2019s truly no other asset class that can compete, including real estate. Leveraged real estate investing<\/em>, or buying a home with leverage with the intent of using it to create passive income through renting it to some other schmuck, often<\/em> outperforms the stock market <\/strong>\u2013 but (a) owning a home as your primary residence or (b) unleveraged real estate investing have not historically outperformed the good ol\u2019, easy-to-access S&P 500.<\/p>\n<\/blockquote>\n Let\u2019s begin.<\/p>\n 30-year (fixed rate) mortgage at 3%<\/p>\n With a 30-year mortgage, our equation for the home described above looks like this:<\/p>\n<\/div>\n Of course, this example ignores maintenance, but we know we can conservatively assume maintenance will cost approx. 1% of the property value per year, or $5,000 in our case (that comes out to $416 per month).<\/p>\n For our 30-year mortgage, our monthly payment is $3,055<\/strong>:<\/p>\n Our mortgage\u2019s principal + interest = $1,686<\/p>\n<\/li>\n Insurance = $162<\/p>\n<\/li>\n Property tax = $791<\/p>\n<\/li>\n Maintenance = $416<\/p>\n<\/li>\n<\/ul>\n While it\u2019s unlikely that your maintenance will be perfectly predictable and broken into flawless $416 chunks every month (it\u2019s more likely that you\u2019ll go six months without having to pay a dime and then realize your foundation under your house is f***ed and it\u2019s going to cost $10,000 to fix it), for the sake of this exercise, it\u2019s easier to bake it in as an average and spread it out across the payments.<\/em><\/p>\n So there you have it. 30 years to pay it off = $3,055 per month on a $500,000 home, with everything else included. Happy Meal, baby.<\/p>\n Easy math says that there are 156 months in 13 years (when our family will sell), and 156 monthly payments of $3,055 is $476,580. Add our down payment, and you get $576,580<\/strong>, our total spent<\/strong> over 13 years.<\/p>\n 15-year (fixed rate) mortgage<\/p>\n The interesting thing about the 15-year mortgage and all the other costs associated with home ownership is that your other costs don\u2019t change despite the fact your mortgage is going up. In other words, the entire amount you\u2019ll owe monthly for everything (insurance, taxes, etc.) doesn\u2019t double proportionally in the same way that your actual mortgage\u2019s principal and interest (the blue section below) will increase. <\/p>\n So what\u2019s the 15-year look like?<\/p>\n<\/div>\n For our 15-year mortgage, our monthly payment is $4,131<\/strong>:<\/p>\n Our mortgage\u2019s principal + interest = $2,762<\/p>\n<\/li>\n Insurance = $162<\/p>\n<\/li>\n Property tax = $791<\/p>\n<\/li>\n Maintenance = $416<\/p>\n<\/li>\n<\/ul>\n There you have it: roughly $1,076 more<\/em> per month. <\/p>\n $4,131 multiplied by 156 monthly payments is $644,436 spent, plus our $100,000 down payment for a total of $744,436 spent <\/strong>over 13 years.<\/p>\n (It\u2019s now that I\u2019d like to remind everyone that the house itself was \u201conly $500,000.\u201d) * insert smiley face * <\/p>\n Well, if you recall in our original example, our family moved out after 13 years \u2013 less than halfway into their 30-year mortgage term. This meant that \u2013 despite already paying $263,016 to their mortgage lender (i.e., just their monthly payment * 156 months) \u2013 they still owe $256,992. How is that possible? <\/em>Remember, they were making majority-interest payments almost the entire time \u2013 so while they\u2019ve already spent $263,016 on their mortgage, they still need to pay back $256,992 toward their principal<\/em>. <\/p>\n If your head is spinning from the #QuickMath, that\u2019s $520,008 in total for the $400,000 mortgage alone if they were to stop in year 13 and pay it off all at once with the proceeds from the home sale. <\/p>\n Because our family bailed after 13 years, they had made the bulk of their interest payments but few actual principal payments by comparison. <\/p>\n They paid $132,315.31<\/strong> in interest over those 13 years. <\/p>\n Woof.<\/p>\n What\u2019s this picture look like for a 15-year mortgage?<\/p>\n We already know we\u2019re paying $1,076 more per month, and if we still bail after year 13, we\u2019re only 2 years away from being totally paid off anyway (which means we don\u2019t have to cut the bank a fat check after we sell the house).<\/p>\n After 13 years, the 15-year mortgage family would\u2019ve paid only $95,191<\/strong> in interest, compared to $132,315.31. Not only that, but rather than still owing $256,992, they\u2019d only owe $64,268<\/strong>.<\/p>\n While the 30-year mortgage would\u2019ve elicited $263,016<\/strong> in payments over the last 13 years, the 15-year mortgage would\u2019ve seen roughly $430,872 <\/strong>in total payments \u2013 meaning our 15-year mortgage ballers paid $167,856<\/strong> more than our 30-year mortgage cruisers over 13 years for their mortgages.<\/p>\n I\u2019m pulling the taxes, insurance, and maintenance out of these figures to make it just<\/strong> about the mortgage principal and interest payments. We\u2019ll add back in taxes, insurance, and maintenance at the end because I like to twist the knife.<\/p>\n The 30-year mortgage would\u2019ve cost:<\/p>\n $263,016 over 13 years in principal and interest<\/p>\n<\/li>\n $256,992 at the sale of their home to pay back the bank<\/p>\n<\/li>\n = $520,008 spent total<\/p>\n<\/li>\n<\/ul>\n The 15-year mortgage would\u2019ve cost:<\/p>\n $430,923 over 13 years in principal and interest<\/p>\n<\/li>\n $64,268 at the sale of their home to pay back the bank<\/p>\n<\/li>\n = $495,191 spent total<\/p>\n<\/li>\n<\/ul>\n While we easily could\u2019ve just taken the total interest paid in both scenarios after 13 years and done a little fast subtraction to see the difference, I wanted you to see \u2013 firsthand \u2013 how we arrived at these final totals.<\/p>\n The 30-year mortgage peeps paid only $24,817<\/strong> more. <\/p>\n Does this feel shockingly low to you? It did to me. <\/p>\n \u201cHow could that be?\u201d I asked myself, double-checking the math. \u201cWhen I look at \u2018total interest paid\u2019 in every single mortgage calculator, it says the 15-year mortgage would save more than $100,000 in interest!\u201d<\/p>\n If you\u2019re asking yourself the same thing, consider this: A 15-year mortgage will<\/em> save you roughly $110,000 in interest compared to a 30-year mortgage, over the entire 30-year lifetime of the loan<\/em>. But if you\u2019re bailing in year 13, that\u2019s 17 years of interest that never has the chance to accrue. You sell the house, pay off the remaining principal, and move on. <\/p>\n So we can clearly see that the 15-year mortgage cost more as we went, but ended up saving us about $24,817 in interest.<\/p>\n Remember the opportunity cost we talked about? At $1,076 extra per month, the 15-year mortgage didn\u2019t come cheap. <\/p>\n What would\u2019ve happened if our 30-year mortgage fam had invested the extra $1,076 instead of applying it to a 15-year mortgage?<\/p>\n Assuming a conservative 7% average rate of return\u2026<\/p>\n<\/div>\n There you have it. <\/p>\n Our 15-year mortgage pals saved $24,817 in interest, but our 30-year mortgage pals are actually the ones who got ahead. <\/p>\n Investing the extra $1,076 per month for 13 years resulted in $236,714 in a taxable investing account.<\/p>\n Subtract the $24,817 extra that they\u2019ve had to pay in interest for their net gain:<\/p>\n The family with the 30-year mortgage who invested the extra monthly payment in the total stock market instead of securing a 15-year mortgage would have net $211,897 more than the family with the 15-year mortgage.<\/p>\n That, my friends, is opportunity cost. <\/p>\n Remember, to get your equity out of a home, you have to sell<\/em> the home. <\/p>\n Assuming our friends sold their homes for $1M each (#twins), here\u2019s how they really netted out:<\/p>\n They each paid $123,500 in Dallas property taxes over 13 years (1.9% of the property value every year)<\/p>\n<\/li>\n They each paid $39,000 in insurance over 13 years (0.6% of the property value every year)<\/p>\n<\/li>\n They each paid $65,000 in maintenance over 13 years (1% of the property value every year)<\/p>\n<\/li>\n<\/ul>\n That\u2019s $227,500 in #extras.<\/p>\n So we add that number onto the cost of the mortgage over the 13 years as well as the amount they still owe the bank:<\/p>\n 30-year <\/strong>| $520,008 spent on mortgage + $227,500 in #extras = $747,508 total spent for the $500,000 home over 13 years<\/p>\n<\/li>\n 15-year <\/strong>| $495,191 spent on mortgage + $227,500 in #extras = $722,691 total spent for the $500,000 home over 13 years<\/p>\n<\/li>\n<\/ul>\n Since both homes are selling for $1M 13 years later, that means the real estate agent\u2019s 6% commission is $60,000. Throw it in the bag, sis.<\/p>\n 30-year <\/strong>| $747,508 total spent + $60,000 commission = $807,508 spent<\/p>\n<\/li>\n<\/ul>\n 15-year <\/strong>| $722,691 total spent + $60,000 commission = $782,691 spent<\/p>\n<\/li>\n<\/ul>\n And last but not least: Did you notice one sneaky cost we haven\u2019t accounted for yet? <\/p>\n Our $100,000 down payment.<\/p>\n That\u2019s right! The two figures above for each mortgage are just the monthly payments, taxes, insurance, and maintenance. When we add our initial<\/em> $100,000 down payment, our final costs are:<\/p>\n 30-year <\/strong>| $807,508 spent + $100,000 down payment = $907,508<\/p>\n<\/li>\n<\/ul>\n 15-year <\/strong>| $782,691 spent + $100,000 down payment = $882,691<\/p>\n<\/li>\n<\/ul>\n So our 30-year mortgage family will have:<\/p>\n $92,492 in profit from their home sale and $236,714 in an investment account, for a total walk-away value of $329,206<\/strong><\/p>\n<\/li>\n<\/ul>\n And our 15-year mortgage family will have:<\/p>\n $117,309 in profit from their home sale and $0 in an investment account, for a total walk-away value of $117,309<\/strong><\/p>\n<\/li>\n<\/ul>\n Does $211,897 sound familiar? That\u2019s because we saw that number above when we subtracted our extra interest payments from our stock market gain, and we could\u2019ve stopped after merely subtracting \u2013 but I wanted to flesh the scenario all the way through to #completion to show the final net gains for each.<\/p>\n Obviously, it goes without saying that six figures in gain is great \u2013 but these families spent the same amount of money<\/em> over the 13 years, and one came out $212,000 ahead<\/strong>. One invested in their home, one invested in the stock market \u2013 and it\u2019s clear who came out in front.<\/p>\n The majority of the growth and profit over that period came from the investment account.<\/p>\n All that to say, don\u2019t ignore the stock market in your pursuit of home ownership, regardless of which type of mortgage you end up choosing. While there\u2019s a psychological benefit to paying off your home and owning it outright, there\u2019s little financial or mathematical sense in it (as you can see here).<\/p>\n Ta-da! * takes bow * <\/strong><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":" In case you missed my previous scorching hot housing posts that almost certainly had an agenda (\u201cHot Takes on Home Ownership: Keep Renting\u201d and \u201cWhen the Math Supports Buying Your Primary Residence\u201d) as I grew increasingly more cynical about the home ownership equation, I\u2019d recommend reading at least the second one before launching into this […]<\/p>\n","protected":false},"author":178814,"featured_media":2419,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-big-purchases-cars-and-houses.php","format":"standard","meta":{"footnotes":""},"categories":[36],"tags":[43],"class_list":["post-88","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-spending-and-saving","tag-big-purchases-cars-and-houses"],"yoast_head":"\nOur example today<\/h4>\n
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The 30-year mortgage has a few flaws<\/h4>\n
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<\/p>\n\nEnter: The 15-year mortgage<\/h4>\n
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30-year vs. 15-year<\/h4>\n
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So what do you get for your extra $1,076 per month?<\/h4>\n
What are their final totals spent?<\/h4>\n
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But we\u2019re not done yet \u2013 what about opportunity cost?<\/h4>\n
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<\/p>\n\nHowever, that\u2019s still not the end of the story (gasp!)<\/h4>\n
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All in all, the 30-year mortgage folks are $211,897 ahead. <\/h4>\n