In today's video, we're going to be talking about the 30-year mortgage versus the 15-year mortgage. There's a common belief that a 15-year mortgage is the ultimate tool to save money on interest because you pay off your mortgage faster, and in some cases, your interest rate is cheaper. However, we'll run the math and provide insights on both options. By the end of this discussion, you'll have a better framework for making an informed decision.
The big names in finance often emphasize the lower interest payments of a 15-year mortgage as a reason to choose it over a 30-year mortgage. But is this the only factor to consider? Let's explore an illustration period of 30 years or 360 months to understand this further.
Changing the time frame of analysis when comparing loans skews results. To compare a 15-year mortgage accurately with a 30-year one, you must maintain the same analysis period, in this case, 360 months.
If instead, you chose to invest that $400,000 at a 6% return over 30 years, it could grow to $2.4 million. This is the opportunity cost of diverting your cash to mortgage payments instead of investments. You can either pay up interest to a lender or pass up interest that your investment would generate.
The math might be identical under certain conditions, but what's more crucial is the behavioral aspect. Control and discipline over your cash flow determine the practical outcomes in real life.
In the decision-making process concerning your mortgage, it's not just about the interest rates. Consider the opportunity cost of money and your financial discipline. Do the math, understand the options, and then make a choice that aligns with your financial goals and lifestyle.
In Part 2, we'll explore further strategies including the impact of bi-weekly payments and more.
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