The Power of 15! How would you like to help your clients achieve financial independence quicker? There’s a reason financial guru, Dave Ramsey, hates 30-year mortgages with a passion! He contends that 30-year mortgages rob Americans of their financial future, because the real American dream is to live debt-free and own your mortgage outright.
Instead, he suggests that the best strategy—if you can’t afford to purchase your home outright—is a 15-year mortgage note with a payment that does not exceed 25% of your income.
He may have a point. For simplicity, let’s compare a 30-year and 15-year note on a $250,000 home purchase with 20% down at 4.75% and 4% interest respectively:
The 15-year note would be $436 more per month. Ouch! However, after 15 years, with a 15 year note, you’ll own your home “free and clear”! With a 30-year mortgage, you’ll have barely made a dent in your mortgage. You’ll have only paid $65,870! That means you STILL owe $134,130! Double ouch!!
Not only will you still owe a ton of dough, the difference in your net worth—assuming an annual property appreciation rate of 3%—is huge! With the 30-year fixed mortgage, your net worth (based on your equity and property value) would be $255,362. With your 15 year fixed mortgage, your net worth would be $389,492. The difference is staggering! That’s $134,130—your net worth is actually more than 50% higher with the 15-year mortgage.
For Californians (and those in other high-priced markets), the prospect of purchasing a home with a 15-year note with a payment that doesn’t exceed 25% of your income may seem an unobtainable or even laughable proposition. A couple making $80,000 per year would be hard pressed to find a home with a mortgage of barely $200,000.
However, in most of the country, this is quite doable and can be an effective strategy to achieve financial independence well before you plan to retire.
If you need guidance on how to create a 30-year versus 15-year analysis, check out the following “Turbo Tip”: