I'm writing this after getting sent a video on mortgages from a friend that I later noticed some discrepancies in, and having a discussion with my cousin about some issues/lack of knowledge he encountered with a banker when figuring out the mortgage plan for his house. As the title states, it's a lesson on checking numbers yourself, to the best of your abilities, especially when the numbers are large, and the decision(s) carry significant positive/negative consequences for your financial future. I will be focusing on the numbers from the video for the rest of the post. This is not meant to say anything about the video creator, it is simply an example of why you should do your own research and number crunching when possible, and to not rely solely on others to do your financial math for you.
VIDEO:
https://www.youtube.com/watch?v=BJ3xhjqk52A
TL/DW: A video advocating for a 30 year mortgage over a 15 year mortgage, when paired with investing. He cites many reasons, including tax deductions, real-estate investor benefits, more flexibility with payments, etc. However, the bulk of the video (3:43 - 11:20) is spent giving a real world example showing how the 30 year loan allows you to end up with $200k more than the 15 year loan, after 30 years has passed.
SUMMARY OF EXAMPLE:
Loan amount: $300k
30 year interest rate: 5%
15 year interest rate: 4.375%
Annual market return: 7%
15 year investment strategy: pay loan for 15 years, for next 15 years invest monthly
the amount you were paying for the loan
30 year investment strategy: invest monthly the difference between the 15 year monthly cost and
the 30 year monthly cost for 30 years
RESULTS IN VIDEO OF EXAMPLE:
30 year mortgage investment portfolio: $941k
15 year mortgage investment portfolio: $732k
The first issue found comes early in the video, when laying out the numbers for the example. When talking initially about monthly costs (3:55), 5% interest is used for the 15 year loan, instead of the mentioned 4.375%. This lead to a $2,372.38 monthly cost being cited rather than the $2,275.86 it would cost, as shown in the table below.
https://www.mortgagecalculator.org/ (website he used)
| 15 Year (4.375%) | 15 Year (5%) | 30 Year (5%) | |
|---|---|---|---|
| Total Interest | $109,654.98 | $127,028.56 | $279,767.35 |
| Monthly | $2,275.86 | $2,372.38 | $1,610.46 |
| Difference (30 - 15) | $665.40 | $761.92 | N/A |
Assuming this error propagated through the rest of the calculations, I made a table for the investment portfolios with the 15 year mortgage at both 4.375% and 5%, shown below.
https://financialmentor.com/calculator/compound-interest-calculator (website he used)
| 15 Year (4.375%) | 15 Year (5%) | |
|---|---|---|
| 15 Year Investment Total | $732,053.56 | $763,100.20 |
| 30 Year Investment Total | $821,904.74 | $941,126.62 |
| Difference (30 - 15) | $89,851.18 | $178,026.42 |
The numbers cited in the video for the 15-year-mortgage portfolio were with the 15 year at 4.375% interest (10:18, $2,275 invested per month), and the 30-year-mortgage portfolio used the 15 year at 5% interest (10:56, $762 invested per month). Looking at the table, that would take the final figure from $200k to $178k if the initial mistake of 5% interest for the 15 year mortgage was carried throughout. And the actual numbers take the scenario from the quoted $200k down to $90k.
Beyond this, the actual cost of the loan was never subtracted from this portfolio number. Doing that, and taking into account inflation during loan repayment as mentioned in the video(the 30 year loan benefits from a fair amount of interest still being paid at the end of the loan, when interest has had time to chop off some of the cost), I arrived at the below table.
https://ostermiller.org/calc/mortgage.html (2% inflation)
| Total Paid (No Inflation, in Today Dollars) | Total Paid (Inflation, in Today Dollars) | Portfolio - Total Paid (Net Money, Inflation) | |
|---|---|---|---|
| 15 Year (4.375%) | $409,654.99 | $353,579.90 | $378,473.66 |
| 30 Year (5%) | $579,769.20 | $435,513.84 | $386,390.90 |
| Difference (30 - 15) | $170,114.21 | $81,933.94 | $7,917.24 |
After these calculations, it turns out that with the given scenario, you end up $7.9k ahead by choosing the 30 year loan over the 15 year, compared to the $200k figure quoted in the video. Many of the other reasons for a 30 year loan laid out in the video have their merit, and with every situation being different some of those reasons may play a bigger role in deciding the duration of the loan than just net monetary outcome. They are important to be aware of and should be considered, but are not the point of this analysis.
This post is not meant to be advice on a mortgage, either, nor should my numbers be used to justify a decision for your situation. I did not account for tax deductions, inflation on investments, I'm sure I missed other things in order to stay true to the scenario given, and only focused on one scenario. Running the numbers for other 15 & 30 year interest rate combinations with everything previous being equal, the lower the interest rates are, and the closer they are, the better the 30 year loan becomes when using the above method. With a 15 year 2% mortgage, and a 30 year 3% mortgage, the 30 year ends with $159k more than the 15. With a 15 year 4% mortgage, and a 30 year 5% mortgage, the 30 year ends with $53k less than the 15.
TL/DR:
The quoted figure in the video of $200k extra from a 30 year mortgage compared to a 15 year mortgage turned out to be $8k for the scenario described. When making a big financial decision, try to run the numbers yourself with the tools available to you, to make sure you're getting the full picture, and can make the best decision for your situation. Even if you can't fully replicate or formulate what you need, looking deeper will help you understand more of your financial decisions, help you make better ones, and put you more in control of your financial life.
Submitted November 20, 2020 at 07:08PM by nazh0t https://ift.tt/3nIfTub
