Let’s say you need to come up with an extra $600 each month for a 15 year loan. Is this impossible? For some people it could be easy.  Most people fall into the “could manage it” category but would rather not have the pressure.  Let me tell you how you can “grow” into a 15 year loan.

If you are a runner you can get what is called a “runners high” after a period of running.  Think of this loan as a “mortgage high” every time you pay it.  Be proud of the fact that the higher payment is the result of your commitment to yourself and your family.  You are putting money away for your future every time you pay your mortgage.

Now that you can mentally see yourself paying your home down, you need to figure out where to get the extra money.  Here is a recent example of some clients of mine making it work:  
 

Nick and Liz are middle class parents of two grade school girls, aged three and five, in Bethesda, MD. Nick makes $68,000 per year as a property manager and Liz has a nice salary of $51,000 as a teacher. They bought a home 5 years ago for $300,000.  Although it had appreciated up to $500,000 it is back down to about $450,000 now. Their incomes allow them to take home $6500 per month after taxes, health insurance and tax-deferred retirement/college contributions.

They currently have a 30 year mortgage at 6.25%. The balance is $300,000 and the fully amortized payment is $1847 per month, plus taxes and insurance. With their mortgage expenses, plus all other living expenses (food, transportation, child care), they have debts of $5500 each month. With a take-home of $6500 and expenses of $5500 it gives them about $1000 a month to save or invest. I asked them what they do with the extra $1000. They said they weren’t sure. They said they had a savings account. It only had $600 in it. Where does the money go? Most people probably blow about $1000 each month on junk and don’t even realize it. Put that money to good use. Nick and Liz did. They are now diversified in every direction. In addition to their 15 year loan, they set up a small equity line to use as a safety net in case things got tight. The equity line provides for 18 months of reserve funds in case of job loss or an emergency. It is tax deductable too!  Nick and Liz were very happy that could reap long-term benefits of the 15-year loan while at the same time have a safety net for the short term while their incomes catch up to  the higher payment.

Note: You should be maximizing any contributions to tax-deferred investments such as 401k’s for retirement or 529’s for the kids’ college. The combination of these tax-deferred investments with a 15 year loan will put you in excellent financial shape. Best of all you can sleep at night knowing it.

In addition to all the traditional benefits of the 15-year loan, many homeowners will borrow extra equity from their homes and invest it. The 15 year loan is an excellent way to borrow cheap money and invest it into the stock markets. The math is simple. You can borrow money around 4% and invest it in the markets that will return an average of 8%. Please consult your financial advisor to see if this type of investing matches your financial profile and risk.

 10 reasons why the 15 year is a smart move.  

1. It takes the discipline out of saving. When you are thrown in the water you swim.
2. Some say take the 30-year and make extra payments. It’s a novel idea but very few people stick to it. Even if you stick to it you are paying a higher interest rate.
3. You will never have to refinance again.
4. You build equity much quicker than a 30 year. For example, after 7 years you decide you want to borrow $75k in equity to build an addition or pay for college. If prices haven’t moved, and believe it or not there is a good chance of this, you may be out of luck if you have a 30 year loan. With the 15 year loan you will have the equity and be able to access the money. Think of it as a safety net.
5. If you have a good financial advisor, you can borrow extra money at the low 15 year rate and invest to your risk level. The interest is deductable and your money is working for you in all directions.
6. It only takes one pay raise to make up for the difference in the payment between the 15 year payment and 30 year payment. If you can make it through the 1^st year you will be fine. If you are not expecting a pay raise you should start looking for a new job.
7. 30 year rates are usually about .375% higher than 15 year rates. However, given the recent mortgage crisis there has been emphasis on making the 15 year rates more attractive. This has caused 15 year rates to be as low as 1% below 30 year rates right now, instead of the usual spread of about .375%.
8. You can set up a small equity line to eliminate the risk of not being able to make payments in case or emergency or job loss.
9. In year 16 you will have no mortgage payment and a huge cash flow from your income. Think of the freedom.
10. You home is a tax-free investment when you sell it.

   Chris Pugh, Choice Finance®