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Most-Common Money Mistakes: Getting a 15-Year Mortgage

By Motley Fool Staff - Sep 27, 2019 at 9:02AM

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Bet you thought that paying off your house faster could only be a smart move. Well, not always.

You don't need to be told that managing your personal finances can be tough. Virtually anyone reading this will be able to say truthfully that money is tight in their household. Too many things need to be done, and there's not quite enough income to cover everything. So we all make choices. We prioritize. We postpone. 
And, with embarrassing frequency, we also blunder.

In this Motley Fool Answers podcast, co-hosts Robert Brokamp and Alison Southwick have invited certified financial planner Josh Strange, the founder of Good Life Financial Advisors of Northern Virginia, to talk about the five most common money mistakes he sees his clients make, and how we can avoid them.

In this segment, he weighs in on this fairly common piece of advice: Instead of getting a 30-year mortgage, get a 15-year mortgage and pay off your house faster. Sounds reasonable, but in fact, there are a number of reasons why that's a bad move for many people. (They also digress into a discussion of something that would be a smart move for millions of people right now: refinancing.)

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 03, 2019.

Robert Brokamp: Let's move on to No. 2. Getting a 15-year mortgage that they can't afford. Why is that a mistake?

Joshua Strange: The thing with a 15-year mortgage is, especially in a low-interest rate environment today, the spread between a 15-year and a 30-year isn't as significant as it used to be, but the payment is a lot more because you're paying off principal on a 15-year schedule versus a 30-year schedule. All too often I'll see people who have done this. It's a very noble goal to pay off your house. Unfortunately, we have a lot of people that are house rich and cash poor, and a 15-year mortgage can exacerbate that.

My advice to clients is it might cost you a little bit more in terms of interest, but depending on their situation, obviously by having the flexibility of the lower payment, they can always pay it off faster. Nobody's going to take your house if you don't make the extra payment, but if you don't make that minimum payment and you come on hard times, you're going to have problems.

Brokamp: I pulled up some numbers. These days, the rate on a 15-year mortgage is 3.05%. A 30-year 3.6%. So it's not that big of a difference. The average size of a new mortgage these days is $350,000. The payment difference is almost $900 a month between the two and you have to have some way to cover that because that's $10,000 a year.

Strange: Exactly. And so I think that comes back to the infinite wants and limited means. If you're going to put your retirement at risk for paying off the house, that might not be the best choice. Or funding a child's college education. It may be better to invest those monies elsewhere. What happens is that people have done this. Then they need money and they don't have money on the side. Guess where they go? To the house.

Brokamp: To the house.

Strange: They get an equity line, so they're reversing what their initial goal was.

Brokamp: So they were trying to pay off the mortgage and now they just had to reincrease it because they had to access those funds.

Strange: It's one of those things where sometimes quantitatively and when you just look at the numbers, it makes sense, but when you actually deal with real-life people, the theory and the reality of people's situations doesn't always jive.

Brokamp: You mentioned the low interest rates and they've dropped significantly over the last year. These days are you talking to your clients about refinancing?

Strange: Absolutely. There's a couple of reasons for that. One is, obviously, the reduced interest cost and if their goal is to pay off the house. I just had this conversation the other day. It was really hard to get this guy to understand. If we could get him to refinance, he's got more money that will go to principal. He could continue to make the same payment that he's been making -- which he's comfortably making -- but just pay off the house even faster; or, he could look at diverting some of those funds to other investment strategies.

Brokamp: And anyone who's thinking about it, I read recently something like eight million homeowners, now, would benefit by refinancing, and there are plenty of good calculators on the internet that can help you make that decision.

Alison BrokampSouthwick: We have the appraiser coming by on Sunday.

Brokamp: There we go.

Southwick: But I don't know what to do, because our house still has walls that have been ripped apart, so I don't know how I'm going to explain that away.

Brokamp: Hang blankets. Very large blankets.

Southwick: Because we just have tapestries in this house. They'll convey. Can we add that to the appraisal cost of the house?

Brokamp: If they increase the value.

Strange: If you were going to an open concept.

Southwick: Right. We'll see how it goes.

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