(Originally published 02/28/12.)
You’ve heard the personal finance pundits on TV recommending them. You’ve seen banks advertizing them like crazy. The 15 Year Fixed Rate Mortgage. It’s been touted as the best thing since sliced bread. “Lower rates! Pay less interest! Save tens of thousands of dollars over the life of your loan!” But is the 15 Year Fixed Mortgage truly the financial savior that its hyped up to be?
Interest rates are at record lows and many borrowers are being advised to refinance into a 15 year fixed mortgage. The benefits are obvious. Although their new payments would typically be higher than their current mortgage, “for a few hundred dollars more per month,” they can save tens of thousands of dollars in interest and pay off their home years sooner.
This is all true. But financial decisions should never be made in a bubble. Using the medical field as an analogy, we know that a medication to cure one malady often results in dangerous side effects. Similarly, when making decisions about your financial health, you must consider the potential unintended consequences of your decisions – and you should never ask a mere salesperson for a diagnosis!
Consider the following:
It’s a well known fact that most Americans are not saving enough. Whether their retirement is around the corner – or decades away – far too many Americans are nowhere near prepared. When personal cash flow is redirected towards a mortgage payment instead of a more appropriate investment vehicle, personal wealth suffers. Remember, the value of your home will appreciate (or in recent years, depreciate) in value, whether you have a large mortgage balance, or no balance at all!
When borrowers prepay their mortgage or choose a 15 year over a 30 year mortgage, they build home equity faster. Yet this equity is not contributing to wealth accumulation. To access the home equity, you would have to borrow against it, or sell your home. On the other hand, if this cash flow were properly invested, the growth of these funds, accumulated over time, can be used to fund your retirement, children’s college expenses, or should you choose, to pay off the mortgage balance.
With interest rates currently at record-breaking lows, most people’s cash flow could be allocated more efficiently to paying off credit card debt or investing for their future. With the help of a competent and qualified Financial Planner (again, don’t entrust your financial future to a mere salesman), there are plenty of appropriate investments out there that could yield a rate of return that exceeds the rate of interest you’re paying on your mortgage. And since mortgage interest is for many people tax deductable, the after-tax equivalent mortgage rate might be even lower!
(SIDEBAR: If you’re interested in meeting a competent and qualified Financial Planner who will help you structure an appropriate financial plan, I work with many and would be happy to make an introduction.)
In my daily practice, I’ve experienced countless borrowers seeking my help. They fell for the “15 Year” hype from some bank salesperson and are now buried under the strain of their payments. Their savings have dwindled (in order to make their payments) and their credit card debt has ballooned because their cash flow no longer covers their normal living expenses. They are heading towards financial ruin and don’t even know why, all because of the financial malpractice of some bank salesperson.
A competent and qualified professional has many tools in his tool chest. Just as a carpenter wouldn’t use a sledgehammer on a picture hook, no mortgage program or investment product is “one size fits all.” A 15 Year Mortgage is appropriate for some borrowers and very inappropriate for others. Therefore, when choosing the right mortgage for your situation, steer clear of the mere salespeople. Seek the advice of a competent, qualified, and Certified Mortgage Planning Specialist. Doing so will ensure your mortgage appropriately meets your needs, integrates with your greater financial plans, and that you enjoy your home for years to come.
(This information is for general educational use only. Consult your personal financial or tax advisor to determine what financial products and strategies are appropriate for you. Or call me for a personalized mortgage consultation.)
Warren Goldberg is a Certified Mortgage Planning Specialist and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.