When a consumer calls me for mortgage rates, 90% of the time they’re looking for a 30 year fixed mortgage.  I can almost guess immediately what mortgage the customer is going to ask for before they finish their sentence.

Let me start off by saying that I do not have anything against 30 year fixed loans.  They have a relatively low payment with little risk.  However, I truly believe there is a better loan out there.  It’s a loan that helps homeowners reach financial freedom faster.  If it were the standard, more homeowners would be debt free, house values couldn’t be inflated too easily and we likely would not be in the recession we’re in.  So, what is this magical loan that is so special?  So special that I risk being ridiculed by every industry expert for going against the grain?  Well, the answer is simpler than you may imagine…the 15 year fixed mortgage.

I’m going to share something with you that may make me sound like an oxymoron being that I’m a mortgage loan officer.  I want all of my clients to one day own their own house free of a loan.  I believe that owning your house free and clear of debt, along with being debt free as a whole, is the heart of financial freedom.

The average retiree on social security receives $1,000.  That’s $2,000 a month for a married couple.  Let me ask you something.  Could you live off of $2,000 a month?  If you said “No”, rethink your answer.  If you owed your house free and clear and didn’t have any debt, could you live off of $2,000 a month?  You probably could.  

We’ve all been programmed to think a 30 year loan is the holy grail of mortgages, but mortgages are just a fancy term for “loan.”  What else in life would you buy using a 30 year loan?  Would you take out a 30 student loan?  How about a 30 year car loan?  How about a 30 year loan on a boat (and I’m not talking a yacht)?  Of course not.  However, we’re happy to purchase a home and stretch out the payments as long as possible. 

15 year fixed mortgages save interest by having a lower rate than 30 year loans and by shortening the loan term.  How much does it save you?  More than you may think.

Let’s assume you’re offered a 5% 30 year loan and a 4.5% 15 year loan at $200k.  A $200k 5%-30 year loan has a total of $186,513 in interest charges.  A $200k 4.5% 15-year loan has a total of $75,397 in interest charges.  That’s a difference of over $111,000 in interest!  The 30 year has almost exactly 2.5 times more interest collected over the life of the loan.

So why don’t more consumers take a 15 year mortgage?  I’ve heard every reason under the sun as to why.  Here are the most common ones I hear:

• “I can’t afford the payments”
• “I don’t plan on living in this home forever”
• “I’ll make extra principal payments on my own”
• I can earn more money by investing rather than” putting it in my home’s equity”

Are these good reasons?  Sometimes yes, but usually not. 

It’s true that a 15 year loan does have a higher payment and that making extra principal payments does save money, but the reality is consumers usually pay what shows up on their statement.   Does it make sense to always get a 7 year car loan and pay extra in principal?  Sure it does, but we still usually opt for shorter loans.  Why?  Is it because we don’t want to pay for that car long after the value has decreased below the loan amount?  Is it because you don’t want to pay for that car forever?  Of couse this is why.  Yet somehow we’ve known this and have accepted shorter automobile loans but not with home loans.  Why?  I can tell you why, because we’ve been programmed to look for a 30 year loans. 

The reality is our home is often the most valuable thing we’ll ever own.  We are given the freedom to use that value in any way we want, so we use it by getting a long loan to keep the payments low.  No bank would ever give you a 30 year loan on a car because they know it would be worth virtually nothing by the end of the loan, but does that mean we shoud take a 30 year loan on a house just because it’s available?

Our fear of a high monthly budget drives us to shoot for a smaller payment.  Ask any used car salesperson and they’ll tell you it’s not about the trade-in value or sales price, it’s about getting the person a payment they’re comfortable with.  A sleezy salesman can use that tactic to get you into an overpriced car, but we’re using the same tactic on ourselves when we buy a home. 

We make adjustments to our lives to compensate for expenses.  Auto repairs, kids college tuition, medical bills or the unexpected addition to the family are all things we deal with, yet we find our way to adjust.  Start with a higher payment on your house and you’ll likely find a way to adjust when life throws you a financial curveball.

I know there’s at least one more group of homeowners who are still shaking their head.  They’re asking me, “What if I will never own this house free and clear because I know I’ll be moving before the loan is paid off.  How can you say a 15 year loan is still right for me?”  My answer, “Would you rather owe $5,000 on a 10,000 car when you trade it in or owe $10,000 on a $10,ooo car when you trade it in?”  Whether or not you pay it off is besides the point.  If you had a 15 year loan and sold your home before paying it off, you would owe much less on your home thus allowing you to put more money down on your next home.  Guess what else that does for you?  The larger down payment makes a 15 year loan on your new home affordable!  Now you’re 15 years away from owning your dream home free and clear instead of 30 years.  Suddenly the idea of going into retirement owning your home outright goes from a wish to a reality.

 I’m not here to tell you that you should immediately refinance your home or halt shopping for a home until you can afford a 15 year loan, but I do want you to consider this before you jump into a home loan you haven’t put much thought into.  Ultimately, it is your money and nobody is going to make that payment other than you, so you have to do what you’re comfortable with.  However, before you make your decision, ask yourself if you’re really comfortable throwing away that much money and delaying your financial freedom for another 15 years.  The higher payment may not sound that bad after all.