Choosing the Right Mortgage

One of the first decisions home buyers need to make is a 15 or 30 year mortgage.

Hi, I'm Rob West. The 15 year mortgage is paid off quicker and saves tons of interest. The 30 year is budget friendly but costs more in the long run. Is there another option? I'll talk about that today, then it's on to your calls at 800-525-7000.

That's 800-525-7000. This is MoneyWise Live, biblical wisdom for your financial decisions. Well, a recent article on the personal finance site Measure Twice Money gives the pros and cons of a 15 versus 30 year mortgage. It's a debate that's been raging for years, and it usually focuses on the ton of interest you'll save by opting for the 15 year loan, whether you're a first time buyer, refinancing or looking to downsize. If the money's in the budget, folks often go for the shorter term mortgage.

Crunch the numbers and you'll see why. A 30 year loan for $300,000 at three and a half percent interest and a monthly payment of $1350 means you pay, get ready, $185,000 in total interest over the life of the loan. That would mean two or three years salary to pay the interest alone. Your monthly payment is significantly lower than with a 15 year loan, as you'll see in a minute, but you're paying for that benefit big time over the years. Okay, let's say you opt for a 15 year mortgage so you can pay it off faster. The same loan again at three and a half percent interest would have a monthly payment of $2150. That's $700 more a month than the 30 year loan, but the total interest paid over the term of the mortgage would be only $86,000. That's a huge reduction of $99,000 in total interest. No wonder people opt for the 15 if they can handle the payments.

Now I know what you're thinking. The interest rate wouldn't be three and a half percent with a 15 year mortgage. The rate would be lower than the 30 year mortgage and you're right. So let's do the math again with a 15 year $300,000 loan at three percent interest.

Your monthly payment would be $2,070 then the total interest paid over the term of the mortgage would be only $73,000. That's even more of an argument for the 15 year loan. So the 15 year loan is great, but it does carry more risk than the 30 year. You're assuming you won't have a serious financial setback that prevents you from making those higher monthly payments. But job loss, medical expenses and other financial calamities can and do happen and they may overwhelm your emergency savings. Lifestyle creep also happens where you take on new expenses that are difficult to get out of like buying a high end automobile. Those problems are all made more difficult to handle with a higher mortgage payment. A 30 year note has risk also, but not as much. You also pay a ton of extra interest for that reduction in risk.

So how do people decide? Well, maybe by trying to get some of the benefits from each of the two mortgages. The article I mentioned called this a hybrid approach and it's also what the late Larry Burkett suggested many years ago.

It's this. Go ahead and get the 30 year mortgage, but pay it off like it's a 15. The 15 year mortgage has a lower interest rate and the 30 year mortgage has a lower monthly payment. But treating the 30 like a 15 gives you tremendous cash flow flexibility.

Now it's not free. There's a cost to this hybrid plan. If you go with the 30 year mortgage but pay it off in 15, your monthly payment would be around $2,170 or about $100 more.

That's because the interest rate would be in our example, three and a half percent, not 3%. Now you might think no way until you see that this gives you the option of reducing your monthly payment from $2,170 all the way down to $1,350. That's 820 more a month to get you through a financial crisis.

The COVID pandemic has revealed in no uncertain terms that the economy can nosedive in a heartbeat. Being able to reduce your monthly obligation by over $800 has real value and could be a financial lifesaver. There's also the peace of mind that comes with knowing you have a significant financial escape hatch. You won't have to worry nearly as much about missing payments and probably defaulting on the loan.

Of course, this hybrid approach isn't for everybody. You may have already saved up the recommended three to six months living expenses in your emergency fund. You may have greater than normal job security for you. A straight 15 year mortgage might make more sense. You could save around $100 a month after all. But if you're in doubt, consider playing it safe and going with the 30 year mortgage. You can always make the extra payments each month, which you should do anyway.

I hope that helps as you make your next mortgage decision. This is MoneyWise Live. We'll be right back. We're delighted to have you along with us today on MoneyWise Live. I'm Rob West, your host. This is where God's word intersects with your financial decisions and choices. We'd love to hear from you in just a moment. We're going to begin taking your calls and questions on anything financial as we apply biblical truth and biblical principles to what you're facing today in your financial life. The number to call with lines open is 800-525-7000.

That's 800-525-7000. A little later in the broadcast today, we'll be joined by Bob Dollar, good friend, Chief Investment Officer at Crossmark Global Investments. Bob has a long tenure on Wall Street managing literally billions and billions of dollars. He's also a Christ follower and can help us navigate the markets with a biblical worldview at its core. Certainly going to be interesting to hear what Bob has to say about the markets following Russia's invasion of Ukraine.

We need to pray for folks in the path of that, but we also need to be thinking about the financial implications and Bob will shed some light on that coming up a little later in our broadcast. Again, lines open today. We'd love to hear from you, whatever's on your mind. 800-525-7000.

We're going to begin today in Johnson City, Tennessee. Hey, Benjamin, thank you for calling. How can I help you, sir? Thanks for taking my call. My question was about a term life insurance policy I have. I'm 28 and my agent called me the other day and said every 11th year the premium will increase threefold. And he's asking me to convert some of it over to a whole life or universal life.

And I'm not familiar with those. I was hoping to get your thoughts on that. Yeah, yeah, we could talk about that.

I think it's first important to understand what coverage you have now, why you have it, and whether or not the policy you have is the right way to approach it. So you said you're 28 years old. Is that right? Yes, sir. Okay. Are you married?

I'm not. I do have a mother. She's disabled and lives with me. Okay. And so the primary purpose of these funds, I assume the death benefit would be going to her as the beneficiary for her to, you know, be able to maintain her lifestyle if you were to pass away. Is that right?

Yes, sir. The goal of it is to pay off my house and hopefully help her with any debt she has, a car or what have you. I currently owe about $85,000 on the house, and the death benefit is $150,000. Okay, very good. And are there any other needs that she has beyond just being able to pay off the house and so forth? Would you, you know, is she relying on you for a stipend or any part of your income? She currently has her own disability or Social Security income, and it's pretty substantial, I think, with what she would get from my death, if that were to occur, it would get her bills down low enough to where she could live off that monthly and hopefully start paying them off on her own.

Okay, very good. Yeah. So I think in terms of what you should be looking for, given obviously, you know, you're a young guy, you know, you want to make sure that her needs are covered beyond your life. And that's really the purpose of insurance. I think a term policy is is the way to go, you know, a 40 year old buying a 20 year even half million dollar policy, you know, would be, you know, only about $27 a month.

So you know, it's not expensive. I think the key is, you know, you want to buy a level term policy where you're paying just for the pure cost of the insurance, not trying to use it for a savings vehicle. And recognize that as long as you, you know, replace it with a new 20, you could even get a 30 year policy. You know, perhaps 10, what I would do is look at perhaps a new 30 year policy today, and then maybe 10 years from now looking at replacing it again, even if the Lord allows her to live a long, long time at some point, you know, there's not going to be a need for that insurance. And the term insurance is the most cost effective way to do it, especially as a young guy who's healthy. The only thing you have to recognize is you want to get a long enough term so that if something were to, you know, happen to you medically that would make you uninsurable, you wouldn't be able to replace it, you just ride it out.

But the beautiful part of the level term policy is not only is it pure insurance, but that premium is not going to change for the life of that term. And so you can offset this risk, you know, between now and whenever that term runs out, or the Lord calls her home, and you could drop the policy. At some point, if you were to decide to marry and you had a family, you'd want to think about perhaps adding another policy on top of that or replacing it, you know, because you want to think about other folks that would be depending upon your income, like a spouse, or children. And for those folks where you're wanting to truly offset your income, you'd probably want to have about 10 to 12 times your salary. As a starting point, you may even want to go up from there for things like paying off a mortgage or for college education. But I think for your mom specifically, if you believe, and it sounds like good logic, that this 150,000 is enough, I don't see any reason for that to be a permanent insurance policy, where you're adding a savings vehicle, because she is, for all intensive purposes, going to, you know, pre-decease you. And if she doesn't, the Lord calls you home, you know, anytime soon, you would have that term policy to cover, you know, that period of time, let's say 20 or 30 years down the road.

And there's just no reason to spend a lot of money to do that, because term and term policies at your age are going to be very inexpensive. Does that make sense, though? Yes, sir, it does.

Okay. So what I would be doing at this point is if the 150,000 is right, and how many years are left on that term? I'm only my third year into it. And what, what term is on it?

Or what was it when you got it? 20 year policy, I think 20 year policy. Okay, very good. Yeah, then, you know, for the next 17 years, that policy premium is not going to change at all. And so I think you're all set there at some point, perhaps in a couple of years, you may want to look at replacing it with a new 20 year policy.

And as life experiences, you know, it's dipped slightly because of the COVID pandemic. But normally, at least in prior years, it increases with medical advances and technologies and new medicine. And as that happens, the cost of the term insurance actually gets cheaper. So it's not uncommon for a healthy person to be able to replace a term policy with a new term, and actually have the same premium every month or even slightly lower. So I would check that in a couple of years. But it's not uncommon for a healthy person to be able to replace a term policy with a new term policy.

But you know, at least for the next 17 years, that premiums not going anywhere, and you've got enough coverage. Okay, thank you, sir. Okay, Benjamin, we appreciate your call. God bless you. And we'll hope to hear from you again soon.

Emma's in Fort Lauderdale. You're on MoneyWise Live. Go ahead.

Hi, thank you for taking my call. I was trying to figure out I'm 58. I'll be 59 this year.

And I live in Florida. And but I would only have like 20, like 23, 24 years in. And so my pension won't, it'll be decent, but it won't be as high as it would be if I stayed till, you know, 66. And I just wanted to retire earlier.

So that's what I'm calling about. And I want to retire earlier having some health conditions that are causing me, you know, some pain, physical pain. And so I'm trying to hang on as long as I could to 62. But my husband is of the belief that I should work till, you know, 66.

Yes, yeah, very good. Well, you know, I think the key is always going to come down to what is your monthly need, and whether your pension, you know, plus social security benefits, whenever you decide to claim those benefits, plus begin taking your pension will be enough to satisfy what you need to cover your lifestyle. Tell me about your debt situation. Do you have a home mortgage or any other debts? Yeah, we have a mortgage. But we all we don't owe that much anymore. Because we've we've been here a long time.

We owe probably maybe 50 or $60,000 on it right now. Okay. All right.

And does your husband work as well? Yes, yes. Okay. Is he looking to try to retire in the same timeframe? Um, he says he's gonna work till he dies. Okay.

Very good. So you will have when you decide to retire, whether it's because you choose to or you just medically have to, you will have his income, plus your pension, even if you take it at a reduced level, plus at some point, social security, correct? Yes.

Okay. And so I think this really is just a function of really sitting down and studying your budget to see what is our monthly need? Is there a way we can trim expenses? And what income sources will we have in retirement? Ideally, you would hang on until you all get this mortgage paid off, because that's going to take what would likely be the largest expense that you have off the table, which just makes meeting your monthly obligations even more feasible, based on the income sources that you have.

So I think the key is, you know, how long can you wait? And one option would be, for instance, you know, if you waited till you paid off that mortgage, maybe you retire at 62, begin taking the pension, and you try to wait to take your social security, because, you know, if you take that at 62, it's going to permanently penalize you about 32% of the monthly benefit amount versus if you wait till 66 or 67. So I think, if it were me, I would sit down with a financial planner and have somebody really take a look at all the pieces and parts, your insurance, your income sources, social security, your pension, really help you put a plan together that makes sense, that includes tax considerations, then you can pay somebody to do that for their time, you know, one time, and they can really help you look at all these things. But at the very least, I would be looking at, you know, your budget, making sure you understand what your expenses will look like when you get to that point, because a lot of times, some expenses will come off the table, you may not be driving as much, you may not need work clothes, your clothing budget goes down. So really study that and then compare that to the income sources you have and figure out the right timing for all of this. We appreciate your call today.

800-525-7000 is the number to call. We're going to pause, but we'll be right back. Stay with us. Welcome to MoneyWise Live. This is biblical wisdom for your financial journey. And our website today is some great featured articles at moneywise.org. How should Christians approach home mortgage debt, the topic we opened with today.

We have a great article called The Fear Factor, one from Ron Blue on what to do if you're too far in debt, just a host of articles and resources that will help you, including one for reasons couples should be joined in their finances, how you should approach bringing your finances together as a married couple, all that and more when you visit moneywise.org. By the way, when you stop by, make sure you create a free account that will ensure that you get our MoneyWise weekly wisdom email. We send that out each Thursday. All right, we've got some lines open today. Heading back to the phones. 800-525-7000. In just a moment, we'll be talking with Elaine in Chattanooga, wanting to know about retiring and Social Security. But next up is Norma in Wellington, Florida. Go right ahead.

Hi, Rob. I have a question about what do you think about that? What are the pros and cons of self-directed IRA and using those funds to buy a property now during of course, property values high and also with this Ukrainian war?

What are your thoughts? Yeah, self-directed IRA can be a great tool for the benefit of our audience. This is an IRA that allows you to buy assets other than marketable securities like stocks and bonds.

So essentially, you can hold just about any asset in a self-directed IRA, but you'd have to open the IRA with a self-directed IRA custodian. You could then roll assets in and then they would help you buy these assets like real estate. I like real estate a lot. Real estate is a non-correlated to the stock and bond market. It's a great way to diversify a portfolio. And in many cases, it will run counter to the financial markets. It does well over time. Historically, it has appreciated.

We've certainly seen that in the last couple of years. And it can provide a steady income stream if you've got a rental property. The great part about doing it inside an IRA is that any rental income you collect grows tax-free or tax-deferred within the IRA. And then you can buy, sell or flip to accumulate properties inside the IRA without paying capital gains. Any downside would just be that you have to use a self-directed IRA custodian.

It's going to be a little more expensive. You can't claim any deductions for the property. All expenses, repairs and maintenance are usually paid with IRA funds. And you have to pay others to do that to manage the property for you. And of course, you and your relatives can't live in or run a business out of the property. So you've got to have somebody that handles that for you. But other than that, Norma, if this truly is for investment purposes to diversify your portfolio, you've got the expertise in selecting the properties and you've got the assets that you could move into the self-directed IRA to go in and make the purchase, then I think it's a great option as a part or one piece of a well-diversified portfolio.

Does that make sense? Yes. But in this case, it's my only, I would say, my only 401k. My only retirement account.

Sure, sure. So I think from that standpoint, if you say, would you like for, forget the self-directed IRA for a second, let's just look at the asset class. Would you be better off having 100% of your retirement in real estate versus a stock and bond portfolio? I would say the stock and bond portfolio historically will do better with less expense and upkeep in terms of a real estate portfolio or a rental property.

So if this is really your only assets for retirement, I would say despite Ukraine and whatever else will come, and there's always going to be the next something, historically, if you have a properly managed, properly diversified stock and bond portfolio with a long time horizon, that's going to give you the best overall return if that's all you're considering. Stay on the line. We'll talk a bit more off the air. We'll be right back on MoneyWise Live.

Stay with us. Thanks for tuning in to MoneyWise Live. I'm Rob West, your host, biblical wisdom for your financial decisions.

We've got one line open, 800-525-7000. Hey, let me remind you that MoneyWise Media and MoneyWise Live are listener supported. That means that we do what we do in this program each day and on the web through the MoneyWise app, all because of your listener support.

If you consider yourself a part of the MoneyWise family, we'd invite you to be a financial partner. You can do that quickly and easily online. Just head to our website, MoneyWise.org, and click the donate button. You can give through the mail. You'll find the address there through a toll-free number if you'd like to talk to someone on our team or through our online secure form. It's a tax-deductible gift if you make the gift to MoneyWise, a not-for-profit ministry. You can do all of that again on our website, MoneyWise.org. Just click donate. Thanks in advance. All right, let's head back to the phones. Elaine's in Chattanooga. Hi, Elaine. Good afternoon.

How can I help you? I have a question about my social security. I began to draw my social security at 67 while I was still working and continue to do so. I will be 72 this year. So, if my employer is still taking out social security, will I continue to reap benefits to my social security with this continuing?

No. I mean, the only way that your social security would continue to increase by working is if you are making more than you made in the past. So, your benefit is based on your highest 35 years of earnings. And if your earnings this year replace some of those lower years somewhere in those 35 years of your highest earnings, then that would cause your benefits to increase. But apart from that, it won't because you've locked in your benefit when you started taking social security at 67. You're free to continue to work. But unless you're replacing one of those prior years, then you're not going to increase your benefit at all.

And that added income could mean higher income taxes and higher Medicare premiums. So, you just need to look at the big picture to make sure that it makes sense. But purely from a benefit standpoint, Elaine, you know, unless you're replacing a lower year, you're not really helping yourself in terms of that monthly benefit check. Okay. Okay. So, I am replacing those years.

That's one of the reasons it's been hard to give this job up. And I'm in good health as well. Okay. Yeah, very good. So then you, yeah, you are improving that check and will continue to do so as you earn more than you have in one of those prior years.

You've got the cost of living increases on top of that. But, you know, I think at the end of the day, it really just comes down to are you fulfilled with what you're doing? Is the Lord calling you to something else?

Obviously, you've got good health. So, I'd say just keep on keeping on. And we appreciate your call today very much. God bless you. To St. Cloud, Minnesota. Hi, Steven.

How can I help you? Hey, Rob. Yeah. So, what happened last week was my water heater decided to start leaking all over the ground.

It was from 1985. So, I got a good run. But I'm just wondering what the process for insurance is. I already opened up a claim and stuff. And we got it all cleaning out right now, letting it dry. But I'm just curious as to like what to expect from the insurance adjuster. When does he come? And what other questions I might want to ask? So, just wondering what to expect.

Yeah, very good. You know, water heater leaks are very annoying. And they do cause quite a bit of damage, you know, anytime water is involved. They're generally covered by homeowner's insurance, less the deductible, of course. So, you really just need, you know, each insurance company is going to have a different process and procedure. So, just make sure they tell you really quick, clearly, I should say, about what you need to do. It probably involves as a next step getting estimates beyond the, you know, water mitigation that you're doing right now. I would get, Steven, at least three estimates on repairing the damage and putting the house back as it was.

You can show these to the insurance company. Don't necessarily take the least expensive one. You're going to want to make sure the materials to be used are the same quality as before. So, you know, if you're replacing hardwoods, you know, make sure it's the same. You know, if it's an oak, don't replace it with a pine and vice versa.

Carpeting should be of the same quality as well. So, I think you just want to take a look at that, make sure you are truly, you know, returning it to the place that it was. And the key is going to be, you know, whether you get up above that deductible as to whether the policy will actually kick in.

So, I'm glad you reported on a timely basis. The biggest thing is just to go ahead and, you know, try to take care of it as quickly as possible so you don't have any kind of mold issues. You'll want to, you know, make sure that they do a thorough job in getting that cleaned up, including, you know, checking the walls and so forth.

But apart from that, it's really just a matter of finding the right contractor and getting the insurance company to approve it so you can get the repairs completed. Okay? Okay.

Sounds good. Thank you. All right, Steven, God bless you. We appreciate your call today.

To Bedford, Indiana. Hey, Lily, how can I help you? Hello, Mr. Moneywise. So, I'm having some debt issues, you could say. I have just about $800,000 in debt on all of my credit cards.

And also, not only that, but my income yearly is about $13,000 and that's working the bare maximum that I can possibly work. What is your advice? Yeah. And so, let me just make sure I heard you because this doesn't sound quite right. Did you say $800,000? $100,000, is that what you asked? Yeah, I'm just trying to confirm the debt number that you said you had.

Yes, that is correct. How much is it? $100,000.

$100,000. Okay. And you said that's all on credit cards or is that different types of debt? It's all in credit cards. Okay.

All right, Lily. Well, I think the next step, if all of that is true and you're only making $13,000 and you're not able to pay the minimum payments on that $100,000 in debt. So, what you're going to need to do is really get some wise counsel to help you navigate where you go from here. You're going to want to work very hard on trying to get your income up. You probably want to check with our friends at christiancreditcounselors.org to take a look at that. They're going to help you work through your budget and they'll take a look at each of the credit cards, see if they can help you get those interest rates down so that you can keep those current, cut up the cards, never use them again and work methodically to try to get those paid down. You know, credit cards can be really dangerous if we're not careful allowing us to spend beyond what we have in the way of provision. So, when they become something that's detrimental to our financial life, we need to get rid of them and, you know, everything comes back to Lily and this is, you know, important for all of us to understand. First, recognizing God owns it all and we're stewards of what he's entrusted to us and that we have to live within his provision and that means we've got to have a plan. Whatever provision he has provided for us and that doesn't mean we don't try to improve that along the way but whatever comes in, we need to find contentment and a willingness to live within that which means we need to have a plan that recognizes what our expenses are and stop spending well before the resources are gone so we have margin so we can save for the future and if we have some debt, get that paid down. So, Lily, you reach out to our friends at christiancreditcounselors.org. Let them work through a budget with you.

Let them take a look at each of your credit accounts and see what they can do to get this going in the right direction and by all means don't use those credit cards. Lily, thanks for your call. We'll be right back on MoneyWise Live. Stay with us.