E67: How to avoid the biggest mortgage pitfalls

Nate: In this episode, we will discuss how to avoid the biggest mortgage pitfalls that many people find themselves in so that you can use your mortgage to your advantage instead of to the bank’s advantage. She’s Holly, and she helps people find financial freedom.

Holly: He is Nate, he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: Another great day for a podcast, and right off the bat we wanted to welcome you. If you’re a new listener, we upload a new podcast every two weeks. Every other Monday, you’ll get a new podcast, a new upload from us. I wanted to welcome you. I wanted to thank everyone who has been a listener of ours. We hear such good things and good reviews from so many of you and it really encourages us. For those of you who haven’t, if you guys could do us a favor and rate the podcast and subscribe to it, share it on social media, all those types of things, it really helps the word get out and helps our mission of getting people out of the conventional traps that they may be in and into some new ways and new way of thinking, new philosophies so that you can break free from the herd and avoid getting slaughtered in the future. Absolutely.

Now, if you wanted to go… we find that a lot of people go over it with their family, with their kids, so just wanted to encourage you to continue to utilize it as best you guys can. We love to hear from you personally as well, Holly and I do, if you are enjoying it or if you have questions. Just wanted to continue to encourage that before we got started with today.

Today is about mortgages, Holly, and we’ve actually done an episode on this before, and the reason we’re bringing it back is because we’ve had so many people over the last couple of years since we did the first podcast ask us questions on this topic. It’s really resonated so we wanted to maybe delve a little bit deeper and, in fact, we wanted to delve so deep that we did… we’re actually going to do this as a two-part podcast, today and then in a couple of weeks we’ll launch part two of these mortgage pitfalls and what you should be doing instead. Why do you think it’s such a big topic for people?

Holly: Well, I think partly because oftentimes you’re hearing a lot about mortgages, 15 years versus 30 years versus the interest rate has dropped. It’s dropping every week. You want to get it locked in lower. How do I do that? I need to make an extra house payment. There’s so many things going on with because, really, your house is your home, and most of us, though, have this home and yet the mortgage is this 30 years versus 15. Which is better? Do I really want to be paying for 30 years on this mortgage? Those kinds of questions I think come in and we live in an environment where it’s preached that interest rate, that interest rate, that interest rate, and your house is an investment, yet I don’t think all of us necessarily see it as an investment because many times for us, it’s not the investment. There’s somebody else always getting the money.

Nate: Yeah, I think that it’s such an important topic for us because it’s typically the biggest decision many people make… The biggest purchase we make a lot of times for the average individual is going to be their house, and how they pay for it is going to be very important. On top of that, Holly, we talked to a lot of people who have had a home, had a mortgage, they have equity built up and they never even thought they could use it. For whatever reason, by the way, I feel like people think they can use their home equity for like remodeling their house and doing improvements to their house, and that’s about where the scope ends. I don’t know why that is. If it makes sense to do it for that, do you think we could open up the box and do other things? I hope so.

You brought something up. One of the misconceptions or pitfalls or myths, whatever you want to call it, of buying a home is many people think that their house is an investment or an asset, their primary residence, and that can be a dangerous thing as Robert Kiyosaki says, who’s Rich Dad, Poor Dad for those of you who follow, is that an asset is something that’s supposed to put money in your pocket. A liability is something that takes the money out of your pocket. For all of my life, especially up until I learned these ideas especially, but even up to this point, my personal house right now that I live in does not do a very good job of putting money in my pocket. It seems to be a money pit at times. I know the value may go up and things and I’m always happy about that, but is your house really an investment if it’s costing you money, cash flow each and every month where you have to work just to keep the house?

Holly: Every month, it’s this bill or that bill. My house is relatively new, Nate, and so I feel like in six years what we’ve had to put into it or replace or do this or that, it feels like sometimes it is a money pit. That there’s just one other thing you have to do. It’s exactly that belief of the money is always leaving your pocket and going into somebody else’s pocket.

Nate: Yeah, I think that there are ways that you can turn your house into an asset, and that’s actually what we’re going to get into in the next episode of the podcast in a lot of detail different ways that you can turn your house into an asset. For most people, they are not treating their house as an asset. It’s more of a liability to the extent that they don’t use. That’s the thing. You can have the house and it can be an asset, but if you never put it into motion, you never work with the money, you just let it all sit there and you just make payments and pay the bills and pay the property tax, you’re really not going to get ahead.

Nate: The first pitfall is with the mentality of, “The house is an asset even if I don’t do anything with it”, and we’re here to say, especially in this next episode, we’re going to really delve in deeper into how to make it a real asset, one that can make you money and put money in your pocket and produce value for your family, not just a place to live and I’m paying for that on a mortgage. That brings me to kind of another question. What’s the big difference between a 30-year and a 15-year mortgage, Holly?

Holly: The biggest difference is the lower interest rate, typically, and the fact that you believe that you are going to save so much money. That over 30 years you would have given the bank so much more than you would have after 15 years and more than likely the belief that your payment, it’s less, because it’s 15 years versus 30. I would say that’s the biggest I’m going to say misconception because there’s a lot of things that I think are better on a 30 year versus a 15 year, and it’s not just the interest rate that’s so significant.

Nate: I can agree with a lot of people that it feels good to have a mortgage paid for. A lot of people, that’s a goal of theirs and I’m all for it. Yes, it can feel great to have your mortgage paid for, to own your house free and clear. I’m not saying that’s a bad agenda, but the question has to be a little bit deeper, and that’s when you start running the numbers and you look at math and that’s where really start to question. You really look at a 30-year and a 15-year mortgage, the main difference is just how much it’s costing you. In other words, to pay off a… If you borrow $300,000 to buy a house, if you pay off over 30 years, obviously, the monthly payment and the monthly obligation is going to be lower for the balance to hit zero, so we got 30 years to pay it off as opposed to 15 years.

The problem is, is that a 15-year mortgage is actually putting the bank in a much better place than it’s putting you, and the reason for it is the bank has a lien on your entire house whether you’ve got $1 owed on it or where you got $300,000 owed on it. When we start making payments on a 15-year mortgage, what we’re doing is we’re paying the loan back faster, which can be nice in one regard, but it actually gives the bank back their money quicker. If you go out and have a rough patch financially speaking, you’re actually locked in making this larger payment and all of the equity that you’ve built up, you may have to foreclose and lose the whole thing if you can’t make the payments.

One of the things we’re going to mention on here, and I hope to delve into a little bit deeper, is why a 30-year mortgage can actually benefit you, but it depends on how you operate overall. That’s one of the things I wanted to get into if we could, Holly, is the question of, why is there a lower interest rate with a bank on a 15-year mortgage instead of a 30 year? Why are they trying to entice us? We walk into a bank, we sit down in front of them. The banker is in there saying, “Well, look how much interest you’re going to pay on a 30-year mortgage, and you’re going to pay so much less on a 15 year. Why don’t we just choose the 15-year mortgage and help you save money on interest?” You’re looking at the payment, you’re like, “Wow, that’s going to make things pretty tight to get it paid off in 15 years, but that’s a lot of money. I’m going to do it.” They’re even going to throw in a lower interest rate to do it.

Holly: Well, it gives them more principal, number one, and it gives them more cash to work with, but the other things is is that you’re locked into this payment. I just wish we could realize that money is more valuable today than it is in the future, so if they can get your money in 15 years versus 30, they want it. Well, you’re giving them strong, strong dollars and basically it’s more principal that they get to have. Like Nate said, remember, whether it’s a dollar or $300,000, it doesn’t matter because the bank is going to get your house if something happens. Whether it’s a dollar or 300,000, and you’re locked into that. Try and go and change. Ask yourself, you get into a 15-year mortgage, how likely is the bank then when you… if you do fall on hard times or anything like that likely to go, “No, let’s go ahead and change it back to a 30-year mortgage”?

Nate: It actually puts you in a very precarious position a lot of the time. The bank is all for it. It’s less risky to a bank to offer you a 15-year mortgage and it sounds good to some people to get it paid off in 15 years and be free and clear. It sounds great, but what’s actually happening is we’re paying it back quicker and quicker, which means they’re getting their money back faster, but until there’s a zero-dollar balance on the house, on the mortgage, they’re still going to come and get it if you don’t pay them back. Let’s just say if you chose a 15-year mortgage, it was going to be a thousand dollars a month. Let’s just say that was the payment on a 15-year mortgage, and if you chose the 30-year mortgage, you would have had to be locked into a $600-a-month payment. That’s a pretty typical difference.

Well, you go out there and you say, “Okay, I want to get this thing paid off. I’m going to choose the 15- year mortgage. Hoorah. Let’s get it done.” We go in there and we’re halfway through it. We’re in year seven, we’re in year eight, we’ve been paying it. We’ve sent them all this extra money. The balance has gotten further down, and that happens to be around the time, seven, eight years later, that we do fall on the tough times. We lose our job, the economy collapses, there’s not much work, income is going south.

Is it going to be very likely that we can walk in to the bank and ask them at that point, “Hey, guys, you remember seven, eight years ago when you gave me the option between these two? The 15 or the 30 year and I chose the 15 year because I want to get it paid off? Well, you remember that discussion?” The guy is like, “Yeah, I do.” “Well, now, I’m having a hard time making this thousand-dollar payment. Can we switch it to the $600 a month at least to help me get through this timeframe?” What do you think they say?

Holly: No. Get out of here! You can’t do that! You took the 15. They’re selling you the 15, so they’re selling you the 15 and once you do it, they’re not going back to a 30. They’re not going to do it.

Nate: Now you’re stuck since your income has dropped dramatically or your business is dropping down, revenue, or something bad is happening. They’re not going to want to refinance it for you, and all this money that you’ve been storing in the house is now worthless to you, practically. Maybe you could fire sale it and get it closed down so you can pay the bank off as quickly as possible and maybe walk away with something, depending on how quickly you get it sold, but either way, it puts you in a very precarious position. If we think about the opportunity you have if you chose the 30 year, now you’re only stuck with 600 a month, but what about that extra $400 each month that you had freed up because we didn’t choose the 15-year mortgage? What if we did something else with that and put that 400 a month toward elsewhere? 

In reality, seven or eight years later down the road, now we’d be stuck with only a 600-a-month payment instead of a thousand a month, and we’ve have a whole bunch of money someplace where we don’t have to crawl back to the bank and ask for it back and hope to be approved for it. We just got money. One of the things that Holly and I like to share is this idea of separating the equity from your house. How much is equity in the home actually make somebody? What’s the rate of return on equity?

Holly: Zero. 0%. It’s so great for you, that equity, it’s earning you 0%.

Nate: Yeah, we put in after-tax dollars. It earns 0% and it actually raises your taxes because you no longer have a mortgage interest deduction, or you’re lowering that deduction the more you put towards the principal. How much money do we really want to put towards the principal of the mortgage? The one thing I guess that it does do, Holly, is that it does… if we put money towards principal, it reduces the interest that we pay on a mortgage. That’s the only value that that has. Your value of your home is going to increase and decrease regardless if you have a mortgage on it or not. Your house should be appreciating whether or not there’s a mortgage. Paying on the mortgage doesn’t impact the value of your house.

What you really ought to do, instead of giving the bank control of that money, is you want to pay the bank off in as long of a time period as you possibly can. Get it back to them as long as you can. The bank on my own home… I don’t suggest this for everybody, but I’m a bit crazy. I’ve actually got an interest- only mortgage. I don’t want to send them a dime of principal because I want to take all of the principal money that normally we’re just sending to the bank and I want to work with it myself. I think I can work with the money myself and do better with it than what it’s going to cost me just to pay interest on the home, but knowing that I could pay off the mortgage at any point because I’ve been working with the cash on the side, especially with infinite banking and the things that we do.

Let’s use the bank’s dollars. Instead of giving it back to them quickly, let’s give it back to them as slow as we can. Let’s put them to work for ourselves, and that way at any given point something happens to us, we have a whole bunch of money, not equity in the house that we have to ask for. We have to get approved for. We have to jump through the bank hoops to get, but just cash. I’ll build my equity somewhere else.

If you run the numbers, guys, on a 30-year mortgage versus a 15 year and you take the money that you would have spent for the 15 year and you put that excess money in a policy, a lot of times 15 years will go buy and that policy will have enough cash value to pay off your mortgage anyway. During that timeframe, you would have had free rein of the money to do whatever you want with it and put… the bank is actually the one at risk. They don’t have the capital back, so it’s a longer term for them and you’ve actually made a profit typically on it. We’re actually going to delve into that a bit deeper in part two in our next podcast.

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Holly: Before you go quickly running to the bank for that low interest rate in 15 years because you kind of want to get the monkey off your back, really stop and think about the financial position you’re putting yourself in as well as, what is the plus for me? The bank out of the generosity of their heart is not giving you a lower interest rate. It’s more of a plus or positive for them than it is for you.

Nate: You hear people like Dave Ramsey, other people saying not just 15 years paying it off, let’s pay it off as quickly as you can. Five years, 10 years. Throw everything you got at the house, and it always just blows my mind, especially a guy like Dave Ramsey, for those of you who know him, who thinks and proclaims that everyone’s going to earn 12% rate of return in their mutual funds. Why on Earth if you have the opportunity to earn 12% in a mutual fund would you ever pay down a mortgage that’s probably a 4% interest rate that’s tax deductible? That does not compute to me.

It’s kind of like that fact that… I don’t know if you guys ever heard with Warren Buffett and how he pays his taxes, how he delays paying his taxes for as long as possible and he’ll pay the interest on the back taxes and the late fees on the back taxes because he says, “I can earn more money if I use this money for five years and pay just interest back to the IRS. I can earn more money with it by me working with it than if I just sent it to them and avoided the interest and penalty. In some ways it’s very similar to that, that we believe, especially in today’s low interest rate environment, that., for you guys listening, that it is more powerful and more profitable for you to take control of the equity of your house.

My suggestion to you is don’t build it up. Don’t make it a focus to stuff as much money as you can in your house unless you have a desire to pull it back out and use it, and we’re going to talk about how to do that in the next episode. That’s what we want you to do is start using the house and what you’re already doing as an asset as opposed to just a liability building up equity. For what? If you’re never going to touch it, what’s the point?

Holly: We can pay off the house quickly. Let’s say you do pay off the house quickly, but all you’ve done is create assets and not cash, and you always need cash every day to live on, to grow, to build, to pay for things. You can have all the assets in the world, the house is paid off and not have any cash and be stuck where, “Now, I’ve got to get rid of this”, or, “I’ve got to figure out how to do this.”

Remember what Nate said, if you can earn 12%, why aren’t you earning the 12% on that money instead of earning a lower interest rate and giving it to somebody else? “I did the 4% because it was so good for 15 years”, but you lost the ability to allow that excess money to grow at 12%. It’s really going to grow at 12. Put it there versus, “Let me get a lower mortgage for 15 years and a lower interest rate just to make up the difference.” It’s not worth it in the long term.

Nate: Yeah, and a lot of times 15-year mortgages are sold based on that, where the banks are really trying to encourage it and a lot of these people are trying to encourage… like Dave Ramsey, others speakers, Suze Orman and whatnot, to pay off your house quickly and choose the 15-year mortgage because you’ll pay less interest over the timeframe, but they’re letting the nickel hide the dime. It’s not about the amount of interest you pay to the bank necessarily, it’s what are you missing out on by contributing so much money to pay off your house mortgage? What opportunities are we missing out on because all of the money is stuck in our house?

Many times it can be huge amounts of money over time, especially with some of the ideas we’re going to talk to you about. Essentially for this part one, we want to avoid some of the biggest mortgage pitfalls. If you’re not using the value or the equity of your house, then don’t consider it as an asset or an investment on your books.

Holly: I think, too, that goes along with, Nate, just addressing the fact of how many of us have actually made an extra house payment and we did it because of the belief that it benefited you. How did it benefit you? If you’re getting zero rate of return on that money, how did it making an extra house payment benefit you?

Nate: Lowering your tax deductions for the year so you have to pay more to the government by making extra payments to the house.

Holly: Exactly, because most of it goes to principal. That’s what the extra house payment goes to, principal.

Nate: This is what I always tell people, by the way, Holly. There’s really two things you want to look for when you’re dealing with your home. The safest place for you to be… I know it may sound surprising to some, but the way to be as safe as you can possibly is, number one, to have your mortgage completely paid off. That way the bank can’t have any say. The other safest point is to have your house mortgaged to the hilt. Have as much as you can borrowed out. Now, I’m not saying that, of course, you can’t borrow it out and just spend the money. You’ve got to separate the equity from the house and put it somewhere else. I would tell you guys to use… an infinite banking policy is a great place for it to hold that equity.

Anywhere in between, the bank is actually in a better position than you are because they’re going to have a lien. The lower the balance of the loan is as compared to what the house value is, that’s a great loan to the bank. If it’s a $300,000 house and you only owe a hundred thousand, they would love for you to foreclose on that house, then they can sell for… as a flashover 200,000 and make a hundred thousand in profit and got their money back. They’re feeling pretty good about it, but that’s why instead of having a house worth 300,000 with only a hundred thousand borrowed out, either make that thing zero and pay it off or let’s go ahead and take out $200,000 and let’s use that money and separate the equity. That way if you did have a hard time, the bank can’t come get the house, or if they did, they’d have to lose money and you’d make out like a bandit, but either way, separating the equity from the house can have a lot of benefits.

Holly: Absolutely, and I think that’s what you guys have to start asking yourself. Is somebody doing this for the benefit for you? Or is it for the benefit of the bank? How is it better helping you? We get so caught up in the message that is out there. “Oh, 15 year is better. It’s a lower interest rate.” We lose sight of the importance of, how do we make our house an asset? Why are they willing to give us such a low interest rate? What is honestly in it for you versus how is it helping the person giving you the loan?

Nate: Exactly right. If you’re out there, you’re looking to buy a house, you’re looking to maybe refinance a house, or you’re someone sitting on a whole bunch of equity in a home, I would strongly encourage you to tune into our next podcast where we’re going to delve into some things you should be doing. I think it will really help you and we’d love to help you switch positions with the bank, really, where we put you back in control, and just knowing what you should be doing can be very helpful, especially with these big decisions you make. Don’t just trust what they say, don’t just do what conventional wisdom says to do because it doesn’t seem to make sense a lot of the time. Instead, think outside the box. Take control. I think it’ll be a blessing to you.

Holly: For free transcripts and resources, please visit livingwealth.com/e67.