The document discusses factors to consider when choosing between a 15-year and 30-year mortgage. It notes that while a 15-year mortgage has lower total interest costs, many overlook the tax benefits of the higher interest payments in a 30-year mortgage. When accounting for tax deductions, investment returns on savings from lower monthly payments, and inflation, a 30-year mortgage can often be more financially beneficial. This highlights the need to do a comprehensive analysis of one's individual situation rather than relying on claims of saving money through various financing options.

1. WHITE PAPER
MORTGAGE MINUTE
Insights to more informed financial decisions
s

2. BUYING A HOME
UYING
Whether you’re a first time homebuyer or consider yourself a
first-time
seasoned pro, there is a certain anxiety that comes with buying a
s
home. While it’s evident that styles, neighborhoods, school systems,
and property taxes are all critical aspects of the home
home-buying process,
The first, and there is no single element more puzzling and stressful to the
perhaps most consumer than the decision of how to finance one’s home.
important step is to Banks and other financial institutions claim to make th often
this
clearly understand mystifying process “easy,” but with literally dozens of financing
options –adjustable rate mortgages, terms of 15-year, 30-year, and
year, 30
what you can afford 40-year, interest only payment options, as well as varying down-
year, interest-only down
payment sizes - all people are often left with is a case of home-buying
home
hysteria
hysteria.
To make this process much simpler, try turning the clock back a little
and dust off your old economics textbooks. Turn to the chapter on
opportunity cost and take into account a little “gift” that the IRS gives
us called an income tax deduction. After that, figuring out the best
way to finance your new home becomes as easy as deciding what
color would spruce up the slightly weathered exterior!
You need to
understand The first, and perhaps most important, step is to clearly understand
what you can afford. Figure out property taxes, utilities, other home
precisely how your ownership bills, possible refurbishments, and don’t get in over your
hea This is the simple part.
head.
money works to
avoid being trapped The next piece takes a little more expertise. You need to understand
t
precisely how your money works to avoid being trapped by the banks
by the bank's claims claims of saving you money through fancy “quick payoff” options.
of saving you
First, generally speaking, the less money you can put down, the
money better. Just keep in mind that there is a minimum payment amount
that will avoid certain fees (points, etc.) and it is usually advisable to
make at least enough of a down payment to avoid these expenses.
It’s important to understand that financial institutions make money
by keeping our money. They want our money any way they can get it.
.
The amount of money you put down will always determine the size of
© Copyright 2010. LEAP SYSTEMS, Inc. All rights reserved.
. 2

3. your loan and thus, the size of your monthly payments. But the
and, paym
more money you hold onto increases the opportunity and flexibility
you have to make the decisions that are best for you and your family.
When interest rates are attractively low, your ability to outperform
the loan’s net interest rate, by investing in something as simple and
nvesting
In most cases a 15- safe as guaranteed savings vehicles, may be an attractive alternative
alternative.
year mortgage is To the contrary, most banks and other financial institutions heavily
contrary,
push the 15 year mortgage on the consumer. Those who can afford
15-year
not cheaper the higher monthly payment often eschew the 30 year and longer
30-
mortgages in the name of “interest savings.” You will often hear that
a 15 year mortgage will save you considerable money versus a 30-
15-year
year mortgage because you’ll pay significantly less interest. It’s true
that the interest portion of a 15 year mortgage is less, but in most
15-year
cases where a sound rate of return can be achieved, a 15-year
e
mortgage is not cheaper. Here’s why...
A critical component in calculating the cost, that many people fail to
consider, is the tax-deductible portion of the mortgage in the
deductible
comparative cost analysis. For example, when assessing the cost of a
15-year mortgage at 5.25% versus a 30-year mortgage at 5.75% on a
year year 5
The critical mistake $250,000 home, let’s suppose an individual is in a 28% marginal tax
28
bracket and has a well producing investment asset (such as a mutual
well-producing
many people fund) assumed to earn 8% over a thirty year projection. Both
thirty-year
overlook is their mortgages require a repayment of $250,000 of princi over the
principal
term of the mortgage, but the 15 year mortgage has an interest cost
15-year
failure to include of approximately $1 745 and monthly payments of $2,009.69,
$111,745 $2,009.69
while the 30-year mortgage has interest costs of approximately
year
the tax-deductible $275,216 and monthly payments of $1,458.93. Most financial
275,216 $1,458.93. f
portion of their institutions stop there and show the consumer that the 15 15-year
mortgage is far less expensive. But, they have not shown the entire
hey
mortgage in the story.
comparative cost
Since less interest is generated by a 15 year mortgage versus a 30-
15-year 30
analysis year mortgage, the amount of loan interest that is deductible on the
individual’s tax return is also less. This means that the money that
the government was willing to put back into the individual’s pocket,
because of the interest deductions will be significantly reduced.
deductions,
Further, in many cases where an individual’s earning potential
© Copyright 2010. LEAP SYSTEMS, Inc. All rights reserved.
. 3

4. increases with age, the tax rate also increases, meaning even more
savings due to the interest deduction Therefore, in order to
deduction.
properly assess the overall “cost” of a 15 year versus a 30-year
15-year 30
mortgage, one must take into account the difference in the projected
tax deductions and the investment of those tax savings. Assuming
savings
The first, and that the tax savings are invested into an equity product at 8%, the
growth potential of the dollars saved can be significant.
perhaps most
A second area to consider is the lower monthly payment amount of
important step is to the 30 year mortgage. In this example the individual has an extra
30-year
clearly understand $550.76 p month, or approximately $6,609 per year to invest over
per r
the first 15 years. Not only does this money represent significant
what you can afford investment opportunity, but it can also function as a measure of
safety and liquidity in instances where savings reserves may be less
than ideal or in an emergency.
Another area to consider and one that is rarely discussed, is the
nother consider,
eroding factor of inflation. In periods of increasing inflation, a dollar
today is worth more than a dollar tomorrow. So, in the case of a 15-
n
year mortgage, more of today’s dollars, which are more valuable, are
dollars,
being paid to the mortgage company instead of remaining in the
individual’s pocket Depending on the rate of inflation, this factor can
pocket.
contribute significantly to reducing the gap between the present
values of the 15-year and 30-year mortgages.
In sum, when all of these factors are considered, the total cost for
This is just one carrying the 15
15-year mortgage over a thirty-year time horizon can
year
often be more than the 30-year mortgage. And even in cases of low
example of how the rates of return and regardless of interest rates, tax brackets, annual
information you income, etc. many people will still find a 30-year mortgage more
etc., year
economically beneficial due to – lower payments, more spendable
hear may not dollars monthly, protection against loss of income due to a lower
always be in your monthly payment, etc. While this is not universally the case, it is
important to assess your own personal situation for yourself.
best interest.
It is important to keep in mind that the information you hear may not
always be in your best interest. A good way to decipher the best
mortgage option for you and your family is to work with someone
© Copyright 2010. LEAP SYSTEMS, Inc. All rights reserved.
. 4

5. who will giv you the information and tools to gather the facts
give
necessary to make better informed economic decisions.
If you’d like to learn more about mortgages and find out if there are other potentially
hazardous financial strategies costing you unnecessary financial waste over your lifetime, and
learn about how to properly account for all of your financial decisions, contact your local
Personal Financial Economics expert using Wealth In Motion or the LEAP SYSTEM.
SYSTEM
Contact Us
Contact us via e-mail at info@leapsystems.com
908.231.1511 | www.leapsystems.com
© Copyright 2010. LEAP SYSTEMS, Inc. All rights reserved.
. 5
| 1170 US Highway 22, Ste 204 | Bridgewater, NJ | 08807