hi welcome back my name is James Johnson and my expertise lies in retirement and Estate Planning and today we're going to talk about probably one of the most controversial subjects and that is how do you pay for your house so I want you to listen very closely to what I'm about to say you should pay for your house as fast as you possibly can you should just always have the largest possible mortgage right up until the day you die I'm going to say that again you should pay for your house as fast as you possibly can you should just always have the largest possible mortgage right up until the day you die now I'm going to do a little demonstration for you here I'm going to explain that and then I'm going to go on to show you the numbers you see the interesting part about this is people lie but mathematics doesn't so we're going to do the mathematics today and see if this is really true or not so we're going to start with this cup right here and this cup is going to represent our house and our house is currently worth $500,000 now if we were to go look up this house we would find that the house on our balance sheet is under the word assets and if it had a mortgage on it as this house does it has a $500,000 mortgage that would be under liabilities but what we want to talk about right now is we just want to talk about the assets so we have a $500,000 house with a $500,000 mortgage on it now the first question that we want to answer is would this house go up or down in value any faster if we paid it off and the answer to that is absolutely not this house will appreciate or depreciate regardless of how much money we put in it therefore the rate of return on Equity is zero and it is always zero so any Equity you put in this house is currently losing money based on two fronts one inflation the value of this dollar is becoming worth less and less every single day and two opportunity cost so if I had this money that was inside this house I could take it out invest it somewhere else possibly buy another piece of real estate get rent on that whatever the case may be but I could invest that money so I wouldn't be wouldn't be losing the opportunity cost so we're going to start off with this $500,000 house with a $500,000 mortgage on it so we have one $500,000 asset that's working for us today and over here for lack of better words we have $500,000 in our bank account so if we were to look at our assets today we have $1 million in assets we have a $500,000 house with a $500,000 marage on it and we have $500,000 in a bank account now I know some of you are going well we only have $500,000 in assets that's not true our net worth is only $500,000 because when we take away the loan we would be added $500,000 net worth but our assets that are working for us today are $1 million so I have a $500,000 house with a $500,000 mortgage on it I have $500,000 in my bank account I have $1 million in assets the question I have for you is is this house paid for and the answer is yes watch this I move the money from my bank account over into my house and my house is instantly paid for so I'll say it again you should pay for your house as fast as you possibly can you should just always have the largest possible mortgage right up until the day you die so once again I have a million dollars in assets if I was to take $100,000 of this money in this bank account over here and put it into this house what would would this house be worth now and the answer is $500,000 if I was to pay it off this house would still be worth $500,000 but I would instantly have $500,000 in assets instead of a million dollars in assets so maybe you could explain to me why I wouldn't want to keep the money over here in this account and have mortgage on my house and I can tell you the only answer you could give me that would hold any weight whatsoever is I don't want to have a house payment but when you see the mathematics of that you'll suddenly begin to realize that having a house payment is the most important thing that's ever happened to you your entire life and most of you are in a hurry to get rid of it so once again we have a $500,000 house with $500,000 mortgage on it we have $500,000 in our bank account we have a million dollars in assets right now this house has a mortgage and it's still paid off because I can move the money from here to there at any point in time now hope hopefully that got you to the point where you have a little bit of understanding of what I'm talking about but now we're going to go on and we're going to go do the math but the first question I want to ask you is what if everything you thought to be true turned out to not be true I suppose you would want to know right away and what I find is that most people are living in a box and they keep talking to the same people in the same box on how to get out of the box and the interesting part is the directions are on the outside now what's really interesting about this is when you get out of your box you simply always get into bigger box because you're limited by your knowledge so going forward here I want to start off with a little test and if you could just go and get a piece of paper and take and write down one two three four five you're going to answer these questions and we're going to do it pretty quickly here there's not going to be any time for explanation we're simp going to answer the question true or false now I want you to answer the question what in the way that you believe not the way you believe I want you to answer I want you to answer exactly the way you believe so that being said is it true or false a large down payment will save you more money over time than a small down payment so write down your question and I would guess that most of you just said true a 15-year mortgage will save you more money over time than a 30-year mortgage and generally the people give the answer that that is true making in extra principal payments saves you money most people would put true the interest rate is the main factor in determining the cost of a mortgage and once again most people would say true you're more secure here having your house paid off than 100% financed and most people would say true so I want to make sure that you've gone through here now and you've marked down your answers was it true or false for each one of those be sure to hang on to that we're going to come back to that here in a little bit now we have three types of money we have what's called accumulated money these are your stocks your bonds your equity and your house everything that you've managed to accumulate up to this point in your life we have your lifestyle money this is the money that you currently live on now my first question for you is how much time would you like to spend today on sacrificing your lifestyle and hopefully the answer is zero because my rule is you live like you're going to die tomorrow and you plan like you're going to live forever because you just might and I can't tell you which one it is but see we have a third type of money and the third type of money that everybody has is what's called transferred money and this is the the money that we're transferring unknowingly and unnecessarily out of our life and we do this in about six different ways we do it in how we pay for our mortgages how we fund our qualified plans how we fund our College funding taxes protection and major purchases but what we're going to talk about just this time is just about mortgages and how people are transferring money unknowingly and unne necessarily on how they pay for their mortgage now think about this if I can find money that you're transferring unknowingly and unnecessarily would you save it and I hear people say all the time yes but what I find out is that's generally not the case they find a new way to spend it comparing home financing strategies is very important besides the home the most important decision is how you choose to finance it every well-planned mortgage loan considers the intended strategic outcome comparing a 15-year and a 30-year Mor mortgage side by side is a key to an informed decision whether you're choosing a traditional mortgage or paying cash each impacts monthly cash flow and long-term retirement strategies so let's get into the mathematics here I know it's very confusing you go out here and you go to the bank and they've got 15E mortgages and 30s and arms and negatives and balloon payments and bonly payments oh my God it's so confusing I even even know where to start but the question I want to ask you is how does a bank make money I why you think about that for a second how does a bank make money and the answer to that is is that the way Banks make money is they borrow from you the depositor and they sell to you the borrower and they wait way they do that is every dollar you deposit in their Bank the government gives them four they leverage up and then they loan that money out and if A bank's not loaning money then they're going to be out of business now think about this for a second if if A bank's business is loaning money and that's how they make money do they make more money on a 30-year loan at 6% or a 15-year loan at 5.5% and everybody immediately says well they make more money at 6% cuz 6% is higher but that's really not true because see what happens is is when they're on a 15-year mortgage they're getting their money back faster and they're able to leverage it up and get a higher Arbitrage off it over that period of time think about it when they go out and they advertise a loan to you what loan do they advertise they always advertise the lowest rate do you think that's to their benefit or to your benefit is now if it turned out that they actually made more money on a 30-year loan then why aren't there 50-year loans why aren't there 100e loans and the answer to that is because only reason why there are 30-year loans is because they couldn't sell houses without them so they need a 30-year loan out there to continue to sell houses if they had their way it would be a five-year loan it would come back as soon as possible so that they could reduce their liabilities Etc so let's just talk about going out and buying a house so let's pretend that right now we have $500,000 in cash and we got to make a choice we can go out and buy a house today for $500,000 in cash or we could go out today and take out a 100% loan on that house at $500,000 in cash so would it be good to pay cash if we had it well let's see what the math says let's say I took that $500,000 and instead of buying the house with it I invested it at 6% over 30 years now 6% is a very reasonable number we could tie it to the S&P 500 as an example and make a better number than that over time so we're going to use a conservative number of 6% that money invested over 30 years would give us 3,1 11,288 over that 30-year period of time now if we took out a mortgage at $500,000 and let's say we paid 6% in interest so we're going to make exactly what we're paying in interest and over 30 years our payments would be $2,998 a month the sum of that would be $1,791 191 so it looks to me that if you paid cash for your house you made a two million doll mistake pretty amazing isn't it and when you begin to understand this and you begin to understand that typically you can make more than what you actually borrow at and even if you make less than what you borrow at you still come out ahead you begin quickly to understand that paying cash for your house makes zero sense so the next question is well why do people choose a 15-year mortgage well the reason why they choose a 15-year mortgage is because they actually believe that they're going to save on interest over time the the perception is the shorter the loan reduces the cost of the loan well if you follow that logic then you should just pay cash for your house but we've already determined that paying cash for your house makes no sense whatsoever so let's get into the weeds here just a little bit and what we're going to do here right now is and I love this slide this is truly one of my favorite slides is we're going to take a $500,000 loan and we're going to compare a 6% rate on a 15-year loan and a 6% rate on a 30-year loan now I'm well aware that you could go out and you can get a little bit lower rate on a 15year loan than a 30-year loan I'm well aware that I can get tax write offs all that stuff but for right now we're just going to compare apples and apples so if I had a 15year loan at 6% my payment would be $4,299 128 if I had a 30-year loan on 6% my payment would be $2,997 75 now the bank's telling me I should take out a 15 year loan my mortgage will paid off faster everything will be great and fantastic well let's see if that's really true so the difference between those two is 1, 221,50 I'm sorry it's one $1,221 53 so here's my question if I was to go out and make the 15-year mortgage payment of $4,290 for 15 years pay off my mortgage and then Bank $4,299 128 for years 16 through 30 or I was to make a 30-year mortgage payment of $2,997 75 and I was the bank the $1,221 53 in a side account at 6% every year for the 30 years at the end of the 30 years if I made the exact same rate I was borrowing at which account would have more money in it would it be the one on the top or would it be the one on the bottom and I can tell you that I've had literally of hundreds of people I've showed this to I've had about seven or eight people ever get this right and you'd say well how's that possible well because the answer is they would be exactly the same but here's the most interesting part about this exercise that's not the point of the exercise the point of the exercise is to understand this if we had a 15 in a 30-year mortgage and we got out to 10 years and we lost our job and for some reason we couldn't make our house payment and let's say we were making that $4 4,219 payment to the bank and we've been doing it for 10 years we never missed the payment we pay early we do everything that we're supposed to do do you suppose if I went to the banker and said Mr Banker I lost my job I just need a little bit of help here for the next six months to a year so that I can get back on my feet can you help me do you suppose the banker is going to help me and the answer is going to be absolutely not they're going to foreclose on your house very quickly now these days they can't foreclose on it that quickly but they certainly will foreclose on your house and sell your house to get their money back out of it yet if I had Mak the 30-year pay payment of $2,997 75 and I had been banking that $1,221 53 for that 10year period of time how many these $3,000 payments do you suppose I could make at 120 months I have 97,98 and interest alone is $989 186 how many of those house payments you suppose I can make with that and the answer is pretty much all of them I could certainly make them until I I could get myself out of trouble and I wouldn't lose my house in the process so I don't know do you think it's better to put your money in your house or to keep your money and keep control now what you need to understand about putting money in your house is once you put it in your house it's no longer safe it's no longer liquid and it no longer has a rate of return and I don't know where you come from but where I come from that's not a good investment so now let's compare Apple's oranges okay so we're going to start off here and we're going to say that we got a 30-year mortgage over here at 6% and we got a 15-year mortgage over here at five oops 5.5% not a 65.5% 5.5% there we go at 15 years now you can see that the difference between these two payments is this one's about 3,000 this one's about 4200 is roughly $1,200 a month we're going to put that $1,200 a month in the side account at6 % our marginal tax bracket is going to be 30% and we're going to do a little calculation here so the qu question I have for you is what rate of return do you think I have to make on that side account that I'm putting $1,200 a month into to have enough money to pay off that house in 15 years and the actual answer to that question is 5.04% net after taxes now here's the interesting thing if I actually paid and made six% on it instead of paying off my house in 15 years I would have enough money over in this account over here to pay off that house in 14 years and six months but oh no the bank said I should take out a 15-year mortgage now I got one more thing here for you really quickly is I want you to re think that about this for a second you live in a house that's worth $1 million and I live next door in a house that's worth $1 million we have the exact same house we bought it at the exact same time the difference is is that you've been making B monthly payments on your house and you've been paying your house off as fast as you possibly can and as a matter of fact you only owe $1,000 on your $1 million house I on the other hand sucked out all of the equity in the house I put it over in a taxfree safe environment for to invest in and I've been making interest only payments towards my house and not only that I overleveraged my house and I owe $1.2 million so you owe 100,000 I owe 1.2 million we go on on vacation together we're on our way out to Las Vegas on the way back we get in a terrible car accident neither one of us can work any longer whose house are they going to take first yours are mine and I assure you you're going to take yours so fast your head will spin they will look at you and go sorry this is my house now because all they have to do is sell it for $100,000 to get all of their money back out no problem no harm no foul they will literally come to me and say Mr Johnson we have to figure out how to keep you in this house because if they were to take my house they instantly lose because they can't get even a small amount of their Equity back out of it get it now here's another scenario while we're g on vacation a giant earthquake happens opens up swallows both houses who's better off me or you because all of your Equity is in the bottom of the hole you're going to walk away sad but you lost the mortgage the bank's security is in the bottom of the hole I'm going to walk away but I've got all my cash cash who's better off me or you so should I have my house paid for or 100% financed now you can't 100% finance but which would be better having a large mortgage or no mortgage at all so remember these questions let's go back over them again a large down payment will save you more money over time than a small down payment well as we see mathematically that answer is false a 15-year mortgage will save more money over time than a 30-year mortgage as we've seen that answer is false making extra principal payments saves you money that answer is false interest rate is the main factor to determining the cost of a mortgage that answer is false you are more secure having your house paid off than 100% finance that answer is false so if everything you thought thought to be true turned out to not be true how soon do you want to know I want to leave you with two more things there was this lady she was cooking Thanksgiving dinner for her daughter and her daughter asked her mom how come you always cut the ends off the ham before you cook it she says you know I don't know honey she says my mom's always done that so she calls up her mom she says mom how come you always cut the ends off the ham before you cook it she say I don't know about you honey but the reason why I do it is because my Pan's too short so most people operate on Old beliefs in a new world we're in a different place than we were in the 30s they can't just foreclose on your note and call your loan at any time we're in a different place you're in a different place now whether you pay off your mortgage or not that's entirely up to you but the math says it's not a good idea the math says it can be millions of dollars worth of mistake over your lifetime so how do you feel put in the comments below about whether you think you should pay off your mortgage and why or does this make sense does it make sense to you please make some comments below be sure to subscribe to our YouTube channel and come back and learn some more remember to live like you're going to die tomorrow plan I get to live forever keep smiling and make it a great day
