The printing press revolutionized how information was disseminated to the masses, but of course it is an antiquated machine by today's standards. Later on, the ability to print in multicolor brightened up the way in which we received information. But printing was still two dimensional. Today, we are on the verge of the 3D printing revolution.
As it pertains to your client's financial decisions, we can either think in black and white, in color, or we can incorporate an entirely new dimension. Mortgaging a home is one area where your clients can get better results by thinking three dimensionally.
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Black and white analysis
If your clients ask you whether they should utilize a 15-year or 30-year fixed $300,000 mortgage, here's the one-dimensional/black-and-white analysis:
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Multi-color analysis
In the first dimension, a 15-year mortgage is better because the homeowner/mortgagor spends $137,385 less on interest payments over the life of the mortgage. What happens when we add some color?
The second dimension in this case is tax deductions. For the sake of comparison, let's assume a married couple filing jointly and earning $200,000 annually. A 15-year mortgage would create a $2,431 deduction in the first year and a decreasing amount thereafter, for a total tax savings of $20,650 over the life of the mortgage.3
With a 30-year mortgage, however, they would deduct $2,947 in the first year and a total of $53,623 over the life of the mortgage. The 15-year mortgage still wins, but by adding color to the analysis, the 30-year mortgage gets $32,973 closer to breakeven. We're still thinking two-dimensionally though; let's see what happens with an entirely new dimension.
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Three-dimensional analysis
With a mortgage, like all money decisions, it's not only about the mortgage as much as it's about someone's holistic financial picture. A mortgage provides homeowners with flexibility because they don't have to put all their wealth into purchasing the house. Let's assume your clients save $36,000 per year, which is 18% of $200,000. Of the $36,000, they will first pay the mortgage and then the rest including the mortgage-interest tax deduction will get invested at a steady 6% rate of return.
Next, we play this out for 30 years, keeping in mind that a 15-year mortgagor will save the full $36,000 annually after their 15-year mortgage is paid off.4 After 30 years, the 15-year mortgagor has $1,586,803.20 but the 30-year mortgagor has $1,736,922.71!
Even though they ultimately paid much more in interest, the 30-year mortgagor ended with $150,119.51 more, which is nearly 10% more than the 15-year mortgagor.
We should think three-dimensionally when helping clients through complicated situations. Mortgaging a home is one example of incorporating comprehensive information to achieve optimal results.
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1 Mortgage rates are as of May 2, 2019 at https://www.wellsfargo. com/mortgage/rates/.
2 Monthly payment and total amount paid were derived from https://www.google.com/search?q=mortgage+calculator&oq=mort gage+c&aqs=chrome.1.69i57j0l5.2982j0j4&sourceid=chrome&ie=UTF-8
3 The mortgage-interest tax deduction was calculated online at https://www.calcxml.com/do/hom09?skn=#detailedResultsTop
4 I'd be happy to supply all my calculations if you're really interested!
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Kyle Zwiren, JD, works with Financial Architects Inc., an independently-owned company located in Farmington Hills. Kyle and his team serve attorneys and other professionals to help them design financial plans in line with their goals and based on optimal efficiency. Kyle practiced law prior to becoming a Financial Architect and left the practice to follow his passion. To talk to Zwiren about other topics featured in The Economic Blueprint, email him at kzwiren@financialarch.com or call him at 248-482-3622.
Published: Fri, May 24, 2019
