A False Sense of Saving: Equity and the 15 year Mortgage


May 1, 2020

My Dear Reader,

Yesterday we covered the “saving money” aspect of 30 and 15 year mortgages and the concept of home investment. From radio ads to financial talk shows, we often hear that our home is our biggest investment. While we won’t be going into that specific aspect today, many advocates of a 15 year mortgage argue rightly that a shorter mortgage payment will give you more equity in your home.  However, much like stocks, equity is only real if you can use it.  And in times of crisis, banks typically clamp down on loans. This is because of the increase in risk per loan. Unless a homeowner takes out a HELOC before an economic calamity, chances are the extra money that they put into their home is no longer accessible when they need it.  This further compounds the opportunity cost of putting extra money into a home which doesn’t produce additional cash flow.  Remember, the basic premise of opportunity cost is that every dollar you spend today could have been invested to yield increasingly more money over time. Every dollar spent today will never again be able to work in your favor. For instance, $100 invested today at the market average rate of return of 7.91 percent will be worth about $1,000 in thirty years. So, every payment made today with your own dollars hurts you in the future.  Therefore, we must question the validity of increasing payments into an asset that locks away its value behind red tape.  

To your creation and potential,

Kevin Prendiville