Peter Dunn| Special for USA TODAY
I have an offer for you. I'm going to give you the opportunity to buy a $250,000 item for either $310,000 or $416,000. It's not a trick. It's not a hoax. You must decide on this information alone which choice makes the most sense. You are either going to pay $60,000 more than the value of the item, or you're going to pay $166,000 more than the value of the item.
This scenario is real. I've just described a very common financial product decision that happens every single day.
We all buy financial products. They come in all shapes and sizes, from protection products like life insurance, to accumulation products such as exchange traded funds. And while the products are each created to address specific needs, at times they begin to appear as though they're a dime a dozen. We buy the products with specific goals in mind, but little do we know the side effects that can often arise from their usage.
As the salesperson selling you the products should disclose, every financial product has its advantages and disadvantages. There are trade-offs, consequences, tax implications, and vulnerabilities, for nearly every financial product out there. Some products are used when they shouldn't be, on accident, and some products are sold into situations in which there is no practical application whatsoever, on less-than-accident.
There are thousands of products out there, yet I believe one financial product reigns supreme. It's so good that its trade-offs are even beneficial. I believe it to be nearly perfect. It also prevents you from paying $416,000 for a $250,000 item. It's the 15-year conventional mortgage.
A 15-year mortgage more or less ensures you won't have a house payment during retirement, allows you to fund other goals (education funding, early retirement, etc.) once the loan is vanquished, prevents you from paying tens of thousands if not hundreds of thousands of dollars in extra interest, and helps dissuade you from buying too much house.
When you buy too much house, other priorities don't get funded — plain and simple. The 30-year mortgage undoubtedly lets you buy more house, and that's not necessarily a good thing.
I know the argument here. "The 15-year payment is too high." Fair enough, but you're saying avoiding a higher payment justifies paying more for something you just insinuated you can't afford? It doesn't.
I'd rather not spend $416,000 on a $250,000 house. I'd rather pay $310,000 once all the principle and interest payments are made.
We've become a society addicted to affording payments — not the items the payments fund. I remember getting the Dell computer catalog for the first time back in the early '90s. I tried to convince my dad that at 13 years old, I could afford three laptops at just $11/month each. The entire point of breaking down payments is to make the unaffordable appear affordable.
Can anyone really afford to pay over $100,000 more than is necessary? You may be able to justify paying $100,000 more in interest if you're investing the difference in payments into an investment that earns more than the cost of the loan. But I just don't see people actually doing that. Instead, they are pushing the limits of affordability and borrowing.
The fatal flaw, as it always is when it comes to money, is our behavior. In an effort to buy more for less, we end up buying more for lots more.
There's another big problem here. It's not uncommon for lending institutions to let you borrow too much money. When you approach a lender with the "how much house can we afford" question, they often respond with an answer not related to your original question. They will let you know how much they are willing to let you borrow. There's nothing quite like having a very important question answered with the answer to a completely different question.
To be fair though, I don't blame the lending institutions for this. Their job is to provide you with the means to purchase a home, while creating a profitable piece of business. They are making a wise financial decision for them. Your job is to make a wise financial decision for you.
The 15-year loan is not for everybody. You can manufacture dozens of excuses as to why it can't work for you, legitimate or otherwise. Some of the more legitimate reasons revolve around specific real estate markets, such as San Francisco, Los Angeles and, of course, Manhattan. Yet those are exceptions to the rule, not the rule.
My hands aren't exactly clean. I've had a 30-year mortgage, and I regret it. However, I've rectified that situation, and I encourage you to explore doing the same. You can shave years off your payment obligation, but most important, you'll stop yourself from paying more for a house than you actually should.
Peter Dunn is an author, speaker, and radio host. Have a question for Pete the Planner? Email him at Pete@petetheplanner.com.
