Buying a Home – House Buying Tips…Part 1 with Mortgage Choices

Many look at buying a house as one of the happiest days of their lives.

For most, it’s an emotional experience.

How do you think mortgage brokers, real estate agents, and the businesses looks at it?

Not emotional.

It’s a business transaction, that’s all.

How to make a smarter decision when buying a home…

Before you jump into purchasing your dream home, here are some practical angles to think about…

• How will you afford the house?
• Are you putting 20% down (20% of the purchase price)?
• Is the money available now?
• Do you have an emergency fund?
• Are there are home improvements that will be required to your new house?
• Will you be getting a 15, 20, or 30 year mortgage?

Did you know that the majority of people buying a house use a 30 year mortgage rate?   It definitely offers a lower monthly payment providing stability in finances.  Are you also aware of how much of the principal of the loan you actually pay in the first five years?  Do you know how much you end up paying on a 30 year mortgage?

Let me explain.

First time home buyers, let’s say you buy a $200,000 house with 3.5% down payment ($7,000) and a 30 year mortgage at a 4% interest rate (common statistics in 2015).  

How much of your house (equity in the house) will you own after year 1?  $10,400

How much of your house will you own after year 5? $25,437

After 30 years, how much will you have paid total?  $331,708

How much interest is that?  $138,708  ($331,708 – $193,000)

Now, if you take a 15 year mortgage with a 20% down payment ($40,000), let’s revist those questions.

How much of your house will you own after year 1?  $47,947

How much of your house will you own after year 5?  $83,106

After 15 years, how much will you have paid?  $213,030

How much interest is that paid?  $53,030 ($213,030 – $160,000)

WOW

There’s a big difference between paying an extra $33,000 up front and an extra $200 per month. That results in paying $85,000 less interest in total over the life of the loan.  Why is it so different?

In the 30 year example, on the first payment of $921.41,  $278.08 goes to Principal, and $643.33 goes to Interest.  Yes, that’s correct, only 30 percent of your money goes towards Principal on the first payment.  You don’t actually start paying more in principal than interest until 12.5 years later!

In the 15 year example, on the first payment of $1,183.51, $650,16 goes to Principal, and $533.33 goes to Interest.  A major difference here.  54 percent of your money goes towards Principal on the first payment, a 24 percent difference than the 30 year fixed mortgage option.  Why 20 percent?  Avoiding PMI, mortgage insurance, is a great way to hold onto an additional $200 per month that can be used more effectively.

All of this information is around the mortgage process.  Don’t forget about the extras like an emergency fund when the air conditioner breaks, a tree falls on the house, or a storm crushes the screen over the pool.  All of these items can have a price in the range of $10,000 or more.  Keep this in mind when making this very important financial decision, not an emotional one.

Beyond the costs and how long it will take to pay down the mortgage, there is a tax angle here.  The more interest paid on the house, the higher the deduction people can take on their taxes.  For a more in depth look at the tax angle, feel free to visit Turbo Tax’s article here on home deductions.

For more information about budgeting and extra expenses regarding your future home purchase, check back next week for Part 2…