Do you consider yourself to be a savvy investor? A frugal deal-finder? Or, maybe you’re a saver at heart and have thousands of dollars in the bank. Whatever the case, you feel pretty responsible about the decisions you’ve made, right? Well, I hope so, but even if you are all of the things above, you still might be broke for life, and it only takes one decision to get there.
One of the Biggest Decisions of Your Life
First of all, no, I’m not talking about getting married, although that is probably at the top of the important decisions list (and it could actually have a big impact on your finances for the rest of your life). What I’m talking about is real estate. Almost every one of us will pull the trigger at some point in our lives and purchase our very first property.
Buying your first home requires careful consideration because…
(1) You want to enjoy it. After all, you’ll spend more time there than anywhere else.
(2) You’d like it to be a solid investment. Nobody wants to buy into a money pit!
(3) You’ll most likely be loaning money from the bank to make the purchase.
How Much Can You Afford Per Month?
In that initial meeting with the loan officer, many people are excited to find out how much the bank will loan them. They hear the “big number” and it’s almost like they forget that they’ll have to pay the money back with interest. With this loan, they begin to picture the house of their dreams and end up purchasing a property that is much larger than their needs….all because they can “afford” the monthly payment.
Your House Loan With Interest
When my friends went to the bank, they found out that they could take out a loan for $225,000. After this meeting, they got all starry eyed and started looking at properties that were over $200,000, even though it was much more house than they needed for the two of them. When they finally decided on a house, guess how much it cost? Yep, $225,000.
Even with a low interest rate of 4.5% (for a 30 year loan), they’ll still end up paying the bank a total of $410,414! Plus, since they have such a large payment, there is pretty much no chance for them to pay it off early! It’s by far the best way to ensure a broke life!
The Wise Thing to Do
With a $225,000 loan, your monthly payment would be approximately $1,654 per month. Now, instead of purchasing the biggest house you can find, why not pick out a more reasonably priced property, but still apply the same payment to the loan? You’d be surprised how quickly you could pay it off.
Here, I’ll prove it to you. With a smaller house, you’ll need less money from the bank and will be able to take out a 15 year loan instead of the full 30 year term. This will take your interest rate down from 4.5% to 3.75% or so. With the same payment amount of $1,654 per month, you can still afford a house that’s $190,000, but you’ll pay it off in half the time! That means that instead of having a loan through 2041, you’ll be paying off the bank by 2026! That’s a huge difference!
Are you choosing to be broke for life? Or, are you paying off that loan earlier than 30 years and enjoying the rest of your life?
Photo By Alina Sofia
{ 15 comments }
We took a 30 year loan when we bought our house but I hated the idea the entire time. When we had our first kid in 2009, I set a goal that I wanted to be mortgage free by the time he went to college, which would either mean we’d have to re-finance or pay early. We just got through a re-finance into a 15 year loan that will have us paying off no later than 2026 which should allow us to reach my goal!
Congrats on setting yourself up for success! Just stick with your plan and you’ll achieve that goal! 🙂
I hear you on the mortgage expenses – but looking for something under $300,000 in the Bay Area usually means on a busy street in a bad school district under a flight path. I wish it didn’t, haha… but “them’s the breaks”.
It definitely keeps you focused – I have to try my best to keep my other expenses down since I purchased my house. In other ares of the country I would have economized more, but here I think I can justify the increased price.
Don’t take these numbers too literally. As long as you don’t try to max out your loans, I’d say that you’re probably ok. Maybe your family could have afforded a house worth $600,000. If this is the case, then I commend you for choosing the $300,000 option.
Buying a house is an emotional decision, but you can not forget about the financial side. It is easy to get caught up buying a bigger more expensive house since the person showing you the hoouse is a sales person (real estate agent/broker). The mortgage guy is also a sales person too. Start with how much you really can afford and talk to someone who does not have a vested interest in the sale. A parent or older sibling may be a good choice.
Great advice Krantcents! It’s good to have a friend to bounce things off of, especially when it’s a 6 figure decision! Always talk to someone that does not benefit from your decision.
I think this all goes back to one key theme, “live inside your means”. At the end of the day these are poor credit decisions where someone is trading their future dreams for present fantasies. It’s a high risk play to live outside your means and it is generally all downside and little upside….
Unfortunately, for some people, “living within your means” is taken as, “don’t borrow more than you can pay back”….
I keep thinking, when it comes to buying things, whether they’re worth it. That’s the big question. Is it worth it? Just because a person can afford something doesn’t make it worth it, and just because a person can’t afford it doesn’t make it a bad deal.
Psychologically, most people spend all their money. Like you said, if they have access to $225K then they will spend close to $225K. I have never bought a house like that. All my houses are CHEAP! I can afford a 1.5M house, but to me that’s insanity. My current house is $400K, and I have a wife, four kids and two dogs. Some people recommend I buy something huge, but I find that my house is already too big. However, when I bought it I paid as little down as possible. I could have bought it with cash, but debt money is cheaper than my own, even though, yes I will pay probably double the sticker price in the end if I ever pay it off. The thing is, I can pay it off within 48 hours, so it’s a decision as to how I structure my finances. I can use my own money better, so I use the banks money to buy my house.
Anyway, for me the short answer is buy what is worth it, meets your needs, appreciates well, whatever is your definition of worthwhile.
You have a very interesting approach by not paying for the house in cash. I do understand it, but then again, I don’t. Yes, I understand that loans come cheap these days, but is it really that easy to make 5% or more with your money? How can you be so confident?
Its surprising of people dont think about these things before they make HUGE life purchases and wonder why they are broke all the time.
I agree. When they use up the rest of their remaining cash per month on the house payment, don’t they realize that they can no longer go on vacation, go out to eat, buy that extra-special gift for the friend Suzy, or even take a day off from work just because?
Maybe they assume that their income will increase in the future? However, with that mentality, they’ll probably buy a more expensive house when it does….
When we do find a house, I’m hoping to do a 15 year mortgage so we can own the home sooner rather than later. It’ll take us some time though.
Keep working on your blog and you could pay it down in less than 15 years. I’ve been talking to some bigger bloggers that say $10k/month is not out of the realm of possibility.
What’s wrong with buying into a money pit if the alternative is forever renting a money pit?
Comments on this entry are closed.
{ 4 trackbacks }