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