So you are looking at buying a house and taking on a mortgage? Well, then we are in the same boat. I love looking at all the wondrous mortgage calculators that are available on the internet. Saves me quite a bit of time of trying to create my own amortization schedule, not that it is all that hard when you have a decent spreadsheet program.

Of course, lots of planning and factors determine exactly how much of a house you can afford. I can’t speak for others, but I would never take out a mortgage based on what kind of house a calculator tells us we can afford. Sure, it’s a great guide, but I would defer to what our budget currently consists of. It is important to have a comfortable payment that can allow you to be flexible with your finances in the future.

Why is this so important? Here come the numbers!

Let’s use the following numbers for a modest house, with a modest rate in our given market:

  • Mortgage = $200,000
  • Mortgage Term = 30
  • Interest Rate = 5.5%

Your monthly minimum payment would be $1,135.58 over the life of the mortgage.

Here are the remaining details of the loan:

  • Payoff Date = March 26, 2039
  • Total Paid = $408,808.80
  • Total Interest = $208,808.80

After 30 years, you would be paying more than double what the original loan amount was with all the accumulated interest. Don’t be discouraged though because the value of your house should increase over 30 years. I wouldn’t believe the bogus figure I hear on TV that your house doubles in value every 7 years, but I would expect it to at least double a couple times over a 30 year period.

Before we get too excited, don’t forget that inflation plays a big role in the time value of your money. $200,000 today will not equal $200,000 in 30 years. Taking an average of 3% inflation over 30 years, $200,000 today equals just over $485,000 in 30 years.

Now, if you were to add an extra $200 per month for a total payment of $1,335.58, how much would you expect to save for the life of the loan?

Here’s the data:

  • Payoff Date = May 26, 2030
  • Total Paid = $339,237.32
  • Total Interest = $139,237.32

There you have it, the mortgage would be paid off just over 21 years instead of the full 30 years. Not only that, but you would save just under $70,000 in interest just by spending an extra $200 per month!

That’s the big key of making ‘cents’ of a mortgage is to be sure you don’t buy too much house. You still have the ability to make those extra payments to get out from under your mortgage sooner, rather than later. We still are a ways away from making a decision on a house, but we are forecasting how much house we can afford and saving accordingly.

Step 1, save for a down payment! Cheers to that!

Stupidly Yours,

Matt