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
I hate tackling mortgage math.
Mainly because you also have to factor in the mortgage interest deductions on taxes. Which gets complicated when you are looking 20 years out.
What will your salary be? What will the tax rates be? What will the tax rules regarding mortgage interest?
I pay in a bi-weekly mortgage plan and I will have mine paid off in 21 years!! Making the same payment as I would in my monthly plan…Great!!
@Joninray
Good point, Joninray. I ran the same scenario numbers through the calculator assuming you make bi-weekly payments. With a bi-weekly payment of $567.79, the mortgage would be paid off in 25 years. That is a savings of 60 monthly payments!
Add an extra $50 per bi-weekly payment and you would have the mortgage paid off in just over 21 years.
Hi guys/gals. Old guy here. A year ago we refinanced our house under the Hapr 2.0 program for a 15 year mortgage at 3.25%. This is NOT the original Harp program that failed miserably. This is the Harp 2.0. Seriously, our bank solicited us for it and I was more than slightly skeptical, but we went thru with it and in 2 weeks we reduced our mortgage to 15 years, dropped several % points and had NO closing costs. It was totally painless. You might want to check that out.
When all cash flows are considered, renting costs less, which means you’ll have more money to save & invest. Over the long run, the stock market averages +10%/yr.
So the 20% downpayment, 3-5% closing costs, 5-6% selling costs every time you move (average US home borrower moves every 7 years), property taxes, maintenance, insurance, is all money that could have been invested.
If you look at everything (all cash flows considered), you spend less money when you rent! Between property tax, insurance, maintenance, mowing the lawn, fixing the roof, etc. etc. plus the extra utility costs you’re spending a lot of money that could be invested instead. What’s wrong with renting??
Learn from the past people! (Of course they look at me like I’m crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from 4AutoInsuranceQuote. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).)
Nobel Prize winning economist Robert Shiller was one of the few people who accurately called both the stock market crash of 2000, AND the real estate crash of the late 2000s.
And he says that owning a home is a terrible investment.