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Mortgages - Six Things You Need to Know to Save Big Money
Most of us make our house payment every month without ever thinking about how we are really spending our money. The fact is, if you purchase a $200,000 house January 1, with zero down, at 5% interest, on a 30-year fixed note, you'll be making a monthly principal and interest payment (not counting PMI, property taxes, and homeowners' insurance) of about $1,073. Some $833 of that monthly payment will go toward interest, and only about $240 to your principle balance. The first year alone will cost you almost $10,000 in interest. Over the life of the loan, you will pay some $186,511 in interest – almost double the cost of the home.
THE TAX DEDUCTION MYTH
What they say: "But mortgage interest is a great tax deduction!"
The Truth: You may not be getting all that interest back at the end of the year and, even if you are, the Federal government spent the last year using your money, interest-free.
It doesn't always pay to itemize your deductions. If you don't itemize, you may get back nothing of the interest you paid on your mortgage. If itemizing works out better for you than the standard IRS deduction, then you can deduct at least some mortgage interest. But if you're in, for instance, a 30% tax bracket, you'll be losing $3,000 on that $10,000. Not such an awesome deal.
The best mortgage is no mortgage at all. But, if you're going to own a home, very few of us have a spare $200K lying around so a mortgage is a necessity. Zero-down loans, getting the closing costs rolled into the loan, or adding the closing costs to a 2nd mortgage, make home buying more readily accessible for some buyers. But they are not intelligent financial moves.
We all know buying is usually more financially responsible than renting. So, what's the answer?
Preparation and intelligent spending.
At Heritage Real Estate Co., we work with dozens of home buyers a year, and see the same scenario over and over: buyers, particularly young ones, have a credit score just high enough to get a loan, just enough income for the house payment (principle, interest, taxes, insurance, and PMI), but not a penny to put down or toward their closing costs. They want the very best house they can possibly buy, and they want it now. They are often unwilling to do anything to fix the place up themselves. They "need" the kitchen to be remodeled, "need" three bedrooms, two baths, and expansive square footage, even if it's only the two of them. And they quickly end up house-poor slaves to a 30-year mortgage that's going to cost them twice what the home will ever be worth.
But that's just the American way, right?
Yep, but it's not the smart way.
Intelligent home buying often requires a little planning, a little time, and a little self-control (egads!).
Steps every home buyer should take include before buying include:
- Establish a relationship with a great lender, one who is dedicated to getting you on the right financial path. This may or may not be the bank where your checking account lives. Talk to several and get a feel for both the products they offer, and the person you'll be working with. This can save you thousands of dollars, and headaches on the way to the closing table. We can help with references.
- Get your credit in tip-top shape. Barely squeaking by the minimum credit requirement to get a loan will cost you a higher interest rate, a bigger monthly payment, more interest over the life of the loan, and potentially more PMI. A good lender can get you on the right path to better credit, and better loan terms.
- Save up enough money for a down payment and closing costs. Rolling these costs into the loan increases your monthly payment, and the amount of interest you pay over the life of the loan, while reducing equity.
- Never have a payment of more than 25% of your take-home pay. Money arguments are one of the top reasons for divorce in the US. Lavish square footage will never bring lasting happiness. Live beneath your means, or you'll be working just to make house payments and there's more to life than that.
- Know the difference between what you "need" and what you "want." A home isn't a status symbol. Be willing to start modestly, roll up your sleeves and invest a little "sweat equity." Upgrade later, when you can really afford it.
- Get a 15-year, fixed-rate mortgage – the savings is astronomical, and it's infinitely safer than an Adjustable Rate Mortgage (ARM), especially in an unsure economy.
THE "BUT I'LL MAKE EXTRA PAYMENTS!" MYTH:
What you say: "I'll make extra payments and pay it off early!"
The Truth: No, you won't. Statistically, almost no one does and, I hate to break it to you, you're probably not a special exception.
We all tell ourselves we'll make extra payments; we'll pay it off early. But, almost none of us do, even if we can. We blow it – all of us – spending money like it's our job: Clothes we don't really need, new purses, cigarettes, movies, 4-wheelers, premium cable packages, alcohol, manicures, new cars, eating out, the latest iPhone, big-screen TVs, Starbucks, high-end haircuts, bottled water, lavish vacations to Disney, and a thousand other shiny gadgets and gizmos we tell ourselves we "need."
What if, instead of zero down and a 30-year note on that $200K home, you put down just 3% ($6,000), paid your own closing costs, and went with a 15-year loan? The monthly payment will cost you an extra $435, but the interest saved over the life of the loan would be some $190,900.
The truth is, the only way to pay off a 30-year mortgage early is to commit to a 15-year mortgage at the outset. For $435 a month more, you will save almost $200,000 in interest and be free of the bondage of a mortgage 15 years sooner.
Will it require some self-denial? Probably.
Will it be worth it? Absolutely.
And you can still deduct the interest.
© Copyright 2018 Heather M Neill, All Rights Reserved.
Bill Porter, Broker
(304) 612-3746207 Aurora Dr
Morgantown, WV 26508
WEST VIRGINIA LICENSES BROKER WVB240300963
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