It’s Finance Friday! Yay! (The last Finance Friday was in March, but we will not forget or stop loving Finance Friday, now will we?).
Today I want to write about something that has become near and dear to my heart as Husband Saign and I have been attempting to purchase our first home: Being smart with your mortgage.
As we’ve been looking for homes, I’ve also become a HGTV connoisseur. With all this important TV-watching experience, I’ve seen a lot of interactions between buyers and their realtors. Sometimes, their realtors say things that drive me CRAZY. They’ll say a little something like this: “The difference between 250,000 and 260,000 is really not very much when it comes to your monthly payment.”
Okay, well, maybe not lies. Yes, it will not make much of a difference when it comes to your monthly payment, but it will make a huge difference over the life of your loan. I want to encourage you to always think about finances in the long-term rather than the short-term.
Let me use the example above. Let’s say that you are negotiating with a seller for a home. You want to offer $250,000. Your realtor encourages you to offer $260,000, with the argument that “it’s really not a big difference on your monthly payment.” Let’s say that you have $30,000 down and you’re going to use a 30-year conventional loan with 4.5% interest rate. (Given the state of congress right now, I’m not sure what the interest rates will be in a month, but right now 4.5% on a Conventional Loan is pretty average). Here’s the math for you:
If you pay $260,000 for the house, your monthly mortgage payment would be $1165.38.
Now, if you pay $250,000 for the house, your monthly mortgage payment will be $1114.71.
So, as you can see, your realtor is not lying: The more expensive house is only around $50 extra per month. I don’t know about you, but for me $50 extra is really not a terrible problem.
The problem is that the math doesn’t stop at the monthly payment…or, at least, it shouldn’t. The difference of price is big over the long term. A mortgage difference of 10,000 will cost nearly $20,000 over the life of the loan if you’re making minimum payments. (In this case it will mean paying $419.535.44 over the 30 year loan, versus $401.294.77).
Now, I realize that when it comes to mortgages, it’s easy to just think of them in terms of the monthly payment. But, i would caution you from doing so. Let’s think about the above scenario: Yes, it’s only about $50 per month. But that’s almost $20,000 extra over the life of the loan. $20,000 is kind of a lot of money in my book. I certainly don’t want to spend an extra $20,000 just because someone reasoned that if the $20,000 was taken from me in a very gradual manner, that it really wouldn’t be a big deal.
So here’s what I would encourage you to do: Do your math! When you’re considering a mortgage, do the math to determine how much you’ll be paying over time for different mortgage amounts. Here’s a calculator that can help you be an informed consumer.
Do you tend to think about finances in the long-term or the short-term? Do you love or hate HGTV?