The first step to paying off the mortgage in half the time is to make the decision to get out of debt. The next step is to take action! The best way to can become completely debt free in half the time, house and all, is by chosing a 15 instead of a 30 year mortgage.
My first home purchase was with a 30 year mortgage
My first purchase was a condo that was financed with a 30 year loan. Why? I was told that it was a lower monthly payment and “that is what everyone else does.”
You know what everyone else also does? Moves away. According to the US Census Bureau, young adults between the ages of 25-34 will move an average of six times. That means most 30 year mortgages will never reach their 10th birthday.
I sold my condo 7 years into the mortgage. A large chunk of the first few year’s mortgage payments consisted of interest charges so I only walked away with only a couple thousand dollars after fees. The lower payment translated into lower home equity and didn’t help with my next home’s downpayment.
Choosing a 15 vs 30 year mortgage saves tons of interest
Houses are the largest purchases most people will ever make, and I don’t mean largest by square-foot! Buying a house is expensive in both principle and interest charges. Looking at the interest charged over a 30 year loan, even with an incredibly low interest rate, may shock you.
Let us use the example of a $200,000 home mortgage at 3.50%:
While a 30 year loan is $532 less each month, you would save yourself more than $65,000 in interest charges over the life of a loan with a 15 year mortgage. That is $366 a month or $84 a week in savings!
You also build up home equity much faster because more of your payment goes towards principal reduction. The lower the balance, the less interest you have to pay each month, which allows you to pay even more towards principal the next month. The cycle of building home equity gains momentum very quickly with a 15 year home mortgage.
Long-term financing didn’t match my long-term dreams
I don’t dream about the financing when shopping for a home. People buy houses because of the possibilities. When we shop for a house we rarely say “the reason I want this house is for the 30 years of monthly payments.” Instead we say things like:
- This house is in a good neighborhood
- We could raise our kids here
- The schools in the area are great
We dream about the potential. We think about holding barbecues in the summer or painting the walls pink if we have a little girl (or blue for a boy). Envisioning where the Christmas tree could go is a vision of the future, shouldn’t we also plan out our finances that way?
How much house can I really afford?
Buying a home is an emotional process that has long-term implications on our finances. It could be a great investment and colossal expense. Maintenance and repairs, upgrades and remodels, furniture and decorations are not part of the mortgage and should be considered before backing a loaded U-Haul up to the garage door.
The safest and easiest way to determine what you can afford is to decide on a purchase that is no more than 25% of your take-home pay on a 15 year fixed rate loan. The rest of the money is yours to pay monthly bills, eliminate debts, and to have fun on the side.
Someone earning $60,000 a year might bring home $4,000 after taxes, health insurance, and 401(k) contributions. They could afford a $1,000 a month house payment. A couple earning $100,000 could probably live comfortably with a $1,350 monthly bill.
Paying attention, not interest
Not everyone’s finances are the same. We all have different goals and money is usually involved at some point along the way. Becoming debt free is a long-term goal and expensive purchases like a home should be carefully considered. The next post will offer solutions for paying off an existing home mortgage in half the time.
In the meantime, shop carefully and happy house-hunting!