Mortgage Mystery…
The final boss, the big debt, the “with you for life” payment. There are many joys, but also risk, worry, and (to some extent) a feeling of being trapped. . .
Home ownership.
Talk about a blessing and a curse! This is likely the largest asset any consumer will purchase at one time, and it plays a massive role in your life. Your home is essentially your life’s headquarters and can have a massive impact on who your friends are, where you work, your quality of life, and even your family decisions. There’s a reason why mortgage questions are highly searched on the internet; People understand the gravity of this decision!
My goal with this short read is to give you an idea of what the “mortgage landscape” looks like, what your average person is up against when looking for a place to call their own. I’ll also give a couple of quick tips and rules of thumb that will add some peace of mind to your life. Be aware, if you’re looking for home style and interior design content it might be best to stop reading now. Also, I won’t be addressing the infamous rent vs. buy question many young people are facing right now. That’s a topic for another day.
First. Here’s some interesting facts that “set the scene”.
80% (give or take 2%) of people pay off their house by the time they retire. If you’re doing the head math, that means that 1 in 5 people never fully own a home.
The average person makes their last mortgage payment in their early 60’s. This makes sense because the average mortgage lasts 30 years (that’s a long time).
Housing prices have gone up about 40% in the last 4 years. Perspective: a house that cost $300,000 in 2020 now costs $420,000 and is going up. Of course, this varies geographically.
The average monthly mortgage payment in the US is around $1,800, or $21,600 per year.
Hang with me on this one- assume that a house costs $350,000, the mortgage is spread over 30 years, and the interest rate is 7.25% (all very reasonable assumptions right now). By the time you’re done paying off your home you will have paid over half a million dollars in interest alone. This is specific to where I live, those numbers can change dramatically depending on where you are.
Second. I know, it looks daunting, but I’m not all “doom and gloom”. It’s important to remember that your home is an investment (its value will likely increase over the years), and owning a home is essential for a healthy financial picture. Also, there are things you can do to make sure that your reality is far less stressful. Here are some guidelines that might help.
Make sure that your down payment is 20% of the loan value or greater. This will allow you to avoid paying for PMI (private mortgage insurance). Basically, a low down payment signals to lenders that your financial circumstances aren’t rock solid, and therefore you are more likely to miss payment deadlines or stop making payments entirely (called defaulting). It turns out that those lenders really want to be paid, thus PMI.
I’ve seen 2 rules of thumb for payment. First, take your annual income and divide it by 12. Your monthly mortgage payment should ideally be around 15% of that. Or, your total housing costs (mortgage interest & principal, property taxes, PMI, association costs, etc.) should be around 28% of that at the most. This is your “margin of comfort”.
Understand that a house will need maintenance. You can ignore it for a long time, but (like it or not) roofs leak, paint fades, and water heaters eventually turn into water tanks. Be aware of the lifespan of your home’s components and budget to replace them. Ultimately just be aware that there are costs over and above the mortgage payment.
Consider opting for a 15-year mortgage and paying it off early (if at all possible), especially with rates in the 7’s. 30 years is a long time, and I bet you’ve got other things to think about and spend money on.
If done correctly, buying a home can be a fantastic and exciting experience! It’s one of those defining moments, a milestone, and a beginning of a new chapter in your life. It’s a part of that American dream, a new sense of freedom, it screams success and independence. However, self-control is the name of the game here. Don’t get too starry-eyed too soon and jump in before you’re ready. That’s how a dream becomes a nightmare.
If you’re not sure if you’re ready or not, find someone you trust to do an analysis for you. Preferably someone who isn’t incentivized to push you through the home buying process. That’s a conflict of interest and they’ll probably tell you that you’re ready before you actually are.
That ends my mini-series on the 3-headed debt monster, and there’s your almost weekly food for thought.
Did I miss anything? Related question? Unsure? Different Analysis?
brett@centennialsec.com or use the “Contact” tab above.
