Home ownership. It’s a big part of the American dream, but unfortunately in our education system they don’t teach us how to make big life decisions like taking out a loan or how to purchase a house.
Before I go into depth about purchasing a home I want you to know that buying a home is not always the best decision. There are many things to consider when purchasing a house that often get overlooked. Many times people don’t account for maintenance, home repair costs which can be major, major expenses, or how long they plan to live in the home. Replacing a roof, furnace, or air conditioner can add up to be pretty expensive, and if you aren’t going to stay in the home for very long it might be smarter to just rent. Just like everything, there are pros and cons to renting and being a homeowner. If you are on the fence about whether or not you should purchase a home here is a rent vs. buy calculator to help you with your decision.
It was March of 2011 and my wife and I were very excited to own our first home. After dealing with the long and frustrating process of purchasing a foreclosure we couldn’t wait to close the deal. I remember sitting at the closing table with my wife so happy and full of excitement. Then our attorney started to review the closing documents with us…excitement gone. To my surprise, when we reviewed the loan documents we saw how much the house/loan would cost when fully amortized over the 30 years. It was a crazy number (like over 6 figures we were paying interest crazy), but I had never looked at an amortization table to see how much a loan actually costs. Despite that shocking number, we still had made a good deal, so it was smart for us to move forward. Here’s an amortization calculator you can use so you wont be shocked at the closing table like I was.
At the time we took out a 30 year fixed rate conventional loan to buy our house. The interest rates for a 30 year fixed rate mortgage were hovering right around 5%…Historically low for the time. However, I still couldn’t get over the amount of interest we were paying on our loan.
Here’s how I saved over $100,000 on our house…
My Mom is a pretty smart lady and is one of my mentors…she rocks. Anyways, she’s very knowledgeable when it comes to finance, investments, real estate, loans, so when I need some advice I always turn to her.
Over the next two years interest rates started to drop. With interest rates dropping my Mom nicely suggested we refinance our house to a 15 year loan. Best suggestion ever. We were able to refinance to a 15 year fixed rate loan at 2.875% interest. Big time savings…over six figures big. That’s our kid’s college education big!
Here’s an example of a 30 year loan compared to a 15 year loan…
- 30 Year Fixed Rate Loan for $200,000.00 at 4.1% interest would cost you: $347,902
- 15 Year Fixed Rate Loan for $200,000 at 2.9% interest would cost you: $246,881
That means refinancing to a 15 year mortgage could save you $101,021. Not bad huh?
If you are interested to see if you should take out a 30 year or a 15 year mortgage use this calculator here.
Everyone’s situation is different so it may or may not make sense for you to go with a 15 year mortgage. It all depends on the numbers so be sure to do the math. Here are a few more tips I’d like to recommend for when you are purchasing a home or taking out a mortgage…
- Just because you are approved for a mortgage from a bank does NOT mean you should take a loan for the whole amount you are approved for. Make sure you can actually afford it with your life style and spending habits.
- Make sure you can make bi-monthly or bi-weekly payments on your mortgage…you’ll save thousands. Use this calculator here to see how much you can save.
- Someday you might be able to pay your mortgage off early, so make sure there is no prepayment penalty on your loan.
- If you can’t do a 15 year loan try for a 20 year fixed rate mortgage.
- Do the math!
With interest rates so low right now it’s definitely worth looking into refinancing from a 30 year mortgage to a 15 year mortgage. By no means am I a professional when it comes to loans, this has strictly been my personal experience, but I highly recommend you do the research and see what options are best for you and your family. Hopefully this post will help you make some smart decisions and help you keep more money in your pocket.