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Coveting a Smaller Mortgage
I realized recently that I’ve been coveting quite a bit lately. I find myself driving through neighborhoods and looking at the different houses and often thinking to myself, I wish I had that house.
To be a bit more specific, the thoughts that go through my head are something like this, "hmmm, that house is smaller than ours, and I bet the people have lived there for a while which means they probably bought it before house prices started to drastically increase…..I bet their mortgage payment is a lot lower than mine."
That’s right, I’ve started coveting other people’s mortgage payment (or at least what I guess to be their payments with the underlying assumption that it is less than mine).
To be fair, I don’t have a ridiculous mortgage payment. In fact, the entire payment (principal, interest, taxes, & insurance) is less than 26% of our take home pay (18% of our gross). Those numbers are much smaller than most mortgage lenders were willing to lend three years ago when we bought it. So, we didn’t go crazy when we bought our house, but I’d still like to be paying less each month for it (but who wants to be paying more for someting!).
A few things to remember when buying a house
You decide how much you can afford, not your agent or mortgage lender
When buying a house and deciding your price range, do not let the mortgage company tell you how much house to buy (unless it’s lower than you were planning, of course). I feel that people sometimes think, "well, the mortgage company approved us for $X, so I guess that’s what we can afford." No, No, NO! Sit down before you start looking at houses and figure out exactly what you say can fit into your budget. And make it a comfortable number that you can live with for 15 or 20 or 30 years.
Plan for contingencies
Remember that things may change in the future too. If you’re married, you might eventually have kids and you or your spouse might want to stay at home and raise the kids. I don’t like to say that this is no longer working (just ask a stay-at-home mom if it is a full-time job) but your income will drop drastically if you do this. Or maybe you’ve always wanted to start your own business. Make sure you can still afford the house if you decide to do this or make some other change.
Know your real monthly payment (all the other payments too)
Another thing to remember is that the costs of home ownership do not end with your monthly mortgage payment. Besides the principal and interest portion of the mortgage payment, you will probably also need to pay into escrow for home owner’s insurance and real estate taxes. This will most likely add thousands of dollars to your yearly expenses, so plan for them.
Beyond the mortgage payment, there are many other costs as well to keep up your house. Stuff gets old and breaks, pipes freeze , work needs to be done…this can add up quickly so at least keep it in mind when deciding how much you can afford for your house.
Consider a shorter mortgage term
If possible, opt for a shorter mortgage term. Of course, each monthly payment will be more (sometimes substantially) but over the long run a shorter mortgage can save you tens or hundreds of thousands of dollars! Usually, shorter mortgages have lower interest rates as well. Play around with a mortgage calculator to see the long-term difference this can make. As a real quick example, consider a $250,000 house at 5.5% interest. Even at the same interest rate, a 15 year mortgage will save you about $143,000 in interest payments!
I didn’t intend this to be a comprehensive list of all things to consider when purchasing a house…just a reminder of a few things. In today’s market, mortgage lenders appear to be much more strict on the mortgages for which you can qualify and I think that is a good thing. At the end of the day, though, you are still the one who must pay the mortgage and the upkeep and other expenses for your house , so go into the process with your eyes open and learn as much as you can before proceeding.
House poor
In today’s uneasy economy (with decreasing house prices, possible job losses, and general uncertainty), buying a house that you can’t afford can certainly show you the meaning of this verse:
The rich rule over the poor, and the borrower is servant to the lender. Proverbs 22:7 (NIV)
Say you and your spouse bought a nice house a few years back that was a bit too expensive for you to afford (but hey, the value would keep increasing – it always does!). Now you’re having a child and one of you wants to stay at home and devote yourself to raising that child. Unfortunately, you can’t afford the house payment on only one salary and you currently have negative equity in the house because of the decrease in real estate prices. Well, in that lamentable situation, your freedom is drastically limited by that mortgage debt.
House prices have been coming down recently, so you could argue it is a good time to be in the market for buying a house. If you are, be smart, be realistic, and plan for some contingencies in the future.
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9 Responses to “Coveting a Smaller Mortgage”
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I love that you mentioned not letting the mortgage company decide how much you should borrow. When we bought our first house, it was $30,000 less than what the bank said we could afford. And it’s a good thing – shortly after we purchased it we found out I was pregnant. I was able to stay home with her because our mortgage wasn’t outrageous!
Christina´s latest blog post…Weekly Link Love
We have been having similar discussions, because we are looking to move up in house. Our family of 4 lives in a 950sqft condo and we are ready. I recently saw my wife considering a $440,000 house, which IMO although we could probably make it work with a lot of effort would destroy our freedom. I want a house that enables us to focus on the things that are really important, not bind us to a mortgage payment and certain jobs. My wife sees the benefits of having a a place for your memories, an expression of us, a sanctuary, and something that brings you joy. Together we will end up making a great decision, but it will take some good discussions and prayer.
The Happy Rock´s latest blog post…Carnival of Top Personal Finance Posts #3 up at Budgets Are Sexy
Getting to the point of not paying a mortgage would really “skyrocket” your wealth. This is certainly something to shoot for.
Just found out that my home lost $15,000 on my tax assessment. Don’t think I’ll be moving anytime soon!
Rick Vaughn´s latest blog post…Wealth is a Team Sport
great points for first time home buyers, I particularly like the point about setting your own price rather than just going with whatever the lender says you are approved for – if everyone would have done that the last 5 years, things would be a bit different now…
I am so thankful for this blog. I read several different financial blogs, and it seems that the majority of them now do focus on being financially responsible. However, they don’t hit the nail on the head like your blog does.
Borrow from none.
Don’t be a slave to debt.
Listen to the wisdom of the Bible.
I know that this doesn’t directly relate to your blog post; I’ve just been a bit frustrated with several blogs that I’ve been reading recently. Borrow from None is a breath of fresh air.
Keep it up.
@Carl, Thanks so much for the very kinds words – I appreciate them. Have a great weekend!
@Christina – that is a great testimony to the power of prudent and commonsense planning – thanks very much for sharing!
@THR – It is sometimes hard not to get carried away when house shopping (that’s why the realtors sometimes show you houses above your price range, right?) Good luck with your search.
@Rick – I agree – I occasionally run the numbers on how quickly I could save if I didn’t have to pay that mortgage every month.
@ChristianPF – that is a really, really great point….a bit different, indeed!
Nice post…
I bookmark your website…
You have a very useful blog. I am surely going to bookmark it right now. I have been into heavy debt for past 2 years and my life seems so hard. I searched for solution on the internet, blogs and forums. I got some help but that was not enough for debt settlement. I have Google a lot and have seen something about debt relief companies offering affiliate programst . Can you guys help me to find some more information on debt relief companies offering affiliate programs?