What if I told you that you could purchase a $190,000 home with the amount of rent you are currently paying a month? The going rental rates for a modest 2-3 bedroom single family home are anywhere from $1,200 - $1,500. If you are paying $1,300, today’s super low interest rates would allow you to pay that same $1,300 a month to buy a 190k house! Now obviously these numbers are approximate. Your rate will change based on credit, your down payment, the amount (if any) of your mortgage insurance, and your property taxes. I also played it safe and used a 3.25% interest rate to accommodate for less than perfect credit (the average rates are still under 3%!) You can check it out for yourself at bankrate.com. Mess around with different numbers. But be warned, the monthly payment it generates is strictly your principal and insurance payment. You can safely add about $500 to the number it gives you to cover your escrow payment (property taxes, home insurance, and mortgage insurance). After playing around with this calculator, you’ll realize that today’s crazy low interest rates make it possible to purchase higher priced homes for monthly payments equal to current rental rates.
As I said last week, getting a mortgage will be easier to swallow if you think of it in terms of a manageable monthly payment instead of thinking of the entire repayment amount. However, some of you aren’t comfortable with the amount of interest you’ll have to pay over the life of the loan. Did you know you could easily shave many years off of your 30 year loan, thereby reducing the amount of overall interest you’ll pay? Here’s how it works:
One Extra Mortgage Payment
If you make just one extra mortgage payment a year, you will pay your mortgage off in 26 years as opposed to 30. Do you know how easy it is to make one extra payment? You won’t even feel it. Here are a couple options:
Divide your principal/interest payment by 12. If your payment is $700 a month, that’s $59. Now you just add $59 to your regular monthly mortgage payment, and by the end of the year, you’ll have made one full extra payment.
Pay your mortgage biweekly instead of monthly. If you split your total monthly payment in half and pay a half payment every two weeks instead of a full payment every month, you’ll end up automatically paying an extra payment by the end of the year. How is this possible? If I pay a half payment twice a month, won’t that just be 24 half payments, or 12 full payments? Nope. You will actually end up making 26 half payments. There are two months out of the year that contain three two week increments instead of two.
If you know there will come a time when you will have an extra $700 all at once, just add it to one of your monthly payments.
Two Extra Mortgage Payments
If you can manage to make two extra payments a year, you’ll shave off SEVEN years of your loan! How can we easily do this?
Repeat the first step above, but multiply that extra amount by two. If this ends up being too much for your monthly budget to handle, do the next step (you’ll barely feel it).
If you are currently paid biweekly, then you probably already know that there are two months out of each year that bless you with three paychecks instead of two. If you operate under a monthly budget, well….that third paycheck should basically feel like free extra money. You only count on two paychecks to pay your monthly bills, so when that third check hits, what are you going to do with it? There are tons of budget-hacking tips you could employ (my favorite is to use it to pay for car insurance so that I feel like car insurance is free 😁), but if you really want to pay down your mortgage faster, then just apply both of those extra checks to your principal. The amount of each check should cover an extra mortgage payment and put extra money in your pocket.
Are you enticed by the 15 year mortgage?
If a 15 year mortgage sounds way less scary than a 30, I’d suggest getting a 30 year loan but paying it off in 15 years. Why? Well...you’ll reap the benefits of a 15 year payoff but have the peace of mind afforded to you by the flexibility and lower monthly payment of a 30 year plan. The best part? You don’t have to double your monthly payment to make this happen. You actually just need to make seven extra payments a year. Using our example above, you would pay $413 extra each month. Again, use the mortgage calculator to play around with numbers specific to your situation.
What if I miss a monthly payment or make late payments?
Fear not my friend. I know you probably think it’s easier to skimp out on your landlord because he has to jump through a million hoops to evict you, but there’s leniency with a mortgage too. First of all, lenders give you a 15 day grace period to be late on your monthly payment. On the 16th day, they start charging late fees. I bet your landlord charges a late fee after three days. 😉 Secondly, you won’t lose your home over one or two missed payments. However, if you are someone who is seriously worried about that, then you either need to set up auto payments so you don’t forget, or you need some help figuring out your monthly budget. If that’s you, just talk to me. I can give you a very easy budgeting solution that will fit your specific needs.
Alright guys that’s it for this one. As always, if you have any questions about these topics, don’t hesitate to reach out.