Tuesday, July 7, 2009

Mortgage Madness

I mentioned in an earlier post that the good folks down at Wells Fargo were willing to loan us $325,000. (Remember that these people have also recently taken lots of taxpayer money to get themselves out of a mess, but that's beside the point here. Or maybe it IS the point.)

Well, that got me to thinking. You should know before you read any further that I am a math nerd. (No really.) And I get a kick out of the mortgage calculators that can be found online. (Just search under mortgage calculators and you'll be amazed how many will come up.)

You should also know that I am a compulsive online home-looker. (Of course, I could blame this on having moved so many times.) ((Am I using too many parentheses in this post?!?))

The following houses are for sale in our future town of Fort Smith, Arkansas, and the pictures came from this site. The first one is very similar in size, age, and location to one we will likely be renting and will possibly purchase within a year.

It was built in 2000, has 3 bedrooms, 2 bathrooms, and is 1636 square feet. It is listed for $142,000. For the record, you can get larger houses in this price range if you're willing to consider a much older home and/or a less desirable location.

This second one is closer to what Wells Fargo has in mind for us.
It was built in 1994, has 4 bedrooms, 4 bathrooms, and is 3457 square feet. It is listed for $335,000. It's also located in what most consider to the be one of The Best Parts of Town.

(I know. If' you're reading this in many parts of the country, even today, you may be gasping at the inexpensive houses, but the principles below still apply, just on a grander scale.)

Would I love to have that second one? Of course! Do I want to be able to sleep at night? YES!!

Here's where it gets interesting: Let's compare loans of $140,000 and $325,000, each at 5.5% interest on a 30-year, fixed-rate mortgage. The principle and interest (P+I) payment on $140,000 is $795. For $325,000, the P+I payment is $1845. That's a difference of $1,050 per month.

Suppose you buy the $140,000 house but decide to make the $1845 payment on it every month, adding $1,050 to the required minimum payment. In just under 8 years, you would own the house free and clear!

Assuming a very modest appreciation rate, let's say that at the end of those 8 years, you sell the house for $175,000. Now that $325,000 house will only cost you an additional $150,000. ($175 + $150 = $325) Paying the very same amount that you have been paying all along ($1845 per month), you will then have paid off the $325,000 house in just 8 1/2 more years. In other words, starting from the day you buy the $140,000 house, you will have paid off the $325,000 house in 16 1/2 years.

Now, stay with me here. If you had bought the $325,000 house to begin with and made the same $1845 payment, at the end of 16 1/2 years, you would still owe $210,675 on it!

Of course, by the time you sold the first house, the second one would be worth (theoretically, at least) $411,700. If you still wanted that house, though, you could still have both houses paid off in less than the originally planned 30 years. (8 years for the first house and 16 years for the second house)

Like us, you may not have $1,050 extra every month to add on to a mortgage payment, and even if you do, there may be even better ways to invest it. And yes, there are lots of valid arguments for buying a nicer house to begin with. We may very well decide we just need/want more room. But doesn't it at least make you think about your dream home (and how to get it) in a different way?

My goal in this post, as with all posts on this site, is not to tell you that this is the only way home-buying, selling, moving, etc. can be done, but to give you something to think about, share our experiences, and maybe encourage you to think differently.

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