How to Buy Your First Property
Buying a home is an important lifetime achievement in everyone’s lives. In fact, I bought my first home at the age of 20.
This section will show some of the variables to consider when purchasing a home as well as different cost calculations.
Being savvy with the numbers and calculations can save you a lot of money over the 15 or 30 years that you are paying off your mortgage loan.
When you go to buy a home you have the option to buy it with all cash. Generally though, people do not have enough money saved to make an all cash purchase and must therefore rely on a mortgage loan from a local bank.
Loans come with interest that you must pay on top of the principal. The early years of repayment consist of an interest heavy monthly payment meaning principal is just a small portion of the payment.
At some point in the loan several years later, a shift occurs where principal becomes the larger portion of the payment than interest.
Therefore, people who purchase properties with large mortgages and decide to move a few years later have hardly any principal built up so they get back just a small amount compared to what they spent on payments over the few short years.
All that money they didn’t get back was lost money to interest.
Just something to consider if you think you’ll only own a home for short term before moving.
It may be better to start with a smaller less expensive home for those few short years and wait to get your dream home until your certain you’ll be living in it for many years to come.
Interest Rates on Loans:
There are fixed rate loans and adjustable. Most financial experts suggest fixed rate loans because you can lock in a low rate and if it goes even lower you can refinance.
An adjustable interest rate changes and can be bad in times of inflation costing you more in interest. Therefore, we’ll discuss fixed rate interest since the majority of homeowners choose this type.
When buying a home you can get a 30 year loan or a 15 year loan.
A 15 year loan will have higher monthly payments than a 30 year loan because you’re paying it off sooner but it also means you’ll pay less in interest.
You saw earlier in investing how time and compounding interest adds up so in terms of loans if you want to pay less interest then pay back the loan quicker.
- 15 Year Rates (Feb 2015) – 3% per year
- 30 Year Rates (Feb 2015) – 3.7% per year
As you can see the 15 year rate is lower than the 30 year. Now let’s run some calculations using an online mortgage calculator from BankRate.com. You can find a mortgage payment calculator on many different sites but feel free to try out Bank Rates. They have a lot of calculators for different financial topics like car payments, investing, etc.
Before we start though, we’ll assume a down payment of 20% of purchase price which is pretty standard and leaves us 80% of purchase price to be financed by the loan.
- $100,000 home = $20,000 down payment / $80,000 loan
- $200,000 home = $40,000 down payment / $160,000 loan
- $300,000 home = $60,000 down payment / $240,000 loan
- $400,000 home = $80,000 down payment / $320,000 loan
- $500,000 home = $100,000 down payment / $400,000 loan
Now using the rates above let’s begin monthly payment calculations for both 15 year and 30 year loans.
15 Year Loan Monthly Payment: $690.58/month
30 Year Loan Monthly Payment: $460.28/month
Total Cost of Loan over 15 Years: $124,304.40 ($24,304 in Interest)
Total Cost of Loan over 30 Years: $165,700.80 ($65,700 in Interest)
15 Year Loan Monthly Payment: $1,381.16/month
30 Year Loan Monthly Payment: $920.57/month
Total Cost of Loan over 15 Years: $248,608.80 ($48,608.80 in Interest)
Total Cost of Loan over 30 Years: $331,405.20 ($131,405 in Interest)
15 Year Loan Monthly Payment: $2,071.74/month
30 Year Loan Monthly Payment: $1,380.85/month
Total Cost of Loan over 15 Years: $372,913.20 ($72,913 in Interest)
Total Cost of Loan over 30 Years: $497,106.00 ($197,106 in Interest)
15 Year Loan Monthly Payment: $2,762.33/month
30 Year Loan Monthly Payment: $1,841.13/month
Total Cost of Loan over 15 Years: $497,219.40 ($97,219 in Interest)
Total Cost of Loan over 30 Years: $662,806.80 ($262,806.80 in Interest)
15 Year Loan Monthly Payment: $3,452.91/month
30 Year Loan Monthly Payment: $2,301.41/month
Total Cost of Loan over 15 Years: $621,523.80 ($121,523 in Interest)
Total Cost of Loan over 30 Years: $828,507.60 ($328,507 in Interest)
Check out the total cost of the loan as well and see how paying it off sooner can save you a lot of money towards retirement. The more expensive the home, the more interest you’ll spend over the lifetime of the loan.
So when you say you want to buy a $500,000 home, in reality you’re buying an $800,000 plus home depending on the down payment and how quickly you pay off the loan balance.
To calculate lifetime cost of loan you simply multiply the monthly payment by the number of payments you’ll make over the lifetime of it.
- For a 15 year loan you’ll make 180 payments
- For a 30 year loan you’ll make 360 payments
Example: $10,000/month payment x 180 payments = $1.8 Million Dollars
Living Costs Differ by State
Depending on what state you live in can result in different living costs especially in real estate.
For example, a $400,000 home in the Midwest might be a really nice looking mansion with a few acres of land while a $400,000 home in California may only be a small couple bedroom home with a small backyard.
Property Taxes Differ by State
If you are trying to decide on a state you want to move to and live then it would be wise to check out statistics online of the different property tax rates. These taxes can add up over time and you may benefit or save a lot more money living in one state over the other.
One Last Thing on Mortgage Interest Rates
Current rates are pretty cheap at 3-4%. Historically, rates have been 7% to 18% in the past making cost of living expensive.
The financial crash in 2008/2009 has been followed by falling mortgage rates since then but appear to be bottoming out.
The Fed, as of Feb 2015, has spoken about increasing rates at some point in the near future which has the different financial markets on edge because currently getting loans is cheap.
Keeping rates low promotes society to get loans and spend money which stimulates the economy.
If the Fed wants to slow people’s access to money and slow inflation then they may hike interest rates to discourage people from wanting to borrow.
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