A home is the most expensive purchase that most people will make. The median sale price of a home in the United States last quarter was $412,300. But this is just the sale price of the home. Let’s talk about the hidden costs of home ownership and how you can save hundreds of thousands of dollars on a home purchase
This week I upgraded my mortgage to a loan that will save me $213,107.34 compared to my previous loan (if I was to make minimum payments throughout the life of each loan). Let me just take a moment here because this number is shocking to even me and I had to double check this math about 5 times to believe it. And the crazy thing is that I didn’t even do anything crazy. There was no wheeling and dealing or crazy strategies. I achieved this by switching from a 30-year mortgage to a 15-year mortgage.
Hold on, hold on! Before you click away thinking this isn’t achievable for you, let me also tell you that it only increased my monthly payment by $270.55 per month. Let me show you how this works:
For the sake of easy math, let’s say you are going to purchase a $250,000. Again, for easy math, you’ll put down a $50,000 down payment so your loan amount is $200,000. On average, your interest rate is going to be a difference of about 1% with a 15- and 30-year mortgage. Right now, the average 30-year interest rate is at about 7% and a 15-year interest rate is at about 6%. So, here’s how that math works out:
- If you purchased a home today with a 30- year mortgage on a $200,000 loan at 7% interest rate, your monthly payment (principal + interest) will be $1,330.60 and you will pay off the home in August 2054. The total cost of your loan (principal plus interest) will be $479,022.09. Your total interest on the loan will be $279,022.09.
- If you purchase a home today with a 15-year mortgage on a $200,000 loan at 6% interest rate, your monthly payment (principal + interest) will be $1,687.71 and you will pay off the home in August 2039. The total cost of your loan (principal + interest) will be $303,788.86. Your total interest on the loan will be $103,788.86.
So, for about $357 per month extra, you pay off the home 15 years earlier and save over 175 thousand dollars in interest!
There’s one other hidden cost that I also got rid of this week with my new loan that I want to mention just briefly - PMI. Private Mortgage Insurance (PMI) is a pesky monthly fee that most lenders tack on if you owe more than 80% of the value of the home. In other words, the folks who get out of this are the ones who put 20% down at closing. PMI varies based on the size of the loan and a person’s credit. Mine was $77 per month on my old loan but I have heard of this being over $200 per month! I was able to find a lender who doesn’t require PMI so make sure to shop around!
Owning a home is a dream for most people, but sometimes it feels unachievable because there are so many challenges within the process. If you need help with your credit score or a plan to pay off debt and save for a down payment, contact me to schedule a consult today!
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