Let me tell you a story about why I feel like a dork.
Last night, the family was watching HGTV’s My First Place. This lady was drama filled for what she wanted her first home to have – 42 kitchen cupboards, 3 decks, huge closet, ect… – in downtown Chicago. I do have to admit that her Realtor/friend found some great homes in their price range that almost fit the home buyer’s request to the full for under $400,000. Of course, the potential home buyer did have to lessen her dramatic request to get the house of her dreams. She still came out pretty good.
The Terms
- $385,500 for 30 years @ 7%
- Monthly Mortgage = $3,100
My son says to the approximate, “if she is paying $3,100 a month for the house she should have it paid in about 10 years”.
“No”, I said. “It’s a 30 year loan with PMI (etc, etc, etc…)”. (“etc, etc, etc…” meaning I don’t really know what I am talking about)
Then I questioned myself. He’s right – it should only be around 10 years if she is paying $385,500 at $3,100 a month.
Questions set in and the calculator came out.
I did the math it didn’t work. (Yes, my husband owns a house but his explanation wasn’t working for me).
So, I hopped on the internet and found what I was looking for at Bankrate – the magic words “% per year”.
I did the math and then I…
GASPED!!!!
$365,500 (home price) * 7% (interest) = $25,585 (interest per year)| $25,585 * 30 years = $767,550 (total interest paid during 30 year loan) | $767,500 + $365,500 (cost of home) = $1,113,050
To buy a $365,500 house actually cost $1,113,500! And then it’s when I realized – I am a Personal Finance Blogger that just got the jist about buying a new home – I feel like a dork
P.S. – dork or not – I am glad that I finally understand the facts about buying a new home before I go spending $1,000,000 of my money!
I am right, right?
You are not suggesting to pay cash are you 🙂
30 years is a long time and the time value of money gets magnified quite a bit in a period as long as this.
Besides, this is not a million dollars in today’s money. If you discount the inflation, this number will be considerably less.
LOL. Now, if I had that kind of cash I think I would… travel the world on a long time paid vacation. 😉
That would be tough to pay cash for a home at almost $400K. I wish I could say I have that amount of cash in the bank.
I didn’t think about inflation. I tried using an inflation calculator to get a pseudo idea. You’re right, in 30 years with inflation the # would be considerable less. But, it still makes me think a bit deeper if spending that amount of money is really worth it on the house.
Whether is today’s money or tomorrow’s money, you are still going to pay that much in interest. The only way to pay less would be to prepay your mortgage, thus decreasing the interest payments over the life of the loan or refinancing for a lower rate…7% seems really high for right now anyway, maybe that was a repeat show of some time ago.
And there are some who pay cash for a house. http://www.moneysavingmom.com is planning on it and talks about it on her blog. I wish I would have though of doing that too. I hate oweing money on a house. Plus, once you have a house you want to do things to it (too much watching of HGTV), thus spending even more money.
I love our house (most days) but the mortgage is an albatross. And we are looking to spend a bunch of money on renovations next year. Sigh.
Thank you for the link, Mama Bird. Paying cash. Wow.
I didn’t think about all the upgrading and decorating you’d want to do to a house. LOL. Definitely one to think about it. A good upgrade to a kitchen – $15K plus. I think if you plan on staying long term its probably a great investment for your money. 30 years is a long time.
And you’re right, 7% is a pretty high interest rate. If I figured that I would be paying One Million plus for the place I don’t think I’d be buying that place! They are first time home buyers who saw more that, ‘we got approved for $400,000’ not we will be paying $1,000,000+ for this house. After saying that… the house wasn’t so pretty after all. LOL! (You notice banks or Realtors don’t point that out… I guess that is the way the business wheel spins – they wouldn’t make quite as much interest or commission sales if they told you that). I think for a first time home buyer as my self, it would be smart to ask, “And how much will I have paid on this home in 30 years?” Smart, eh? LOL.
You love your house… it makes it sound as if the renovations will be quite worth it.
This is the very reason why I’ve been thinking that paying 100% for cash isn’t that bad of an idea. However, saving up $400K – that’s another issue all together!
Ya, right? I can see why it would worthy to have a significant down payment. I didn’t understand that before. I was all about, “oh, I could use a first time buyer’s down payment loan and then the loan for the house. I would only need $3K-$5K for a down and closing costs”. Okay, now I want at least a $10K-$20K down payment.
I think, SS4BC, it would be good to at least have a good size down payment and then find a home where you could make at least an extra $100 in your mortgage payment. This would decrease your payback time. That may be something to consider.
Crazy, right? We put down 20% and are making extra principal payments each month to cut down on the crazy amount of interest paid over the life of the 30-year mortgage. You do get back a bit of the interest when you claim it on your taxes, but not enough to justify what you pay!
Good for you for putting 20% down and making extra principal payments! I still think its a worthy long term investment. I didn’t think about that either – getting some back in your taxes. It is a nice deductible.
My husband, he bought his house on good terms by only buying what he needed at the price he needed. His established credit history allowed him to obtain a loan with a low interest rate – thus creating low mortgage payments. The payback on the house is not nearly as audacious as paying one million plus. LOL.
I am glad that I learned all this about house buying and am getting such great feedback from all of you. Thank you! 🙂
I know paying cash in full seems unattainable but you know what? I think that with a lot of creativity and a concerted effort, paying a higher percentage like 40-50% might be doable. I’m saying this knowing that I still only have $100 in my house fund, but still, over the course of 2 years, I’ve managed a 300% (75k) increase in NW plus paid down at least 20k of debt. That pace isn’t sustainable for a full 400k in cash savings but there’s still a decent possibility of saving 25-30% of the purchase price once you’ve killed off your debt.
Dang girl! Nice job on your NW! I think someone with your optimism would easily find a 40-50% down payment doable.
I have found that I am much more cautious when looking at the possibility of buying a house. First thing I ask myself, “how much with interest is this house going to cost me?”.
Congrats again. Sweet!
It’s crazy how much people actually wind up spending to buy a home….part if me wants to dive in and buy – but the other part… the part who does math like you says no way, save more money first.
And it doesn’t help that there are so many first time buyer programs only requiring 3% down, when my brain is telling me to have at least 20% down. Although, the interest rates are pretty nice right now if you have what it takes to buy. And it could be worth it if you plan on living there for some years.
I do look forward to the day I can buy a house, with financial foundation. 🙂
But, this case above it seriously crazy. I KNOW that couple had NO idea how much they would end up paying in the end. They were just crazy with envy! 😉