Monday, August 13, 2012

A house costs what?!

Ok... I'm still on my research for future goals. Please keep in mind the following post is entirely hypothetical, running on the assumptions things go on the level 4 or 5 on a scale of 1-10 of how good my life follows a set, semi predictable pattern (10 being perfectly).

For whatever reason, I was thinking I may want to buy a house/condo in about 5-7 years (year 2017-19).  Why that range? For one, I would've been living on my own for 2-4 years and would have a good knowledge of the area in Chicago. It would've given me sufficient time to put some ground under my feet and wind in my sails. Which means my finances will still be on track and I would've kept enough of my savings relatively untouched. I'd also have enough savings to make a down payment.

For two, I have a "little" (huge!) ding in my credit, which is a 3-month late payment on my smaller/closed credit card. Not sure why, but that fact alone hits my credit enormously, even if it is the only negative thing on it. Well, besides high balances on my cards. That ding will disappear in 2017, so with luck, my credit will heal nicely thereafter.

Not to sound like a complete inept person, but I had to run the numbers. A good/decent price for the kind of house I think I'd like runs in the $180k range. That came out to about $970/mo. Over the life of a standard 30 year mortgage... I'd have to pay a total of $347k assuming 5% interest (higher than averages, I know).

Wait, what? I have to pay almost double? And interest makes up for the extra 93% (or 167k)?! Has this always been this way? This is an outrage! Somehow I just had never thought a house was THAT expensive! And that so much of it was solely interest! That's insane! I am completely disgusted at that fact. So I had to thinker some more... As a true PF blogger, I'd try to snowball the heck out of this debt. So being extremely conservative... I'd be putting an added $500 on the debt. It cuts the time by 15 years! Hurray! But I'd still be paying 40% in interest, or $72k in just interest. What the heck is up with that? This is terrible! The math is horrible either way I look at it. I just had no idea. So tomorrow, I embark and delve more into this issue, that I am sure a lot of you already know about... but I'm just a bit in disbelief houses are that expensive, without factoring in down payments, taxes or maintenance. And that the loans are so, so terribly expensive.


  1. That may be true, but renting is 100% interest - because you don't get anything back from it ;)

    1. That is true as well, but I still think 93% interest to own a place is still rather steep!

    2. But renting can keep you from losing money in a bad investment (falling property prices, inordinate costs of upkeep) so that you're guaranteed not to leave net negative (exclusive of monthly cost, of course - which you'd have with buying in the form of interest, as Tanner noted)

  2. Welcome to the world of a mortgage:) But Daisy is right- at least some of it goes towards the principal!

    1. That "some" is so small until about 7 years into it... I can't believe that's the way things are.

  3. Welcome to the world of real estate!
    And if you think the interest rates are bad now?....go back to the mid '80s when we bought our 1st house with an 8.75% loan.LOL

    This is why young folks get into trouble with real estate....they see the birds chirping and all the lovely things about owning and not the dark evil things....ok, maybe but not evil, but all the costs. And that's what the people in the RE business want to sell you....the dream of a home. Don't let them snooker ya. ;-)

    And yes, since mortgages became the way to buy a house after WW2, you pay a helluva lot more than the actual "price" of the home.(Before the Depression, people waited and paid cash for homes. People use to live with family and save until they could afford a home outright.)

    So what do you do?
    You do everything in your power to bring down what you will be forking over for a home.
    You buy small.
    You buy in a good but cheaper area.
    You buy something without all the bells and whistles.
    You find a deal.
    And you save a bunch of money up before you sign.
    The more can put down, the less your loan is=the less interest you end up paying out over the lifetime.
    Get a good rate(bring your debt ratio down and your credit score up to get the best rate).
    Get a fixed rate loan.
    Make sure your house payments are less than 1/3 of your net income each month or you will often have to choose between eating and paying your mortgage.
    Find a lender who will let you make extra payments on principle AND let you pay the loan off early without penalty.
    Get a 30 yr. loan but make extra payments on the principle.
    Making just a few extra payments on principle will shorten the life of your loan and save you $$.
    Better yet, find a situation where you can live for free and stash the money you would have spent on rent into an account.
    Do it long enough and you can buy a house for's been done.

    We bought this house in 2000. We put almost 35% down. We bought at the low end of what we could afford. Even then, we had to carry 2 mortgages for almost 1 year until the old house sold. We refinanced once when rates when down in early 2000's. Then we just threw every extra dollar into paying more principle like a crazy person. We paid the house off in March of 2007. No more mortgage for us ever again....

    That being said....some areas of the country the costs are too ridiculous to buy a house.
    most places in CA, NYC, Chicago, Boston, DC/Northern VA.
    Finding affordable there is very very hard.

    And don't every use your home as a piggy bank and take a HELOC on the value you have accrued in it.
    And never think of your house as an investment, it's barely an asset.
    The only way your home can make you money is if you sell it(and for more than you paid for it). If you sell it, you don't have a place to life anymore.
    Houses are a drain on your assets.
    They cost you money, not make you money.
    Payments, insurance, taxes, upkeep, higher utility bills, repairs, yard work, and on and on.

    Don't be in a hurry with this.
    Gawd, now I'm depressed and I need a drink..... ;-)

    1. You bring a lot of good points. I know I want to, but may not be able to put down 30% down, but I am planning on 20%. The calculations I saw were on a 30yr mortgage, making extra payments like crazy, so finding a loan that will let me do that without penalty is a must. It will probably be the only house I'll ever buy, so while I wont look at the belt and whistles, I do want a nice house instead of going extremely cheap and minimalistic.

  4. Yes, that's the way it's always been. The financial world is designed so that the haves keep on having and the have-nots keep on having-not, unless the have-nots fight furiously and move wisely to step their way around all the traps laid for them. I have confidence you'll step to the other side, though. Most people don't even run the numbers like you just did!

    1. I don't blame them either... it's scary! I am truly, truly shocked at this realization. So you can be sure I will be very careful about this...

  5. Yep, that is how it works. If you find an amortization calculator online, it will show you EXACTLY how much you will pay per month on interest (based on the numbers you provide). It takes YEARS before the amount you pay in principle is more than the interest (assuming you aren't making extra payments).

    Add in taxes, home owners insurance, maintenance. Factor in moving expenses, purchases (will you need a lawn mower? Snow shovel?), decorating (because we all know we want to do something to personalize it!).

    Good for you for doing the exercise now.

    1. Yup, I found a very nice amortization calculator to double check my numbers and found the same... it's scary.

      I didn't even get to those costs you mentioned, because I just thought I couldn't be right... it couldn't possibly be so expensive! But add in taxes and home owner's, and that's a huge amount. I will really need to step up the game to make this happen...

  6. Interest is definitely a money sucker!

  7. Whats good about this is that you are doing the research, so you'll make a good decision based on facts and realistic planning.

    One of the things we did right from the start was to always pay extra on our mortgage every single month. We almost doubled our money on our first home because we added value and sold at the top of the boom in the 80's

    with this house mortgage interest rate was 11% when we moved in and went up to an horrific 18%! we kept paying extra and later, when DH was laid off and I lost my job we were able to go 6 months without paying our mortgage until we found jobs.

    You're smart and you think ahead, take your time and learn as much as you can and you'll do OK

    1. Wow, 11-18% interest... I don't even want to run the numbers on that. That's stuff that nightmares are made of! I'm glad those extra payments helped out.

  8. Even though it’s just hypothetical, it’s still good that you know what you’re getting into and what you would like for a better choice. Maybe, you can try doing a little more research on other options that can affect mortgage. You scour for some of the better mortgage rates out there. It would greatly help if you don’t spend a lot on interest alone. You can try negotiating with you bank or lender about it.