In today’s climate, it is easier than ever to secure a historically low mortgage rate. With thousands of lenders to choose from, borrowers have more choices than ever. This allows better rate shopping, varying lender credits, and sometimes waivers for appraisal and other items based on your current situation.
The Case for Buying a Home Today
As previously mentioned, mortgage rates are at an all-time low. On the inverse, home prices are quite high. This doesn’t mean you should sit on the sidelines and wait for a housing recession before buying. Do you sit out of the stock market every time an “all-time high” is reached? I hope you don’t, and you certainly shouldn’t, or you would be on the sidelines quite a bit. If you plan on staying in your current area for 5+ years, it can definitely be advantageous to buy now, and lock in that low interest rate mortgage for years to come.
Is a Mortgage Necessary?
I mean, no, not entirely. If you are looking to purchase a $200k house and save $200k toward the purchase, it’s absolutely not necessary. If you can get a mortgage at 2.5% would I recommend spending $200k in cash on a house? Eh… that’s a tough sell for me. As a Wealthy Idiot, low-interest debt on an appreciating asset (such as a home) isn’t high on my list of things to pay off. So in this case, I would take a $160k mortgage after putting $40k down, or 20%. You now have $160k in cash that can be invested in the market, used as a down payment on an investment property, or used to start a side-hustle. Is your Roth IRA funded for the year? If not, do that. There are a litany of things that you can do with $160k that would be more financially advantageous than buying your primary residence. Just some things to think about.
According to Freddie Mac, mortgage rates reached their highest point in modern history in 1981, where the average rate was 16.63% that year. You read that right, the average rate was nearly 17%! As of the time of writing this article, a 30-year fixed rate is 2.73% and a 15-year is 2.2%. This is obviously based on many personal factors including credit history, income, and debt to income ratio or “DTI”, as it’s more commonly referred to. Below we’ll price out some different rates to give an idea of what you can expect to save over the years as a result of being a deal shopper.
Example of Rates at Work
We’ll use $300k as the base loan amount for this example. We’ll highlight the difference between 15 and 30-year loans, and show the monthly payment amount and the total interest paid over the life of the loan.
As you can see in the chart above, a small .5% increase in interest rate can aggregate to thousands of dollars over the life of the loan. If you take a $300k mortgage at 5% for a term of 30 years, you’ll pay almost $300k in interest on the loan. At the same time, the person who bought in the same neighborhood as you at 2.5% is only paying a little over $110k in interest. This is a huge disparity, and it’s one you should not want to be on the wrong side of.
Another factor that should certainly be considered in regards to your financial plan is the monthly payment amount. Above, we can see the differing principal and interest payments based on interest rate. Clearly, the 15-year mortgages have higher monthly payments, and this corresponds with less total interest paid over the life of the loan. Bear in mind that these figures are principal and interest only. You can also expect property taxes, insurance, and sometimes private mortgage insurance (PMI), to be added to the monthly payment.
The 5 P’s: Proper Planning Prevents Poor Performance
You’ve probably heard of this before, or one of the many variants used in the military or business sectors – some of which are not Wealthy Idiots appropriate. It really is self-explanatory. If you can plan ahead, and use math to make your decisions, your personal financial performance will have a higher success rate. In fact, you’ll be that much closer to being a Wealthy Idiot, which around these parts, is a pretty big deal!
Overall, your mortgage is one piece of a very extensive puzzle. If you lock in a low-rate, that big piece can be less burdensome over the years, whether it be 10 or 30. While paying this low rate, you can concentrate on filling retirement accounts, investing in side-hustles, or pursuing real estate. There are countless possibilities if you take the time to think about it, conduct some research, and come up with a plan.
Oh yeah, since I’m a big fan of practicing what I preach, I’m refinancing my 2.75% mortgage down to 2.125%. This represents a huge savings over the life of my loan. Happy mortgage shopping, you Wealthy Idiots!