Saturday, July 5, 2014

Understanding Mortgages Motivated Us not to have one

During and even after the housing market collapse there was a lot of talk about people not understanding mortgages.  With adjustable rate mortgages of different timeframes and types, I can understand this ignorance to a point.  However, understanding a general mortgage is really not all that difficult. 

By learning about and educating my own family regarding the standard mortgage, we in essence motivated ourselves to work hard at not having one, ridding ourselves of the burden of being indebted to a financial institution for the privilege of living in our home.

3 key components of a mortgage
In a standard mortgage, there are three major components that it can be important to have a clear understanding of and that can help clarify just how costly a mortgage will be over time.

These include:

  • Interest rate
  • Loan amount
  • Number of payments

These components interrelate, as the length of a mortgage can affect the level of interest rate and payment amounts significantly.  Someone taking on a 15-year fixed rate mortgage could find themselves getting an interest rate well below the rate of a 30-year mortgage, which means they could pay less in interest over the course of the loan.  However, doing so might mean that the shorter payoff timeframe increases the payment amount so that it’s almost doubled compared to the longer-term loan.

Even a good down-payment doesn’t mean a mortgage comes cheap
We put a large down-payment on our first home.  However, the amount that we had to take on as a mortgage was still significant.  While a hefty down-payment was helpful in reducing our mortgage payments, it didn’t mean that we still didn’t have a hefty monthly mortgage bill or that over time the costs wouldn’t add up.

While we ended up selling our home before the term of our loan was completed, and we had a shorter-term, 15-year mortgage, had we maintained our loan until completion, we would have paid over $70,000 in interest on a $165,000 mortgage.  While this isn’t bad compared to some, it’s still a lot of money to pay to a financial institution for the right to borrow their money.

Extra payments are good, but…
Don’t get me wrong, making extra payments on our mortgage had us on track for cutting almost $20,000 in interest off the total interest on our loan.  We signed up for a bi-weekly mortgage plan as well as making extra payments occasionally on our own when we had a little extra cash available.  However, now that we are mortgage free, we’re finding that no mortgage at all is even better than paying one down quicker.

By knowing how costly a mortgage can be, we decided to downsize our living situation to a condo about half the size of our previous single-family home.  Better yet, this home was also about half the price, which meant we could eliminate our mortgage altogether.  Not only does this mean we no longer have that $1,350 monthly mortgage bill hanging over our heads, but our home equity that we maintain acts as a sort of monetary reserve or cushion in the event of a financial emergency, which increases our peace of mind as well.


Disclaimer:

The author is not a licensed financial, mortgage or real estate professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

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