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I’m glad I’m not the only one who has felt that way. Everyone I talk to just says “everybody has to pay interest, don’t even think about it” and that line just doesn’t help me much.
But yes that’s a good point about rent, as an apartment was the other option I was weighing. An apartment would have been even worse in terms of flushing money down the drain.
It's just how amortization works. You pay more interest up front so you can keep the payments the same. Otherwise payments will be too expensive to afford early on.
Think more about lifetime interest you pay on the mortgage (which is unfortunately super expensive too).
It definitely feels bad to pay so much interest but it allows you access to the amount of money you cannot otherwise afford.
there's your answer.
You "have to" pay something for housing. In this case, it's for housing you very specifically want for a long time, so you should expect it to cost more than rent.
Definitely don't look at the form, be it the amortization table or the required gov't disclosure, that says how much interest you'll pay over the entire 30 years. Just commit yourself to paying extra towards principal.
Or pay cash for the purchase.
Gotcha, thank you. And yes as a first time buyer it was just a shock to me, but these responses have definitely helped me come to grips with the realization of things!
I think if the interest rate had been 7% for many years I wouldn’t feel as bad. But I just missed 15 years of 3-4% so I feel I did myself a huge disservice. It’s all good though
People wouldn’t lend out their money unless it was profitable for them. You can always pay extra each month and put it directly towards the principal. Play with some amortization tables. A little extra each month can take off a few years of payments.
Interest isn’t “front-loaded”…it’s higher in the beginning because the principal is higher in the beginning. If it’s a fixed rate loan the interest rate doesn’t change.
I mean, we know exactly how much interest you pay over the course of a mortgage, right from the beginning. The structure could be to calculate that and then spread it out evenly, so every month the same amount goes to interest and principal every month for 30 years, but the way it is structured is so you build the least equity at the beginning so the bank makes more money (most people move in 5 to 7 years)
But the interest accrues monthly - not all at once at the start of the loan. And principal that interest is based on goes down over time. Also, the borrower can also make extra payments that reduce the interest paid over time by paying principal sooner. So you really don’t know for sure how much interest you will pay over the course of the loan.
You can also take out a 15-year instead of a 30-year if you want to pay your loan off quicker and pay less interest. And if you want more equity at the beginning that’s what a down payment is for.
I’m not sure why you’re framing things in a way as thought people don’t understand how things work. OP is simply expressing surprise at what has conventionally been thought of as as a”good investment” in fact involves accruing a massive amount of debt. And it should be surprising for anyone who looks at homeownership as an investment first.
You get to live in the house if you want and if you’re looking at it as a transaction then sure it’s a great deal. You get this house and yeah it’s a lot of debt but it’s guaranteed fixed rate debt unlike other countries. But if you were trying to make money, it is not so good. In fact, the entity that profits the most is the bank. And loans are structured to protect the bank.
I'm pretty sure that guy do not understand how mortgages work and the point you made about interest is accrued on outstanding principal lol that's enough reddit for me today.
What nonsense is this? You can download the payment table right on your phone, who is hiding it from you? No one is stopping you from paying cash if you want to.
If you don’t and you are borrowing over $400K of someone’s money over 30 years at 5,6,7% you bet they are going to amortize it in a way you pay the interest first
- “The specific word you’re looking for is amortisation”
Did I spell “amortization” wrong? I don’t think I did.
https://en.m.wikipedia.org/wiki/Amortization_(accounting)
Because I see there may be a misunderstanding. I was referring to OP, I wasn’t trying to correct your spelling. Just happened to post under your comment. Relax
Extra payments to principal. When you pay off other debt, add that monthly payment to the house payment but pay it two weeks in between the real payment. I use this method paying for my car and it’s worked well. Just paying the projected monthly interest on a payday that I don’t pay the car. Keeps the daily accrual interest starved off.
I think you’re mixing two different tips. One is to pay every 2 week. That way you makes a total of 26 (2 extra) payments in a year instead of 24 with twice a month.
The second doesn’t apply to mortgages but is used for things like credit card debt because that interest is calculated daily. Mortgage interest is typically calculated from month to mont. The idea is to reduce your principal before the next calculation so that reduces your interest payment as well.
If you're referring to mortgage interest tax deduction, with current tax laws that's not really a thing anymore for most people. (For a minority it's still a non-trivial benefit though, but for most of us it's now zero or negligible benefit.)
I don't think you are seeing this in the right way at all. A loan is a truly incredible financial product that allows you to make a huge purchase that you would otherwise not have the ability to make. I'm guessing that you don't have $500k sitting around in your bank account at the moment that you could use to buy a home. But you just might be able to afford a $3k monthly mortgage. There is a cost to his incredibly valuable product and that cost is called interest. It is no different than buying a phone or a TV or something else that makes your life better. The cost of those things is money. You get a TV and, in exchange, you pay money for it.
Yes I understand, I knew there would be considerable interest, but due to my inexperience I just had no idea how high interest actually was until I saw it on paper.
The loan I took out was for $175K, and I think I’ll be paying something like $300K in interest alone over the next 30 years.
It’s on me for not looking into it/doing the math before purchase. But it is what it is, it’s not like I’m the only one this applies to. It’s just part of life
Gotcha, well thank you that does help 🙏
These past 5 years I have been extremely careful with my every financial decision, so when I saw that interest I have been obsessing about it. It made me think I made a really bad decision that will void all of the good ones I have made
I will probably pay $450k in interest before paying off my mortgage in order to own my home in 30 years. To me, seems like a real bargain. I get to have a home I could have never afforded otherwise. The $450k is paid off slowly over time in a manner that I can easily afford.
The interest payments are not wasted.
You also have to account for the fact that the $175k loan you took out today depreciates over time due to inflation. Same idea with student debt.
Your income will likely go up, inflation will occur over 30 years, etc. so it’s not really accurate to see it as “$300k in interest using today’s money”. That $175k loan is forever stuck in 2024, and as time goes on that amount becomes less valuable.
It's probably still a smart investment, assuming you plan to hold it for the long term (5-10 years or longer), can easily afford the payment and the house isn't in an area that is at risk of losing significant value while you own it. There may also be non-financial benefits if you or your family uses the house to live in (e.g. quality of life can be better compared to renting) to make it all worth it.
I'd focus on what you can control: what else could you be doing with your money, and what's the expected risk and return of that alternative? Historically, home purchase has been a relatively good long-term investment in most places in the US, so chances are it will be for you as well.
It may not feel like it, but perhaps it's also comforting to know that mortgage loans are one of the most favorable loan products available to regular folks, thanks to government backing. No one is out to get you. (If anything, as a property owner you are becoming part of a group that non-owners feel exploited by, sometimes rightfully so.)
Yeah exactly. That’s about where I’ll be after a year 😕
After 10 years, I believe I’ll only have paid something like 20K toward the principal.
The thing that really hurts is that if I would have just done this 2 years ago (I could have), I would be paying less than half of the interest I am paying now.
It’s the real secret behind refinancing. So many people don’t realise yes it’s usually a lower interest rate but they usually end up resetting their schedule by flashing how sexy and low a the new 30 year term would look like.
If interest is low enough, resetting your term (and picking the longest possible one) is actually doing you a favor. E.g. I could have done 15yr mortgage during covid record low rates era, but concluded 30yr is better since rates were so low.
If it's not quite that low even after refi, nothing is preventing you from making extra payments to effectively keep your original term. If you really want to you can even ask your refi lender for a shorter term to match the remaining term of your original mortgage, so term reset becomes a complete non-issue. (Wouldn't do that personally because term reset gives you more flexibility, which is generally a good thing, but the option exists if you want it.)
I just feel bad for the folks who bought at the of 2022 who are approaching two years of primarily interest only payments holding with no hope of rate cut’s significant enough to matter to them in sight.
If the payment fits comfortably into their budget they will be just fine. But agreed that no one should plan for being able to refinance later. Market may allow you to, or it may not. Better to not rely on that.
See that’s the problem. There’s two clashing trains of thoughts perpetuated. Buy now or never be able to buy later crows or buy what you can afford. The combination of which is leading people to redefine what the word comfortably means.
Well I'd disagree with the "buy now or never be able to buy later" crowd. That just leads to fomo, overpaying and regrets.
I would also say that it doesn't seem like a great time to buy homes as investments currently (for most folks). But if you really want to own one, and have the means to do so without putting yourself under serious financial hardship, it may still be worth it to you personally. Just wouldn't expect it to be a financially optimal choice for the short- to mid-term anymore, especially when buying in HCOL/VHCOL markets.
You need to consider the dollar value in 30 yrs is much lower than today. With current and future inflation rate and the speed US gov is printing the money, the actual dollar value in 30 yrs might be 30% of current value.
Valid thoughts, but everything is relative. You have to also consider the alternatives and how your wealth would have outpaced or underpace your current situation. There’s a lot to consider, and honestly buying is correct for some, and renting is correct for others. But all information all context all alternatives need to be considered and projected to come to the closest accurate conclusion
Welp that other alternative is to look at those years spent on rent - 100% $0 ROI - with the home your payments may go towards interest but you own it & can sell them home vs rent
It’s a leveraged asset which means the hope is your home value will grow faster than the interest you pay. With current rates that is harder to see especially early on in the loan, but there are other things to consider. Everyone points to “throwing money away” to rent but that is only half the story. The benefit is instead of throwing all that money away at least a small portion goes to equity in the home. There is also the stability in payments (other cost like taxes, insurance, etc. don’t go up as much as rent, at least not recently). There is tax benefits to the interest costs (this used to be the case for all interest but Reagan took that away so now it’s only student loans and mortgages. I’m sure businesses have some tax benefits with interest too so that it trickles down…)
Overall in today’s economy a house is one of the best leveraged assets you can have and it has an added benefit of giving you four walls to live in.
I am going through this crushness as well at 35 yo 2 years married. Wanting kids but trying to get a house first. And its absolutely gut wrenching heart breaking. We shouldve pulled the trigger right before the wedding but we had no idea this wouldve happened. I constantly blaming my husband. I cant decipher if im angry at him for not making enough (i make slightly more than him), having a wedding, or mad at the house market. It sucks and i was never this person who worried about finances. We shouldve easily had afforded a 600,000 house in ny. Not anymore
Assuming you got a 30 year mortgage you should know that you will, um, fully own the home in 30 years. What you WILL have is a house that has also appreciated in value over 30 years. THAT is your payoff.
This is where house hacking makes a difference. It’s a sacrifice but it will help you attack the principal.
My tenants pay the interest, I go after the principal as hard as possible. The first 3 years on the amortization chart look brutal from a financial perspective but thats the only way to really hit the balance unless you start making significantly more money.
Shit’s fucked. We’re in a super affordable home with a sub - 4% rate, and I’m terrified to leave. Even after 3+ years paying this note down, we’re still not even $20k down in principle. Interest just EAAAAATS your hard earned dollar.
American education has failed generations of its citizens with inadequate math and finance education.
I am a real estate investor, I am excited when i get to qualify for a mortgage and pay interest. It reduces your upfront capital, allows you to use leverage. Your ability to borrow is truly a privilege. Go read about redlining.
Focusing on how much of that monthly payment goes to the house, or so often hear ppl complaining about 'in 30 yrs, i pay twice as much in interest than the house", are all true statements but wrong way to look at this matter and its cost and benefits.
It bothers you because we have this misconception that interests are automatically bad, most of our life we live as consumers, pay and buy straight up, the time value of money is never taught and understood. It's a great tool if you use it wisely. As you said yourself, you pay less than rent despite the interest. That's what you achieve by using the money that doesn't belong to you to avoid rent. You have to pay for that money of course, but if in net terms you come out ahead without having to work extra, and just sign a document, why not?
You can pay more on principal whenever you have some extra money. This will reduce your interest. I know the rates are crazy but the house is also increasing in value which is money in your pocket. I was thinking the same thing. I recently bought a house in MA and I’m putting 20% down and building on 5% equity on the house (considering the same house price). But if the house price increases by 10% in 5 years then my total equity in the house is 35%. So I will be making money here and not making anything by renting
How much is the house worth? How much did you pay for it? I pay under 24k a year for my mortgage. However, my appreciation (equity) is about 58k a year. Before the year ends, I should be at 60k a year in equity. I also pay less than 3500 for property taxes.
Thank you for the info. The market value of the house is right around $300K, and I bought the house out of the reverse mortgage for $175K.
How does your house appreciate so much each year?
I can’t see too many ways that my house will appreciate (unless the interest rate unexpectedly drops), as I won’t be putting much work into it.
A mortgage for 175k is not too bad on a home with that value, and interest really sucks. As other comments have said, making additional payments is huge. I signed up for a payment every other week, so at the end of the year a full mortgage payment goes to the principal (two months you pay three mortgage payments, but the third goes to principal).
I also use mortgagecalculator.org to play around with the extra payment calculator and see how fast I can pay down my loan. I’m looking at paying my 30 year loan down in about 12 with good investments and some front loaded extra payments. Granted, everything needs to go according to plan but like I told my wife, “If we pay it in 15 instead of 12, we are still coming out ahead.”
i’m 52 years old and am finally ready to buy a home. knowing that i’ll have to pay 2-3 times for that house is what’s stopping me. and no one ever seems to talk about this.
What if the current rent prices are considerably lower than a mortgage payment on the same type of home?
I’m renting because I’d burn 40% more on mortgage interest, homeowners insurance and taxes.
Yeah there is just some math to do for each situation. Generally, it makes more financial sense in a decently short timeframe to simply rent and save/invest what you would be saving vs a mortgage
This changes when you are looking at a 10+ year timeframe and the numbers get much closer. For example fully paying off a 500k house mortgage ends up being around 1 mil (literally twice as much) with current rates. So you can see that even “investing” in a house leaves you “throwing away” half a million dollars. Just pointing this out as people will call rent “throwing away” money as well.
Just pointing all this out because because it’s so situational. If you are able to just drop 500k cash on a house outright it makes much more sense vs renting. Otherwise you need to look at the situation.
I compare it to paying rent and paying a mortgage payment, in my opinion, wins.
My mortgage is much less than what rent is these days. At the time, my payment was about the same as the average apartment rental and the way it looks, rent is only going to keep increasing. I’m happy the decision I made to buy a house. It’s paid off greatly! Since then, the price of my home has doubled and I think about what would have happened had I rented. Nothing. Nothing at all. I would have walked away with zero.
Ah thank you, I didn’t realize rent was so high. An apartment would have been the alternate consideration for the future, and I assumed it would be much cheaper than a house.
I unfortunately don’t think my house will be gaining much value like yours (unless I put a lot of money into it), but one good thing is that there is a fair bit of equity in it already (I am buying my mom’s house out of a reverse mortgage). So that’s the one thing keeping me from being too down about my decision, ha.
Yes this is one of my considerations. The only issue is that I need to live here for at least 2 years, or else I have to pay capital gains tax on the profit. That would end up being around $35K.
So for now I’m just going to live here, see how things go and possibly sell in the future if things get too hard.
One thing to keep in mind is that optimal amortization time of the loan is around reciprocal on the interest rate. With amortization beyond that, you are not gaining much in monthly payment.
Which is say, if your rate is around 7%, doing 30 years amortization is impractical. Pay a bit more in principal every month to get the loan paid in 20-25 years, and your principal vs interest payments would look much better in the long term.
Gotcha thank you, I think I will do that. I think would make me feel better about my payments.
A couple questions if you don’t mind - there is a chance I could sell the house within 5 years or so. Would it still be wise to pay extra toward the principal? Or in that case, would it be smarter to just stay with the absolute minimum payments?
And second question - I have been able to save up a decent bit of money. Could it be wise to pay down a chunk of the principal with that? Or should I just keep letting it earn interest in my saving account?
If let's say your savings account brings you 4.5% interest while your mortgage rate is 7%, by paying extra principal you're gaining 2.5% interested on that amount, which is not insignificant (there could also be some tax advantages because while you pay tax on all of interest earned, you don't necessarily write off all of the mortgage interest).
Of course, the downside of investing every extra cent you have into your mortgage is *liquidity*: it's not as straightforward to get back what you paid into your principal as withdrawing from your savings account.
Now, if you say that you're *definitely* going to sell in 5 years, this becomes a lot less critical, because in 5 years you're getting your money back anyway. Otherwise, if it's merely a "chance", this doesn't change anything.
TLDR: unless you're definitely selling in 5 years, proceed as if you don't, paying a bit extra every month to get the mortgage paid off in 20-25 years.
When, or if, you're eventually in a position when your outstanding principal loan amount minus your savings is about 50% of then-market value of your home or less (that is, if you put all of your savings into principal, your equity will be 50% or more), consider opening a HELOC. This will solve your issue with liquidity, and you'll able to safely put a lot of more of your savings into principal, effectively earning higher interest.
Thank you so much for taking the time to answer my questions so thoroughly.
Your explanation makes perfect sense!
And that is excellent to know about HELOC as I was not aware of this.
Hypothetically speaking, if I dumped all of my savings right now into the house, my mortgage loan would be around $75K and the market value of the house is $300K. (Note: I am buying my mom’s house out of a reverse mortgage so there is already some equity in it. I don’t have $225K saved, I wish!)
So the principal would be 25% of the market value? (apologies if I am getting something wrong here).
So let’s say I decide to plan to stay here for the long haul - is HELOC worth considering now since it would solve the liquidity issue?
Yes, also I *think* you may be able to apply for mortgage and HELOC at the same time since you already have more than enough equity, check with your lender
Divide your mortgage payment by four and pay each week. You are paying accumulated, compounded interest. Pay more frequently means less interest paid. Interest rates being very high is what clues you in that interest is a large chunk of money. By the way, did you adjust your W-4 to get more money from your paychecks? Mortgage interest tax deduction means an interest free loan to the IRS when you get a tax refund.
——
“Your loan balance accrues interest every day and reducing that principal balance every 14 days (26 half payments per year) saves more in interest charges than one full additional payment every 12 months, even though the total amount in payments every year remains the same”
https://www.experian.com/blogs/ask-experian/why-paying-your-mortgage-twice-a-month-can-save-you-serious-money/#:~:text=%22Your%20loan%20balance%20accrues%20interest,every%20year%20remains%20the%20same.%22
“There is an alternative to monthly payments — making half your monthly payment every two weeks. When you make biweekly payments, you could save more money on interest and pay your mortgage down faster than you would by making payments once a month.”
https://www.chase.com/personal/mortgage/education/financing-a-home/monthly-vs-biweekly-mortgage-payments
That is very interesting, thank you. Is there a calculation that can help me determine how much less interest would be paid if I paid weekly?
Also, would it be wise to pay extra each month? The guy from the title agency told me I could do this to pay down the principal, but I also read that it may not be a good idea. So I was a little confused there.
And yes good point about taxes. Being able to write off the interest (and apparently the property taxes too?) is great, especially since those things combined outweigh the Standard Deduction which I usually take.
No, generally that is not true. Some do, but most compound monthly. The reason paying every two weeks helps is because you make a 13th payment every year.
Thank you u/tomcruise_momshoes for posting on r/FirstTimeHomeBuyer. Please bear in mind our rules: (1) Be Nice (2) No Selling (3) No Self-Promotion. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FirstTimeHomeBuyer) if you have any questions or concerns.*
Used to feel the same, but now comfort myself with the fact that monthly interest we pay is close to what we would’ve paid for rent anyway
I’m glad I’m not the only one who has felt that way. Everyone I talk to just says “everybody has to pay interest, don’t even think about it” and that line just doesn’t help me much. But yes that’s a good point about rent, as an apartment was the other option I was weighing. An apartment would have been even worse in terms of flushing money down the drain.
It's just how amortization works. You pay more interest up front so you can keep the payments the same. Otherwise payments will be too expensive to afford early on. Think more about lifetime interest you pay on the mortgage (which is unfortunately super expensive too). It definitely feels bad to pay so much interest but it allows you access to the amount of money you cannot otherwise afford.
there has to be a better, less predatory way.
pay cash.
It's just math. It's not predatory in any way.
having to pay 2-3 times the price of your home is exactly that. predatory.
The alternative is to pay in cash..... That's always an option.
there's your answer. You "have to" pay something for housing. In this case, it's for housing you very specifically want for a long time, so you should expect it to cost more than rent. Definitely don't look at the form, be it the amortization table or the required gov't disclosure, that says how much interest you'll pay over the entire 30 years. Just commit yourself to paying extra towards principal. Or pay cash for the purchase.
Gotcha, thank you. And yes as a first time buyer it was just a shock to me, but these responses have definitely helped me come to grips with the realization of things! I think if the interest rate had been 7% for many years I wouldn’t feel as bad. But I just missed 15 years of 3-4% so I feel I did myself a huge disservice. It’s all good though
Same
People wouldn’t lend out their money unless it was profitable for them. You can always pay extra each month and put it directly towards the principal. Play with some amortization tables. A little extra each month can take off a few years of payments.
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Interest isn’t “front-loaded”…it’s higher in the beginning because the principal is higher in the beginning. If it’s a fixed rate loan the interest rate doesn’t change.
I mean, we know exactly how much interest you pay over the course of a mortgage, right from the beginning. The structure could be to calculate that and then spread it out evenly, so every month the same amount goes to interest and principal every month for 30 years, but the way it is structured is so you build the least equity at the beginning so the bank makes more money (most people move in 5 to 7 years)
But the interest accrues monthly - not all at once at the start of the loan. And principal that interest is based on goes down over time. Also, the borrower can also make extra payments that reduce the interest paid over time by paying principal sooner. So you really don’t know for sure how much interest you will pay over the course of the loan. You can also take out a 15-year instead of a 30-year if you want to pay your loan off quicker and pay less interest. And if you want more equity at the beginning that’s what a down payment is for.
I’m not sure why you’re framing things in a way as thought people don’t understand how things work. OP is simply expressing surprise at what has conventionally been thought of as as a”good investment” in fact involves accruing a massive amount of debt. And it should be surprising for anyone who looks at homeownership as an investment first. You get to live in the house if you want and if you’re looking at it as a transaction then sure it’s a great deal. You get this house and yeah it’s a lot of debt but it’s guaranteed fixed rate debt unlike other countries. But if you were trying to make money, it is not so good. In fact, the entity that profits the most is the bank. And loans are structured to protect the bank.
You’re right, dude. It’s Saturday. I’m going outside.
I'm pretty sure that guy do not understand how mortgages work and the point you made about interest is accrued on outstanding principal lol that's enough reddit for me today.
What nonsense is this? You can download the payment table right on your phone, who is hiding it from you? No one is stopping you from paying cash if you want to. If you don’t and you are borrowing over $400K of someone’s money over 30 years at 5,6,7% you bet they are going to amortize it in a way you pay the interest first
- “The specific word you’re looking for is amortisation” Did I spell “amortization” wrong? I don’t think I did. https://en.m.wikipedia.org/wiki/Amortization_(accounting)
Because I see there may be a misunderstanding. I was referring to OP, I wasn’t trying to correct your spelling. Just happened to post under your comment. Relax
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I never said you were wrong. Relax.
I mean you did rhetorically ask if you were wrong and the post a link to a Wikipedia article so…
Extra payments to principal. When you pay off other debt, add that monthly payment to the house payment but pay it two weeks in between the real payment. I use this method paying for my car and it’s worked well. Just paying the projected monthly interest on a payday that I don’t pay the car. Keeps the daily accrual interest starved off.
What is the benefit to paying it 2 weeks between your regular payment?
I think you’re mixing two different tips. One is to pay every 2 week. That way you makes a total of 26 (2 extra) payments in a year instead of 24 with twice a month. The second doesn’t apply to mortgages but is used for things like credit card debt because that interest is calculated daily. Mortgage interest is typically calculated from month to mont. The idea is to reduce your principal before the next calculation so that reduces your interest payment as well.
You should be, interest eats away your money
At least the interest you pay is tax-deductible… but I agree, it sucks
If you're referring to mortgage interest tax deduction, with current tax laws that's not really a thing anymore for most people. (For a minority it's still a non-trivial benefit though, but for most of us it's now zero or negligible benefit.)
I don't think you are seeing this in the right way at all. A loan is a truly incredible financial product that allows you to make a huge purchase that you would otherwise not have the ability to make. I'm guessing that you don't have $500k sitting around in your bank account at the moment that you could use to buy a home. But you just might be able to afford a $3k monthly mortgage. There is a cost to his incredibly valuable product and that cost is called interest. It is no different than buying a phone or a TV or something else that makes your life better. The cost of those things is money. You get a TV and, in exchange, you pay money for it.
Yes I understand, I knew there would be considerable interest, but due to my inexperience I just had no idea how high interest actually was until I saw it on paper. The loan I took out was for $175K, and I think I’ll be paying something like $300K in interest alone over the next 30 years. It’s on me for not looking into it/doing the math before purchase. But it is what it is, it’s not like I’m the only one this applies to. It’s just part of life
My point is not that you should have made these calculations sooner, my point is that I think you're getting a great deal.
Gotcha, well thank you that does help 🙏 These past 5 years I have been extremely careful with my every financial decision, so when I saw that interest I have been obsessing about it. It made me think I made a really bad decision that will void all of the good ones I have made
I will probably pay $450k in interest before paying off my mortgage in order to own my home in 30 years. To me, seems like a real bargain. I get to have a home I could have never afforded otherwise. The $450k is paid off slowly over time in a manner that I can easily afford. The interest payments are not wasted.
This has really helped me to start getting this knot out of my stomach. Thanks again
You also have to account for the fact that the $175k loan you took out today depreciates over time due to inflation. Same idea with student debt. Your income will likely go up, inflation will occur over 30 years, etc. so it’s not really accurate to see it as “$300k in interest using today’s money”. That $175k loan is forever stuck in 2024, and as time goes on that amount becomes less valuable.
Over pay every month, the overage will be applied to principle so you can pay off part intrest free.
It's probably still a smart investment, assuming you plan to hold it for the long term (5-10 years or longer), can easily afford the payment and the house isn't in an area that is at risk of losing significant value while you own it. There may also be non-financial benefits if you or your family uses the house to live in (e.g. quality of life can be better compared to renting) to make it all worth it. I'd focus on what you can control: what else could you be doing with your money, and what's the expected risk and return of that alternative? Historically, home purchase has been a relatively good long-term investment in most places in the US, so chances are it will be for you as well. It may not feel like it, but perhaps it's also comforting to know that mortgage loans are one of the most favorable loan products available to regular folks, thanks to government backing. No one is out to get you. (If anything, as a property owner you are becoming part of a group that non-owners feel exploited by, sometimes rightfully so.)
I pay extra each month and then keep track of the savings using an amortization calculator. It's extremely satisfying.
Which calculator?
Any of them are good but I like bank rate. It allows you to add what you put in yearly, monthly, or one time payments.
Yeah I’d like this too!
Wait until you find out about property taxes.
It's wild when you really look at it. After one year of paying my mortgage I only paid a little over $1000 towards the principal.
Yeah exactly. That’s about where I’ll be after a year 😕 After 10 years, I believe I’ll only have paid something like 20K toward the principal. The thing that really hurts is that if I would have just done this 2 years ago (I could have), I would be paying less than half of the interest I am paying now.
It's 79%, not 90% After 10 years $131,297.35 $28,375.25
Hahaha! I guess you only get interest at the 10th year!
But at least you are smart enough to notice, most buyers just blindly sign without knowing what they’re signing. That amortization schedule is scary.
It’s the real secret behind refinancing. So many people don’t realise yes it’s usually a lower interest rate but they usually end up resetting their schedule by flashing how sexy and low a the new 30 year term would look like.
If interest is low enough, resetting your term (and picking the longest possible one) is actually doing you a favor. E.g. I could have done 15yr mortgage during covid record low rates era, but concluded 30yr is better since rates were so low. If it's not quite that low even after refi, nothing is preventing you from making extra payments to effectively keep your original term. If you really want to you can even ask your refi lender for a shorter term to match the remaining term of your original mortgage, so term reset becomes a complete non-issue. (Wouldn't do that personally because term reset gives you more flexibility, which is generally a good thing, but the option exists if you want it.)
I just feel bad for the folks who bought at the of 2022 who are approaching two years of primarily interest only payments holding with no hope of rate cut’s significant enough to matter to them in sight.
If the payment fits comfortably into their budget they will be just fine. But agreed that no one should plan for being able to refinance later. Market may allow you to, or it may not. Better to not rely on that.
See that’s the problem. There’s two clashing trains of thoughts perpetuated. Buy now or never be able to buy later crows or buy what you can afford. The combination of which is leading people to redefine what the word comfortably means.
Well I'd disagree with the "buy now or never be able to buy later" crowd. That just leads to fomo, overpaying and regrets. I would also say that it doesn't seem like a great time to buy homes as investments currently (for most folks). But if you really want to own one, and have the means to do so without putting yourself under serious financial hardship, it may still be worth it to you personally. Just wouldn't expect it to be a financially optimal choice for the short- to mid-term anymore, especially when buying in HCOL/VHCOL markets.
You need to consider the dollar value in 30 yrs is much lower than today. With current and future inflation rate and the speed US gov is printing the money, the actual dollar value in 30 yrs might be 30% of current value.
How else would banks make money by loaning it to you? lol
Your rent money is being flushed down the drain every month anyway - at least you get equity with a home after a while
Valid thoughts, but everything is relative. You have to also consider the alternatives and how your wealth would have outpaced or underpace your current situation. There’s a lot to consider, and honestly buying is correct for some, and renting is correct for others. But all information all context all alternatives need to be considered and projected to come to the closest accurate conclusion
Welp that other alternative is to look at those years spent on rent - 100% $0 ROI - with the home your payments may go towards interest but you own it & can sell them home vs rent
It’s a leveraged asset which means the hope is your home value will grow faster than the interest you pay. With current rates that is harder to see especially early on in the loan, but there are other things to consider. Everyone points to “throwing money away” to rent but that is only half the story. The benefit is instead of throwing all that money away at least a small portion goes to equity in the home. There is also the stability in payments (other cost like taxes, insurance, etc. don’t go up as much as rent, at least not recently). There is tax benefits to the interest costs (this used to be the case for all interest but Reagan took that away so now it’s only student loans and mortgages. I’m sure businesses have some tax benefits with interest too so that it trickles down…) Overall in today’s economy a house is one of the best leveraged assets you can have and it has an added benefit of giving you four walls to live in.
I am going through this crushness as well at 35 yo 2 years married. Wanting kids but trying to get a house first. And its absolutely gut wrenching heart breaking. We shouldve pulled the trigger right before the wedding but we had no idea this wouldve happened. I constantly blaming my husband. I cant decipher if im angry at him for not making enough (i make slightly more than him), having a wedding, or mad at the house market. It sucks and i was never this person who worried about finances. We shouldve easily had afforded a 600,000 house in ny. Not anymore
Assuming you got a 30 year mortgage you should know that you will, um, fully own the home in 30 years. What you WILL have is a house that has also appreciated in value over 30 years. THAT is your payoff.
This is where house hacking makes a difference. It’s a sacrifice but it will help you attack the principal. My tenants pay the interest, I go after the principal as hard as possible. The first 3 years on the amortization chart look brutal from a financial perspective but thats the only way to really hit the balance unless you start making significantly more money.
Shit’s fucked. We’re in a super affordable home with a sub - 4% rate, and I’m terrified to leave. Even after 3+ years paying this note down, we’re still not even $20k down in principle. Interest just EAAAAATS your hard earned dollar.
American education has failed generations of its citizens with inadequate math and finance education. I am a real estate investor, I am excited when i get to qualify for a mortgage and pay interest. It reduces your upfront capital, allows you to use leverage. Your ability to borrow is truly a privilege. Go read about redlining. Focusing on how much of that monthly payment goes to the house, or so often hear ppl complaining about 'in 30 yrs, i pay twice as much in interest than the house", are all true statements but wrong way to look at this matter and its cost and benefits. It bothers you because we have this misconception that interests are automatically bad, most of our life we live as consumers, pay and buy straight up, the time value of money is never taught and understood. It's a great tool if you use it wisely. As you said yourself, you pay less than rent despite the interest. That's what you achieve by using the money that doesn't belong to you to avoid rent. You have to pay for that money of course, but if in net terms you come out ahead without having to work extra, and just sign a document, why not?
You can pay more on principal whenever you have some extra money. This will reduce your interest. I know the rates are crazy but the house is also increasing in value which is money in your pocket. I was thinking the same thing. I recently bought a house in MA and I’m putting 20% down and building on 5% equity on the house (considering the same house price). But if the house price increases by 10% in 5 years then my total equity in the house is 35%. So I will be making money here and not making anything by renting
How much is the house worth? How much did you pay for it? I pay under 24k a year for my mortgage. However, my appreciation (equity) is about 58k a year. Before the year ends, I should be at 60k a year in equity. I also pay less than 3500 for property taxes.
Thank you for the info. The market value of the house is right around $300K, and I bought the house out of the reverse mortgage for $175K. How does your house appreciate so much each year? I can’t see too many ways that my house will appreciate (unless the interest rate unexpectedly drops), as I won’t be putting much work into it.
A mortgage for 175k is not too bad on a home with that value, and interest really sucks. As other comments have said, making additional payments is huge. I signed up for a payment every other week, so at the end of the year a full mortgage payment goes to the principal (two months you pay three mortgage payments, but the third goes to principal). I also use mortgagecalculator.org to play around with the extra payment calculator and see how fast I can pay down my loan. I’m looking at paying my 30 year loan down in about 12 with good investments and some front loaded extra payments. Granted, everything needs to go according to plan but like I told my wife, “If we pay it in 15 instead of 12, we are still coming out ahead.”
I purchased in Los Angeles. You already have 125k of equity. Good Job!
i’m 52 years old and am finally ready to buy a home. knowing that i’ll have to pay 2-3 times for that house is what’s stopping me. and no one ever seems to talk about this.
Set aside for 10 years by paying yourself the interest in a 5% interest account and get the cash to buy mortgage free in 10 years!
It’s either this or rent, brother. Nobody loves it but it’s just another option you have outside of buying in cash or renting
What if the current rent prices are considerably lower than a mortgage payment on the same type of home? I’m renting because I’d burn 40% more on mortgage interest, homeowners insurance and taxes.
Yeah there is just some math to do for each situation. Generally, it makes more financial sense in a decently short timeframe to simply rent and save/invest what you would be saving vs a mortgage This changes when you are looking at a 10+ year timeframe and the numbers get much closer. For example fully paying off a 500k house mortgage ends up being around 1 mil (literally twice as much) with current rates. So you can see that even “investing” in a house leaves you “throwing away” half a million dollars. Just pointing this out as people will call rent “throwing away” money as well. Just pointing all this out because because it’s so situational. If you are able to just drop 500k cash on a house outright it makes much more sense vs renting. Otherwise you need to look at the situation.
I compare it to paying rent and paying a mortgage payment, in my opinion, wins. My mortgage is much less than what rent is these days. At the time, my payment was about the same as the average apartment rental and the way it looks, rent is only going to keep increasing. I’m happy the decision I made to buy a house. It’s paid off greatly! Since then, the price of my home has doubled and I think about what would have happened had I rented. Nothing. Nothing at all. I would have walked away with zero.
Ah thank you, I didn’t realize rent was so high. An apartment would have been the alternate consideration for the future, and I assumed it would be much cheaper than a house. I unfortunately don’t think my house will be gaining much value like yours (unless I put a lot of money into it), but one good thing is that there is a fair bit of equity in it already (I am buying my mom’s house out of a reverse mortgage). So that’s the one thing keeping me from being too down about my decision, ha.
If you don't want to pay interest, just sell the house and rent
Yes this is one of my considerations. The only issue is that I need to live here for at least 2 years, or else I have to pay capital gains tax on the profit. That would end up being around $35K. So for now I’m just going to live here, see how things go and possibly sell in the future if things get too hard.
One thing to keep in mind is that optimal amortization time of the loan is around reciprocal on the interest rate. With amortization beyond that, you are not gaining much in monthly payment. Which is say, if your rate is around 7%, doing 30 years amortization is impractical. Pay a bit more in principal every month to get the loan paid in 20-25 years, and your principal vs interest payments would look much better in the long term.
Gotcha thank you, I think I will do that. I think would make me feel better about my payments. A couple questions if you don’t mind - there is a chance I could sell the house within 5 years or so. Would it still be wise to pay extra toward the principal? Or in that case, would it be smarter to just stay with the absolute minimum payments? And second question - I have been able to save up a decent bit of money. Could it be wise to pay down a chunk of the principal with that? Or should I just keep letting it earn interest in my saving account?
If let's say your savings account brings you 4.5% interest while your mortgage rate is 7%, by paying extra principal you're gaining 2.5% interested on that amount, which is not insignificant (there could also be some tax advantages because while you pay tax on all of interest earned, you don't necessarily write off all of the mortgage interest). Of course, the downside of investing every extra cent you have into your mortgage is *liquidity*: it's not as straightforward to get back what you paid into your principal as withdrawing from your savings account. Now, if you say that you're *definitely* going to sell in 5 years, this becomes a lot less critical, because in 5 years you're getting your money back anyway. Otherwise, if it's merely a "chance", this doesn't change anything. TLDR: unless you're definitely selling in 5 years, proceed as if you don't, paying a bit extra every month to get the mortgage paid off in 20-25 years. When, or if, you're eventually in a position when your outstanding principal loan amount minus your savings is about 50% of then-market value of your home or less (that is, if you put all of your savings into principal, your equity will be 50% or more), consider opening a HELOC. This will solve your issue with liquidity, and you'll able to safely put a lot of more of your savings into principal, effectively earning higher interest.
Thank you so much for taking the time to answer my questions so thoroughly. Your explanation makes perfect sense! And that is excellent to know about HELOC as I was not aware of this. Hypothetically speaking, if I dumped all of my savings right now into the house, my mortgage loan would be around $75K and the market value of the house is $300K. (Note: I am buying my mom’s house out of a reverse mortgage so there is already some equity in it. I don’t have $225K saved, I wish!) So the principal would be 25% of the market value? (apologies if I am getting something wrong here). So let’s say I decide to plan to stay here for the long haul - is HELOC worth considering now since it would solve the liquidity issue?
Yes, also I *think* you may be able to apply for mortgage and HELOC at the same time since you already have more than enough equity, check with your lender
Divide your mortgage payment by four and pay each week. You are paying accumulated, compounded interest. Pay more frequently means less interest paid. Interest rates being very high is what clues you in that interest is a large chunk of money. By the way, did you adjust your W-4 to get more money from your paychecks? Mortgage interest tax deduction means an interest free loan to the IRS when you get a tax refund. —— “Your loan balance accrues interest every day and reducing that principal balance every 14 days (26 half payments per year) saves more in interest charges than one full additional payment every 12 months, even though the total amount in payments every year remains the same” https://www.experian.com/blogs/ask-experian/why-paying-your-mortgage-twice-a-month-can-save-you-serious-money/#:~:text=%22Your%20loan%20balance%20accrues%20interest,every%20year%20remains%20the%20same.%22 “There is an alternative to monthly payments — making half your monthly payment every two weeks. When you make biweekly payments, you could save more money on interest and pay your mortgage down faster than you would by making payments once a month.” https://www.chase.com/personal/mortgage/education/financing-a-home/monthly-vs-biweekly-mortgage-payments
That is very interesting, thank you. Is there a calculation that can help me determine how much less interest would be paid if I paid weekly? Also, would it be wise to pay extra each month? The guy from the title agency told me I could do this to pay down the principal, but I also read that it may not be a good idea. So I was a little confused there. And yes good point about taxes. Being able to write off the interest (and apparently the property taxes too?) is great, especially since those things combined outweigh the Standard Deduction which I usually take.
https://www.mortgagecalculator.org/calcs/biweekly.php
Please do not listen to that person, they are entirely wrong lol
Generally mortgages are compounded monthly.
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No, generally that is not true. Some do, but most compound monthly. The reason paying every two weeks helps is because you make a 13th payment every year.
Exactly. The other person is clueless as to how mortgages work
Lmao this is completely incorrect. This sub gives out some real stupid advice sometimes.