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I'm looking to buy a house for the first time. I've done some homework, and from what I can tell...

  1. Buying a house via mortgage in Kentucky is somewhat cheaper than renting an apartment.
  2. I need to bring my credit score to at least 630 before lenders will even talk to me.
  3. I need to finish paying off my car which I still owe about $4,000 over the next 2 years.
  4. It's typically a 30 year term.

It's that 4th note which concerns me. It's the idea of committing to 30 years of debt. I see people with lower income than me buying and selling their houses left and right, while I sink most of my income into rent.

How committed should I be to 30 years? I mean, suppose I live there for 5 years and need to move. How hard would it really be to sell the house? I mean, I assume this is a normal process, so the real question is, what are the options?


On that note, if it was easy to sell a home in this situation, then what would stop me from extending the terms to, say, 40 years? Higher interest? Higher credit score requirements? Just rhetorical...


To clarify, properties in my general area nearby my workplace are starting around $230,000 for a decent house. With a 30 year mortgage, my monthly payments would be almost the same as what I currently pay for rent. Or less if I find a cheaper house. Which I see some fairly decent cheap ones too. I'm more specifically in the Louisville area.

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    Please use comments as they were intended. Not to provide partial answers. – JTP - Apologise to Monica Jun 23 at 16:07
  • Do you have plans to live in that area for a while? School (for you or family/kids) and so on. Or do you plan to move elsewhere soon/frequently. – Criggie Jun 26 at 4:15
  • "what would stop me from extending the terms to, say, 40 years?" Well, for one, you don't set the terms, the lender does. And second, it would be basically pointless, there is a law of diminishing returns, in which the monthly payment decreases less and less as you extend a loan past 30 years. Run some amortization tables in a spreadsheet to see what I mean. – Glen Yates Jun 26 at 17:00
  • When you're buying a home, be aware of the phantom costs - this can easily be at least 1% of your purchase price annually. – Wayne Werner Jun 28 at 16:02
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This is 100% routine and happens in almost every home sale.

Whoever you're buying from probably owes a mortgage too!

This gets handled during closing, and it's "behind the curtain". You/your finance company hands over a check for the full purchase price to the escrow agent, a neutral middleman who assures proper money flow. The escrow agent splits the money: (say) $76,000 to the seller's mortgage lender to pay off the mortgage; $6000 for Realtor commissions; and a few other minor closing costs. The Escrow agent gives what remains to the seller, say $15,400. That's a typical day in the real estate business.

So the seller is never given a chance to "mess up" and forget to pay off the mortgage. It's handled for them.

Note that in that example the seller didn't do great; he probably was at disadvantage e.g. having to sell the house a year or two after buying it, so he didn't see much market appreciation, didn't have long to reduce the mortgage principal, and got munched pretty bad by closing costs. (which are the cost of the sale transaction itself: realtor commissions, title search, insurance, etc.)

Or for that matter, the seller might have been a "flipper" who bought the place 2 months ago for $80,000 and put $9000 of work into it. Most of his gross profit went into closing costs. That's how it is.

You can get some really screwball mortgages

You mentioned 40 year mortgages. The idea is to increase your purchasing power, to allow your same monthly payment to buy a bigger house. That doesn't exist, but there are plenty of other extreme mortgage products out there. I was shopping for a house in 2005 in a bubble market. Here are some of the mortgage products they tried to sell me.

  • Adjustable-Rate Mortgage -- these had a low "teaser" mortgage rate for 1-5 years, then popped up to a much higher variable rate that followed the financial markets. These are for houses you intend to sell or refinance before the teaser rate ends. If you stayed in, your mortgage payment changed with the markets, whoa.
  • Interest-only mortgage -- in this case, you didn't agree to pay principal at all, only interest - and again that's adjustable-rate based on the market.
  • Negative-amortization mortgage -- in this one, your payment is less than even the interest, so your total amount owed got bigger each month. Again, adjustable rate.
  • Second mortgages, that would mean you could buy with 5% down, 0% down or even 3% cashback (nominally for renovations). Typically adjustable-rate.

The point of all of these was to increase your purchasing power. Allow you to buy a bigger house (or more accurately, to bid higher on the same little house, so you can beat the other guy, who was doing the same thing. And that's how you get housing bubbles).

The idea is, after the bubble raises your house's value to 125% of mortgage, you can just refinance into a standard 20%-down fixed-rate mortgage.

But as you may have heard from the 2008 housing crash, this is dangerous.

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    Adjustable-Rate Mortgage — isn't it completely standard that the mortgage rate is fixed for a limited amount of time, then becomes variable? Or is that something different? – gerrit Jun 24 at 8:22
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    @gerrit It's certainly completely standard in the UK (finding a mortgage without an initial discount would be a challenge), but I believe Harper is US based, where that is a relatively new deal. He missed the fact that after the discount period comes to an end, one just transfers to a new mortgage (there is no need to move house). – Martin Bonner supports Monica Jun 24 at 8:31
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    ARMs aren't new in the US, they're just not very popular. The vast majority of first position mortgages in the US (including Kentucky where the OP is located) are fixed rate. ARMs probably make up less than 10% of first position mortgages in the US right now. – dwizum Jun 24 at 13:44
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    @dwizum That wasn't the case then (and there). If you didn't use extreme mortgages, then you were competing with peers who were, and as a result they had a much bigger bag of money to bring to the table. They made bids you could not match. – Harper - Reinstate Monica Jun 24 at 14:20
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    @gerrit what Philipp says; I call that the "teaser rate", where it is a fixed rate for the first 1-5 years. Your mortgage lender says "Oh don't worry, you'll just refinance at that point." The "adjustable" part is forced by the lender upon the borrower, you just get a letter one day saying your mortgage payment is now more. I haven't gone into the gory details but I suspect they don't extend loan duration, but you pay the principal on schedule, just more interest obviously. – Harper - Reinstate Monica Jun 24 at 15:42
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As RonJohn points out, selling a house that still has an outstanding mortgage balance is very common.

However, having a mortgage can make it harder to sell, one situation to consider is if the local real-estate market takes a dip after you buy. Say you put 5% down on a $150k house at 5% interest, in 3-years you decide to move, but the market value of the house drops over those 3-years to only $125k. You still owe ~$132k on the mortgage. Unless you have the cash to make up the difference between the new value and what you owe, you can find yourself stuck in a house you no longer want to own.

Additionally, selling a house can typically cost ~6% of the sale price (real-estate agent fees and other costs). So even if the house doesn't lose value you could need to have substantial cash on hand if you sell too soon after buying.

The above are far more problematic for those who borrow near their limit and have small down-payments. Strive for a big down-payment and make sure you can still save a good chunk of your income after buying and you can hopefully avoid feeling trapped.

There are a lot of good rent vs buy articles out there, I would recommend searching for those before you get to buying since there are a lot of factors to consider.

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    So long story short, it better be a house that could potentially increase in value. I do kinda hope to fix-up whatever house I get. So that does make plenty of sense. Not that I want a run-down house. But something that can be easily improved. The fundamental idea is the difference between current value and debt still owed. – Jerry Dodge Jun 23 at 0:02
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    "So long story short, it better be a house that could potentially increase in value." At least maintain value. There are lots of hidden costs in home ownership in addition to the explicit ones like property taxes, HOA fees and the costs associated with buying and selling. – RonJohn Jun 23 at 0:43
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    @RonJohn In a down market, everything goes down. Thinking you'll know which houses will retain value is like thinking you know how to time the market. – Eric Jun 23 at 3:55
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    @Eric that's why you buy prudently. :) – RonJohn Jun 23 at 4:17
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    @JerryDodge: "Costs", yes. "Little", no. A new furnace will likely cost you upwards of 5k; a new water heater around 1k. Then eventually you'll have to replace the AC, the roof, siding, fence, driveway, etc., etc. Not including possible big repairs, like cracks in the foundation. Home ownership makes sense for several reasons, but it is not a given that it's worth it financially. – Martin Argerami Jun 25 at 1:37
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It's that 4th note which concerns me. It's the idea of committing to 30 years of debt.

You're grossly over-thinking a problem that got solved the day after mortgages were invented.

https://blogs.findlaw.com/law_and_life/2017/07/can-you-sell-a-home-if-you-still-owe-on-your-mortgage.html

Most people sell their homes before the mortgage is paid. What happens is that part of the sale price of the house goes to pay off the remaining balance.

what would stop me from extending the terms to, say, 40 years?

The fact that banks and credit unions don't offer 40 year mortgages.

EDIT: some places actually do offer 50 year mortgages. https://www.lendingtree.com/glossary/50-year-fixed-rate-mortgage/ https://www.thesimpledollar.com/how-bad-of-a-deal-is-a-50-year-mortgage/

These links are too long to quote (no soundbites), but demonstrate that longer length mortgages are much more expensive.

(Your questions display a deep misunderstanding of some pretty fundamental realities of how mortgages work.)

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    @alephzero Huh. That is very interesting and apparently market dependent. I'm in the United States and am in my mid-40s, and have had no trouble at all getting 30-year mortgages. – mattdm Jun 23 at 17:24
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    "The fact that banks and credit unions don't offer 40 year mortgages." Note that this is completely location-dependent. Here in Sweden banks are more than happy to give out 100-year mortgages (and they used to give out indefinite-length mortgages before law changes related to the subprime crisis in the US forced them to ask for at least 1% payment per anno). – xLeitix Jun 23 at 17:50
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    @StackTracer you just pay interest and don't build equity. It's pretty similar to paying rent, except that you can opt to pay off (part of) the mortgage to lower the interest amounts – JAD Jun 24 at 6:38
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    "Your questions display a deep misunderstanding of some pretty fundamental realities of how mortgages work." You don't explain how. Ignorance and misunderstanding are different things. This part of your answer can easily be seen as rude. – Acccumulation Jun 24 at 21:07
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    "Your questions display a deep misunderstanding of some pretty fundamental realities of how mortgages work" Hence the tag first-time-home-buyer. – Jerry Dodge Jun 25 at 1:27
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This is a totally normal process. I've done it several times. When you move, you sell the house and the proceeds of that sale cover the mortgage. While it's possible that some loans have a pre-payment penalty (which would essentially fine you for doing this), this is relatively uncommon. (Watch out for this when shopping for a loan — it's possible that this is more common in loans offered to people with lower credit ratings.)

Of course, if the market tanks you have trouble selling the house for an amount great enough to cover the loan, you'll need money from some other source or else you'll be stuck — metaphorically, you will be "underwater". This depends on factors outside your control, of course, but so does lots of life, and it's a risk most homeowners accept.

That said, if you can swing it the relatively higher monthly payments, you can get loans with shorter terms — 15 years is common, and 20 is not unheard of. These usually have lower interest rates, and between that and the shorter term your overall cost over the lifetime of the loan will be significantly lower.

But, in any case, do consider the value of having a known, fixed payment. You note that you're sinking your income into rent. How much does rent go up year-over-year? With a mortage, you've locked in one payment that you know won't increase. Plus, currently interest rates are quite low — lower than average year-over-year inflation in the 1980s, even. So, while your payment remains constant, the relative cost of that payment actually goes down. (Of course other costs of home ownership will, so make sure to plan for that.) Of course, it's better to not have any debt at all, but as debt goes, mortgage debt (because it is secured by real estate) is relatively low-cost.

In order to get a loan with the best rates, you'll definitely want a higher credit score — this makes sense, because the lender is taking less risk. But you should do some careful analysis of the cost of renting vs. the cost of home ownership including the mortgage. Figure in your financial situation and ability to absorb some risk. (What would happen if something goes screwy in the economy and rates jump to 8% or higher? What happens if you end up stuck in the home?) You may find it better to buy sooner rather than waiting — or you may find that you're not financially ready.

If you are having trouble getting your credit score above 650, you may even consider taking a loan at a higher interest rate than ideal now while hoping interest rates stay low while you work on improving that score, with plans to refinance. But, again, make sure to factor the risk of being stuck with it into your planning.

  • "that you know won't increase" - location specific. It's almost impossible to find a mortgage with a rate that is fixed for the lifetime of the mortgage. You may get an initial fixed period, but after that it will be variable. – Martin Bonner supports Monica Jun 24 at 8:33
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    @MartinBonner In the US, including Kentucky, mortgages which have a fixed rate for the entire term are the standard. Adjustable-Rate Mortgages ("ARM") are also available (often from the same lenders) — these usually have a fixed rate and then float. – mattdm Jun 24 at 12:42
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    Damn! I meant to write: "It's almost impossible in the UK ..." – Martin Bonner supports Monica Jun 24 at 14:44
  • Interesting to note, not in all cases have houses managed to grow in value with inflation over different timelines, so while your payment remains relatively flat, the value of the property decreases. The house we purchased in 2008 is nearing the price we purchased for (11 years later) but if you factored inflation from 2008 to now we are about 50k undervalued. – onaclov2000 Jun 25 at 16:45
  • @onaclov2000 Yes, good point. The broader market is still an unpredictable factor. I'm curious, though: what is the equivalent rent then vs. now? – mattdm Jun 28 at 16:21
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A couple of points:

Firstly, a mortgage contract can always be terminated prior to the end of its term. Terminating early typically attracts a penalty payment. There are circumstances where the customer can still benefit financially even after paying the penalty; it all depends on the precise formula the lender uses to assess the penalty, how far into the term the termination occurs, how interest rates have moved since the start of the mortgage and how rates are likely to move over the remainder of the term.

Secondly, there is such thing as a portable mortgage; if you decide to sell your house and buy another one, your mortgage can be ported to the new property. The lender's primary concern is the stream of payments they get from the principal they lend out, and how stable and secure that stream is. They will be only too happy to help you finance your next house at reasonable cost to you as long as they can be confident you are continuing to make the payments you agreed to (even more so if you are trading up and your payments have gone up accordingly).

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    Most home mortgages I have encountered in the US do not have a penalty for early payment. – mattdm Jun 23 at 17:27
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    Agree with mattdm, I worked for several years as a land title examiner, most mortgages do not carry a prepayment penalty. However, one exception would be HELOC loans which may have a penalty in the first few years of the term. I'd also note that I've never seen such a thing as a "portable mortgage". In theory, there's no reason why a mortgage couldn't be portable, but practically speaking I think this would be exceedingly rare. Somewhat related, mortgages can also be assumable (this is also quite rare), which means a buyer could "take over" your remaining payments on the same mortgage note. – David Z Jun 24 at 16:50
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    Every single "conforming mortgage" written to the standards set by Fannie Mae/Freddie Mac to be pooled into mortgage backed securities has no prepayment penalty because of deliberate choices made in the Carter administration; these are the most common retail mortgages in the US. Subprime, jumbo and bespoke loans, and commercial loans for investors could have prepayment penalties. – user662852 Jun 24 at 17:14
  • My perspective is Ontario, Canada, where typical terms are 5 years, but lenders offer mortgages from as little as 6 months to 10 or more years. Rates for each term option are based on the lenders' prediction of future interest rates, but when rates are stable, longer term rates are usually less than those of shorter terms. Termination penalties are the lender's way of making up for income lost because the terminated deal would have paid better than its replacement. Lenders may allow the loan to be ported to a new property or assumed by the new owner of a property. – Anthony X Jun 25 at 0:34
  • I understand that the mortgage industry in Canada is substantially different from the US. Specifically: the most common mortgage in the US is 30-years at a fixed rate. From what I am told, this kind of mortgage basically doesn't exist in Canada. The main reason they exist in the US is because the federal government subsidizes them (indirectly.) – JimmyJames Jun 25 at 17:05
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Edit: I missed that my location and OP's location are different. Probably general advice is still generally applicable, but OP should check the specifics for their location.

  1. I need to bring my credit score to at least 630 before lenders will even talk to me.

Whether this is true depends on a number of factors. However, the higher your credit score the more likely lenders are to talk so it's always good to improve your score if you can.

  1. I need to finish paying off my car which I still owe about $4,000 over the next 2 years.

This isn't necessarily true and depends on your exact financial picture. The mortgage lender will want to make sure that your total debt service load, after adding the mortgage into your mix, is less than a specific percentage of your income. IIRC, it's 30% or 40% of your total income is the upper limit. Ask the lender, they will be very forthcoming with this information.

If your total debt service load is greater than that, but, would be less than that if your car loan is paid off, then paying off your car will allow you to obtain a mortgage. That's a very narrow window though.

It might also be that your specific financial picture includes no other credit history than the car loan. In that case, I could see a mortgage lender wanting to see the loan paid off as an indicator you're likely to pay off your mortgage. This is speculation on my part though.

  1. It's typically a 30 year term.

As others have pointed out, mortgages come in all sorts of lengths for all sorts of reasons. Others have also noted that generally you don't want a longer mortgage, and should prefer a shorter mortgage. I haven't seen anyone mention why: the longer the mortgage amortization, the greater the amount of interest paid. For very long mortgages, you can easily end up paying more in interest than the original price of the property. Prefer shorter mortgages amortizations where possible to minimize your interest cost.

How committed should I be to 30 years? I mean, suppose I live there for 5 years and need to move. How hard would it really be to sell the house? I mean, I assume this is a normal process, so the real question is, what are the options?

Selling while there is an active mortgage probably means paying a penalty for early paying-off of the loan. Ask your mortgage lender for the details around this, they will be very forthcoming.

On that note, if it was easy to sell a home in this situation, then what would stop me from extending the terms to, say, 40 years? Higher interest? Higher credit score requirements? Just rhetorical...

If you're considering flipping the property, that's a specialized circumstance in which you might prefer a longer amortization period to get the current payments down to preserve cash flow for other purposes (like renovations).

If you're considering buying a home to buy a home, prefer shorter amortizations with as high payments as you can stand, to minimize your interest cost. Minimizing your interest cost is a life-time length situation that not everyone is equipped to think about.

Source: paid my own (first and only) mortgage off. I had the same qualms re: selling with a mortgage. It turns out you're not likely to move in the next five years (typical term length) if you don't currently think you might move.

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    I upvoted, this is a good answer that covers many aspects of the OP's question. But I feel your statement of Selling while there is an active mortgage probably means paying a penalty for early paying-off of the loan is misleading for the OP's situation (they're considering a straightforward consumer mortgage in the US). Fannie/Freddie backed mortgages - the vast majority of consumer first position loans in the US - don't have prepayment penalties. So "probably" should probably be "almost certainly won't" – dwizum Jun 25 at 13:23
  • @dwizum Ah. I'm in Canada, and never sold during my mortgage. It did have other pre-payment penalties so I was making an extrapolation from that. – studog Jun 25 at 13:41
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    Fair enough - you may want to edit your answer to clarify that your location is different than the OP's tagged US location. – dwizum Jun 25 at 14:03
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This is a completely common occurrence. Virtually everyone has a mortgage of some sort (some people even have more than one). What typically happens is (oversimplified)

  1. You find a buyer and agree on a price
  2. You agree on any repairs to the property (typically after an inspection, paid for by the buyer)
  3. You agree on a lawyer to do the closing (seriously, don't try to do this yourself). If you or the buyer used a real estate agent, they typically have lawyers they trust to do this, and there's a decent market of lawyers who do nothing but closings.

When you get to closing (a time you and the buyer agree to), the lawyer will

  1. Ensure the incoming funds from the buyer (typically this is done via electronic bank draft since it's almost always over $100k). These funds are deposited into the lawyer's account (typically a separate account set up for this purpose)
  2. Prepare the legal documents necessary to signify the legal transfer. You'll be signing a LOT of documents
  3. Once the documents are signed, payouts start
    1. The lawyer
    2. Your lien holders (i.e. your bank). In most cases, the lawyer will contact the bank for a "final payout" number. As with the incoming money, this is typically done via electronic transfer in most cases. The bank will mail you a final notice indicating payout and closure of your mortgage account.
    3. Any fees for government documentation (fees vary from state to state and sometimes county to county), as well as property taxes
    4. You, the seller (check or wire transfer, depending which you prefer)

In all honesty, this is an easy process (aside from the wrist cramp)

How hard would it really be to sell the house?

Ah, there's the rub. This depends a TON on variables you can't control

  • The local real estate market demand
  • The broader economy
  • How desirable your house is

The risk you take in buying a house is getting the equity back out when you sell. If you buy a house and mortgage the full amount, over time the amount you owe on the house goes down (slowly at first, since that's how mortgages work). After, say, 10 years you'll own a decent chunk, which you'll want to get out if you move. As such, you need to find a house that you not only want to live in, but one that can be sold again later for at least as much as you paid for it.

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