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I just graduated college last year, and was looking to buy a house. Clearly I wouldn't be able to buy it outright, so I was thinking of getting a mortgage. I have a steady job (~$55,000 annual before taxes) and an okay credit score (~740). Here's the deal that a mortgage consultant gave me:

$2,000 per month for 30 years on a $300,000 home (he didn't mention any other fees)

It seems terrible to me because it comes out to a total of $720,000 over that 30-year period. I'm completely new to the concept, so maybe I'm just being naive.

  • 13
    Did the scammer tell you the rate? – JoeTaxpayer Jul 6 '16 at 2:45
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    Does that per-month include property taxes or similar? Or solely for the loan itself. (Most of the time, in the US, you pay one payment per month which includes the mortgage itself plus your property taxes, home insurance, and any other required payments such as mortgage insurance.) – Joe Jul 6 '16 at 3:00
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    If we have to include PMI, no/little money down, etc it could come out closer to $2000/month after escrow. I know also that some "First Time Homebuyer" programs make it 'easier' to get the loan, but will also make it more expensive. Also, as an aside, this seems like a LARGE purchase on this sized salary. It's probably over 50% of annual take-home pay, which most "budget counselors" would probably frown on. Not impossible, just leaves less wiggle room for savings, unexpected expenses, etc. – BrownRedHawk Jul 6 '16 at 12:34
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    Agreed with above. At your debt to income ratio on the house alone, you are probably seen as a higher risk (moreso if you are also servicing debts on student loans, a car, large revolving credit balances) and won't get the best rates. What are you putting down? How much other debt are you servicing ($/month)? Does $2000 include PMI, property taxes and insurance? – casey Jul 6 '16 at 12:41
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    Aside from $2,000/month mortgage sounding like a terrible deal I think you should re-evaluate your needs more modestly. Not sure where you live but in my neck of the woods (Central NY), a house like that would easily cost $1,000-$2000 per month in taxes in addition to the mortgage. You better get way more details from your broker or else you WILL be facing foreclosure within the next 3-10 years. – MonkeyZeus Jul 6 '16 at 17:18
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That seems a very bad offer, it borders on fraud.

In the current US economy, you should be able to get between 3 and 4 % APR (and that number is what you should look at). That means that for $300,000 over 30 years, you'd pay $1,265 to $1,432 per month.

If you are able to pay more than that monthly rate, you should go for less than 30 years - 20, 15, 10, whatever you can afford - but don't overextend yourself.

Google 'mortgage calculator' to do your own calculations.

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    fraud is a bit much... – quid Jul 6 '16 at 4:32
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    @quid: Fraud may be too strong a term, but it is a mortgage that is reminiscent of predatory lending that was prevalent pre-2008. – Bad_Bishop Jul 6 '16 at 12:34
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    I'd be curious if the 2k the OP mentioned is just the principle + interest. When we purchased our house in sept of last year, we were told the total monthly payment, but this also included property tax, insurance, and special property taxes. With all that included, our $170 k home runs about $1250 at 4.1% interest, so I'm not sure how a $300 k home would possibly run the same. – Sidney Jul 6 '16 at 14:19
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    Well, if they tell you the numbers up front and there is no attempt to deceive, I think by definition it's not "fraud". I just saw a news story about somebody buying an abstract painting that basically consisted of a blue stripe and a yellow stripe for millions of dollars. Personally, I'd put the value of that painting at pretty close to zero, but if the buyer knows exactly what he's getting and agrees to pay that price, it's not fraud. It's just crazy. – Jay Jul 6 '16 at 14:21
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    I guess it depends on the country and laws. In Germany, if you sell something for significantly more than the usual value, abusing information deficit or weak position of the buyer, it is considered 'Wucher' (usury). Typically, 2.5 times is the line where courts of law consider this reached. Of course, that applies only to goods with an 'usual price', not singletons, like art. In this example, that threshold is reached for the lower limit (at 3%), so I said 'it borders'. And yes, Fraud is not Usury; I stand corrected. – Aganju Jul 6 '16 at 14:36
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I'm calculating that to about a 7% apr, which given loan rates available today seems a bit high.

I wouldn't get too caught up on what that equates to over the life of the loan. There are a lot of forces in play over a 30 year period, namely the time value of money. 30 years from now a dollar will be less valuable in real terms due to the forces of inflation. At 2% per year in inflation today's $1 will be worth about $0.55 in 30 years.

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    Inflation and the time value of money are separate forces, and they're both a factor. Inflation is a factor, as you say, because some of the mortgage payments will be in "future dollars" rather than "2016 dollars," and future dollars won't be able to buy as much stuff. Time value of money is a separate factor based on the principle that the market generally agrees that a promise of "stuff today" is worth more than "stuff in 20 years." That's generally true even if it's the same amount of stuff, so inflation can't account for that difference. – Mike Haskel Jul 6 '16 at 13:58
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    Also, it's worth bearing in mind that the current economic trend, due to aging populations worldwide reaching retirement age in increasing numbers, is strongly deflationary, and that central banks throughout the world have been struggling desperately (and mostly fruitlessly) to artificially create inflation ever since 2008. This is something that's not likely to go away until the Baby Boomers start dying off. – Mason Wheeler Jul 6 '16 at 14:18
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    "paying back 2x" over 30 years is not bad if you consider that consumer loans get there in just 3-5. +1 for don't get caught up on sum over the life of the loan. Subtract costs of renting a similar property. – Agent_L Jul 6 '16 at 16:04
  • @MasonWheeler, He gets the house and the utility of the house today and he gets to pay interest with future money. "There are a lot of forces in play over a 30 year period," hell, he could refinance in 10 and change the whole game, or maybe his neighborhood sees a boom and he sells. Getting caught up on the total number due over the life of a mortgage is a waste of energy, imo. – quid Jul 6 '16 at 17:04
  • @quid Again, "paying interest with future money" is only a good deal if future money inflates, which is counter to the current natural trend, a trend that is currently growing stronger, and is likely to persist over a good deal of the next 30 years. – Mason Wheeler Jul 6 '16 at 17:11
12

Some part of the payment is probably also going for tax escrow, insurance payments, probably PMI if you aren't putting at least 20% down. Get a complete breakdown of the costs.

Remember to budget for upkeep.

And please see past discussion of why buying a home at this point in your career/life may be very, very premature.

  • There is also the fact that at his age his income might be a lot more in a couple years. I bought my house at a young age when making 40k, and within a few years was making double. I was glad I got the house that was probably initially over my budget because I would have upgraded something smaller, incurring a lot of expenses for selling and moving. – blankip Jul 6 '16 at 17:59
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    @blankip - when I got my first job making decent money, the company folded within a year and since there were limited job prospects there for a guy with less than a year of real-world experience (along with a depressed economy), so I moved across the country to find a new job. That would have been much harder if I owned a house. Unless you're locked to an area due to other factors, buying a house reduces your options if you need to change jobs. – Johnny Jul 6 '16 at 21:13
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The key question is whether this number includes taxes and insurance.

When you get a mortgage in the U.S., the bank wants to be sure that you are paying your property taxes and that you have homeowners insurance. The mortgage is guaranteed by a lien on the house -- if you don't pay, the bank can take your house -- and the bank doesn't want to find out that your house burned down and you didn't bother to get insurance so now they have nothing. So for most mortgages, the bank collects money from the borrower for the taxes and insurance, and then they pay these things. This can also be convenient for the borrower as you are then paying a fixed amount every month rather than being hit with sizeable tax and insurance bills two or three times a year.

So to run the numbers:

As others point out, mortgage rates in the US today are running 3% to 4%. I just found something that said the average rate today is 3.6%. At that rate, your actual mortgage payment should be about $1,364. Say $1,400 as we're taking approximate numbers.

So if the $2,000 per month does NOT include taxes and insurance, it's a bad deal.

If it does, then not so bad. You don't say where you live. But in my home town, property taxes on a $300,000 house would be about $4,500 per year. Insurance is probably another $1000 a year. And if you have to get PMI, add another 1/2% to 3/4%, or $1500 to $2250 per year. Add those up and divide by 12 and you get about $600. Note my numbers here are all highly approximate, will vary widely depending on where the house is, so this is just a general ballpark. $1400 + $600 = $2000, just what you were quoted.

So if the number is PITI -- principle, interest, taxes, and insurance -- it's about what I'd expect.

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    This is the only answer that makes any sense, IMHO. Without knowing PMI, HOA, Property Tax, and insurance - nobody knows. If the mortgage consultant is a decent person trying to explain things in an easy to understand way - than 2k per month for a 300k house that includes those things might be a great deal. – Rob P. Jul 7 '16 at 1:54
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The price of the loan may be justified if you're considered a high-risk applicant for some reason (e.g. you're putting very little money in initial payment), and if it includes all the associated expenses.

What is more relevant to your situation is that you're probably better off renting. Think about it: your $300'000 house will require some repairs in those 30 years (let's estimate those at $100'000). That means in 30 years you'll build $200'000 of equity spending $720'000 on it. Of course this assumes that the value of the house will remain constant. You're effectively be throwing away $520'000, or more than $1'400 a month. If you can rent a place for $1'400 a month or less, you'll build more equity by renting that place for 30 years and saving the excess money in a bank account.

If you consider the interest that money in your bank account will earn you (e.g. 3% annually), you'll build more than $200'000 equity in 30 years even if you spend as much as $1'650 on your rent and save only $350 a month.

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    having recently sold a home we were in for nearly 15 years, we ran the numbers for repairs, mortgage, etc and I can say without a doubt it was far cheaper owning than renting. Renting would have been about 4 times more expensive; and I have no idea which bank you're talking about but average rates for savings account is less than 1% – NotMe Jul 6 '16 at 20:19
  • Owning can be cheaper than the ting, if you're there for a long time. Under 5 years the unrecoverable costs loom much larger and, combined with making moving elsewhere much more difficult, makes buying a really questionable decision. If you think it's worth doing, make sure you have run all the numbers and can afford even the worst case. Remember the mortgage finance collapse a few years ago? Make sure you will be able to ride out something like that when it happens again.. – keshlam Jul 6 '16 at 21:22
  • @NotMe I bet you had better terms on your mortgage than the OP. I'm not saying renting is always better, but it seems it could be the case here, if the OP manages to rent under $1400 or so. Oh yeah, and my last savings account was earning me 2.5% interest (capped to €60'000 or so, but still). – Dmitry Grigoryev Jul 7 '16 at 8:08
2

I'm a visual person so the idea of a 30 year mortgage didn't make much sense to me until I could see it

[mortgage interest vs equity graph

This isn't exact but it's pretty close.

GREEN MEANS GONE!

The green Interest lines represent the money you're giving to the bank as a "thank you" for lending you a large amount of cash up front. As you've already figured out, that's at least the same amount as the price of the home!

TIPS TO BE SAVVY

As much down-payment as is reasonable.

  • 10% down means an additional 10% that you bite away from interest ie doubling money
  • Be careful not to put EVERY penny down, always leave room for a rainy day fund (3 months of payments) in case of a disaster or job loss, it's unfortunate but it happens when least expected.

Keep one eye on beating the interest

  • If you're a first-time home buyer check to see if you get a perc to buy. When I bought a home I was given an $8k benefit for my area!
  • If you can, specify an additional $100 of your payment to be applied directly toward principal. This could eat up to 5 years off your 30 year loan!
  • Advanced: Get an Adjustable Rate Mortgage which starts low (~50%) and eventually blooms (~150%) after a few short years. Pay the bloom amount from the beginning but put all the money beyond the minimum payment DIRECTLY toward principal. This is a simple move to chip away at the interest.

Best of luck!

  • You don't seem to have answered the question. – AakashM Sep 29 '17 at 8:18
  • Many times the most poignant answer is the one that leaves the OP with understanding more about their situation than they did before. I prefer this over "yes" "no" answers. – Jacksonkr Oct 1 '17 at 19:37

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