It’s the new year. Among the plans you make for the coming year, good financial choices should be in the mix. This post will save you thousands of dollars if you act on it.
Why is your mortgage important as a person of faith?
1. Good stewardship. It is a central principle for people of faith that everything belongs to God. “The earth is the Lords and the fullness thereof.” (Psalm 24:1) We brought nothing into this world, and we can take nothing out of it. We just get to use it for a short time. We are but stewards, managers, of what we have been given on this earth.
2. Generosity. For those who practice believe in the spiritual practice of generosity, managing our resources well means we have more to give. Being a good steward makes generosity possible. In a world where thousands of people start to death every day, giving matters. Generosity is the polar opposite of self-centeredness, and a sign of spiritual maturity.
3. Usury. Interest is a way for people who have money to make money by loaning money to people who want it. A loan at interest can be handy in a pinch, but it’s terribly tempting, given our propensity for greed, and has great potential to get us in a lot of trouble. Debt is not your friend. The debtor is the slave to the lender. Charging interest (the foundation of our economy) is criticized heavily in the Bible. Do it if you have to, but when possible, find a way out. It’s better to save up the old-fashioned way than to be hopelessly mired in debt.
4. Enlightened self interest. The less I spend on my mortgage, the less I spend paying interest to the bank, the more I have for my family, for food, for my kids’ college education and so on. We must be wise as serpents, yet innocent as doves.
This is why, if you a going to buy a house, or refinance a mortgage, you need to consider a 15-year mortgage.
If your monthly payment would be the same either way, would you rather pay a mortgage for 15 years or 30 years? It’s not a trick question. Everyone should answer 15 years. You would end up paying half as much. Skeptics will say, if my payments are twice as much in a 15-year mortgage, I might prefer to spread it out. The thing is, in the real world, your payments will not be twice as much for a 15 year mortgage. And your total payout will be thousands of dollars less. One reason: compound interest. Watch.
Let’s say you purchase a house for $300,000, the median sale price for a home in 2015. You put down 20% or $60,000, so you’re financing $240,000. You get a 30-year mortgage at 4% interest (the average rate at the end of 2015). Lets leave out property tax for simplicity. You’ll pay that no matter what your mortgage is. Also, we’ll assume no PMI (mortgage insurance) since you have 20% equity. Here’s what you’re looking at:
30-year mortgage at 4%
Monthly payment: $1146
Total payments over 30 years: $412,487
Total interest paid: $172,487
Now, let’s assume you get a 15-year mortgage instead. Your interest rate will be a bit better: 3%.
15-year mortgage at 3%
Monthly payment: $1657
Total payments over 30 years: $298,331
Total interest paid: $58,331
Notice several things. First, instead of paying $412,000 for your $240,000 mortgage, you would pay $300,000. That’s a savings of $112,000. You’re paying $112,000 for that 30-year mortgage. What could you do with an extra $112,000?
Second, the interest you pay for the 30-year mortgage is $172,000. The 15-year mortgage interest is about one third of that: $58,000.
Third, you will own your house in 2030, rather than 2045.
Finally, your 15-year mortgage payment would not be twice your 30-year mortgage payment. It’s 46% more, or about $500/month more.
Now, $500/month is a chunk if you’re young and getting by on a lower salary. That’s a car payment. It can be a challenge when you’re pinching pennies. But it’s worth it. And, if you can’t afford a $1600/month mortgage – if all you can afford is an $1100/month mortgage – then consider getting a less expensive, smaller home. Why give your money to the bank?
Your total cost for housing, including rent or mortgage, property taxes, insurance and so forth should be no more than 35% of your income. I would recommend more like 25%. Your 15-year mortgage payment, with 1.2% property tax goes up $300 to $1950. Figure $24,000/year. $24K is 35% of a combined household salary of $68,000.
Imagine two sisters, living in the same neighborhood. One gets a 30-year mortgage. The other tightens the belt and gets a 15-year mortgage. Now fast forward 15 years. The first sister owns her house free and clear. She now has that money to spend, or give. The second sister has 15 more years ahead. Which sister do you want to be?
As your setting your goals this year, and for the years ahead, think smart. Save ducats. Then give generously. 15 years from now, when you have no mortgage, you will be thankful.
Here’s a link to a budget form you can use to plan things out.
Here’s a Dave Ramsey video on being a good steward of your automobile choices too. Nine times out of ten, Rasmey says the problem is people are spending too much on their car, or financing their car, a depreciating asset.