So I’m trying to buy my first house down here in San Diego. The markets gotten so low that you can find 2 bedroom condos for under $100,000. A couple weeks ago I found a great deal on a condo for $80,000, so I got a few quotes on home loans, which were right around $600 a month, for 30 years.
So the condo itself is a great deal, but if you do the math, $600 a month, thats $7,200 a year, makes it $216,000 over 30 years! :shocked Thats completely ridiculous to me, I’ll never come out even or ahead. Thats not even counting taxes and whatnot.
I’ve got a 700+ credit score, why in the long run, am I paying nearly triple what the condo costs? How can I cut that interest down? I can afford more than $600 a month, and I’ve been told if I pay it off faster - for instance $1,200 a month instead of $600 - that the interest would be less. How does that work, If I pay $1,200 a month for 15 years, I’ve still paid $216,000 for my condo :huh
Like I said, I’m new to this, so please be patient with me. I dont need sarcasm or insults. I’m here to learn
If this house is for you to live in, and you are paying under 6% on a mortgage, then what you are seeing is “normal”. All banks have to make money somehow. And seeing how much they make over 30 years, even at 4% interest, is amazing and yes its a lot of money. But you are not being scammed. If you want to pay less interest, pay cash for your house or make extra payments on it.
If this is for you to rent out, and your payment is $600 a month, rent it for above your costs (mortgage, taxes, insurance, maintenance, etc) - say $1000 or $1200 a month and you will make a profit.
tiznonay,
I, too, was shocked when I first learned about the amount of interest that was needed to pay off a loan.
A good way to think of it is that you are “renting money”. The first month you are renting $80,000. With your payment you pay a little principal off the loan, so the second month you are renting may $79,985. Renting that much money is really expensive!
If you get a 15-year loan you will pay much less interest. I also recommend getting a duplex or 2-on-1 as then you don’t have condo fees and you have 2 units to pay the rent money on your loan. The lower the interest, the less you pay.
There are numerous mortgage calculators, as well as amortization schedules, available on line. play around with one of them and try different scenarios.
No you will not pay the same amount of interst on a 15 year loan as you would on a 30 year loan or any variaion in between.
As MotivatedCEO stated, the amount of interest depends on how long you plan on paying for the mortgage. You are “borrowing” money. The longer you keep it, the more you pay :deal
I have seen numerous studies that show an abysmal amount of loans ever go to term. People are always refinancing, moving, etc.
If it helps, I do plan on living in the condo while paying it off . . . at least for now. Paying cash is out of the question, I’m only 25, im not sitting on any fortune, lol. Definitely gotta finance it.
So would getting a 30 yr loan and then paying double be a wise move? My goal is to actually pay off and own this condo, so after im done living in it, I can sell it (hopefully for much more than I paid) and buy a bigger house.
That’s smart buying a condo now, while the market is down. If you need a bigger place in a few years, after the market is better, you can probably sell it for a nice profit.
You can get a better interest rate by doing a 15 year loan, but your payment will be higher. Personally - what I would do - is get a 30 year loan and yes, pay double on it, or pay extra. That way IF you hit a hard time, say you get layed off from your job, you can drop your payment down to the lower amount for however many months you need to do it - until you get over your financial hardship.
Just curious. If the purchase price is $80K, how much of your purchase price will the lender finance? Most conventional lenders will only loan up to 80% of the purchase price. The difference has to be paid in cash at the settlement table.
I also wonder what is included in your mortgage payment. A $600 loan payment on an $80K loan amount over 30 years translates to 8.25% interest rate. If this is the case, then a 15 year loan might lower your interest rate to 7.5% but increase your monthly loan payment to $742 per month, whereas paying extra on the 30 year loan so it is paid off in 15 years will take $776 a month (you have a higher payment because of the higher interest rate).
The difference between 360 payments of $600, and 180 payments of $742 (approximately $82800) is the amount of interest the 15 year loan will save over the life of the loan vs the 30 year loan.
By the way, if you have the 30 year loan with a $600 loan payment, adding another $600 per month to your monthly payment will have your loan paid off in 7.5 years. After that, you will have an extra $1200 a month that you can put towards your investments.
What my wife and I did for our first home was to print out the amortization table for our mortgage loan and for each payment add the next payments PRINCIPAL ONLY to the payment. In the beginning of the loan this is a relatively small amount, but gets bigger over time. Each extra PRINCIPAL ONLY payment kills one payment from the end of the loan and you can pay extra payments as you have the money or even pay multiple monthe PRINCIPAL ONLY amounts. BY sticking to the amortization table you know exactly how much you owe and how many more payments are left on the loan. IF you do exactly one extra payment each month you will pay off a 30 year loan in 15 years. We paid off or 15 year initial mortgage in 7 years and saved a ton of interest and then saved to buy our initial investment property.
You don’t buy a house (to live in) to make money. You buy a house to live in because you want to live that lifestyle. You love the schools the park down the street the market on the corner. You want your family to live there. You want to raise your kids in that neighborhood. That is why you live where you live and buy the house you live in. After your life situation changes like you retire or add kids you may want to sell it and move using the proceeds of the house. But that is more like a piggybank than an investment. You paid $80,000 for the house with equity of $20,000. When you sell it you get that $20,000 back after the mortgage is paid and put that down on another house. Rinse and repeat. The residential house stores the money you pay each month and that note pay down coupled with appreciation gives you money to put down on the next house and so on. You are not going to get rich by living in a house or condo.
If you want to make money with that condo, rent it out for $1,500/month and take the extra $900/month add it to your income and instead of buying a condo to live in with a note of $600/month you can now afford a condo that has a note of $1,500/month. That is a condo that is twice as big. You used the real estate to enhance your lifestyle and afford something that you on your salary alone could never afford. Better yet buy 5 of them and live in a house or condo that has a note of $5,000/month. That condo is twice as big with way nicer fixtures and amenities. See how real estate enhances your life?
That is what we do here. We make money with real estate to enhance our lifestyle.
I am guessing that some landlord, who wants you to be a renter forever, told you this line of BS. And you bought it without questioning its accuracy. Let’s run some numbers.
Historically, up until 2006, the median priced home doubled in value about every ten years. At this rate of appreciation, your $80K property will be worth $640K after 30 years.
But, you argue, we are not in normal times. Historic norms are not valid in today’s market. Property is not appreciating at 7.2% per year and probably won’t for quite some time. OK, I concede that, but over time, we will see some appreciation in value.
What if we pessimistically assume that appreciation will average just 5% over the next 30 years. A 5% average annual rate of appreciation makes your property worth $345,755 in 30 years. Even if you are more conservative and assume appreciation will average just 4% over the next 30 years, your property will still be worth $259,741.
You can’t say you will NEVER come out ahead. When you factor in the tax savings you could get with the home mortgage interest deduction over the life of your loan, not only do you make money with appreciation, but the federal government will refund you $34000 (if you are in the 25% tax bracket) of the $136K you will pay in mortgage interest over the life of the loan