I have been debating as to whether or not to make this article. Obviously, you can see the direction I went on this one. I found an article in Business Insider talking about this, and it relates to what we have done recently and how we approached buying this home.
The premise of the article is that, after studying 10,000 millionaires, that you should buy a 15 year mortgage when you buy your home, and even then try to pay it off early. If you do the math, it’s clear that you spend a lot of money on interest that you could keep if you take out a shorter loan.
The Article Avoids
What the article does not talk about is that to do that one must buy a smaller home. This is certainly not what most people want to do. My wife and I wanted to buy a house we could afford on one salary. While neither of us had anything specific to worry about regarding our jobs, we are both careful people. We have nearly a 1 year long emergency fund. Most folks in this community would call us nuts for that alone, but it’s all about your risk tolerance and piece of mind. All in really means in our case is that we will need to save a bit more, for a bit longer, so that we can retire.
Freddie Mac has an article where they suggest what we did and our advice. The thing is that this approach requires a lot of self control. We took out a 30 year mortgage with the specific intent of paying it off early. We have made multiple extra principle payments as and when we could, along with extra monthly payments as our budget afforded. Generally, the principle payments were annual and quite variable. We have been in the home since 2012. The monthly payment has been fixed, but has increased with our salaries.
That’s getting a bit ahead of ourselves, though, you see we also bought a house that was much less expensive than we could afford. We also put 23% down. 23% worked out to be a round number, but the percent was high. Of course we did not want the extra tax of the mortgage insurance. It was harder to buy less of a home than either of us wanted, but it was, and has proven to be the best option. This is another point where the discipline comes in.
The Meat of my Position
When you set out to buy a home that you can pay off in 15 years or so, and we are more or less on target for that, you have to buy less of a home. Your amortized interest and principle payments are greater even as your total interest bill is much less. This means that you are buying a cheaper home than you would otherwise have purchased. This fact alone will save you money on all the other ancillary costs that go with it. A smaller home is cheaper to heat and cool for instance. The outside will be less expensive to maintain, and in general there will be less to go wrong with it; assuming the quality of both theoretical homes is the same.
What Freddie Mac mentions in their article is that you can pay off the 30 year mortgage at any time without penalty. That is a good thing. According to them, this is a US only option. So, hooray USA for getting this part right. They also talk about putting down only 3% and making payments for the rest. That is nuts, but hey you can’t expect a quasi governmental organization like Freddie Mac to have all solid advice.
We will have saved over $100,000 over the course of the roughly 15 years that our loan will be for thanks to the large principle payments we have made along with the extra monthly principle payments. This is in line with the Business Insider article’s points.
The other points of the article is that the author found that most people who are millionaires, I assume in the US, own homes that are less than the national average of $205,000. We are millionaires, collectively, and our home is north of double that. We of course live in the NYC suburbs, and so this is normal. To give you an idea, my father was a union worker for AT&T for 32 years, and we lived in a home that sold for about $400,000. It remains worth that much today, as my parents were lucky enough to sell at the peak of the last bubble. The point, though as mom did house cleaning and clerical work, is that an average blue collar family in the high cost regions of the US can in fact become millionaires. I still had to join the military to pay for college, but that is another story. That house was purchased in 1973 for $22,000, but interest rates then were very high compared to today.
My Primary Point
The primary point here is that there is some easy advice. You should buy as much home as you can afford, but define afford as something you can pay off in 15 years. If you live in the US, then you can get a 30 year mortgage, but you need the discipline as we have had to pay it off faster. We saved more than we expected, and took capitol gains to pay down that mortgage in the big chunks, holding the securities longer enough to avoid short term capitol gains taxes.