I’m Just Here for You

Real quick, listen up.

I’m gonna tell you why you pay money down on a house.

In this case, the house costs $200,000, and the best interest rate you are able to find currently is 4%.

Option A: Pay down 10% ($20,000) for a 30 year mortgage on said $200,000 home.

Option B: Pay down 0% ($0) for a 30 year mortgage on same $200,000 home.

Trust my math from here on out. It will be accurate within a dollar, just depends on how you round.

If you go with option A, you will have a minimum monthly payment of $855, which equates to $307,800 over 30 years.

If you go with option B, you will have a minimum monthly payment of $950, which equates to $342,000 over 30 years.

Seems like a no brainer, yes?

Paying $20,000 up front saves you $34,200 over 30 years.

Worth it?

Worth it.

Now, a slight twist:

Option C: Pay down 10% ($20,000) for a 15 year mortgage on said $200,000 home. Same interest rate (which isn’t realistic, it would be better than 4%)

15 year mortgage!

Option C would result in a minimum monthly payment of $1291.

BUT!

Over 15 years you would pay $232,308.

Recap:

30 year mortgage with nothing down costs you an extra $142,000.

30 year mortgage with 10% down costs you an extra $107,800.

15 year mortgage with 10% down costs you an extra $32,308.

Of course, these numbers include principle and interest only; also included in a real mortgage (at least in Alabama) would be insurance and property tax.

You can get them all combined into one payment in a thing called ESCROW, which stands for

Extremely Stupid Crap Really Outlandish Wonder…

That’s the best I can do… short time frame… you understand…

Anyway, money down?

You be the judge.

Don’t conform.

2 thoughts on “I’m Just Here for You”

  1. This is not cut and dry. The average American saves less than zero dollars per year. But let’s just be generous and say they save $1,000 per year. Would you recommend them paying RENT for 20 years before coming up with that down payment? Or would you take advantage of a 0% down program and own your home?

    Secondly,
    A very strong argument could be made for not putting that money down even if you have it. You could take that 20k and invest it and over 30 years it is going to average significantly more than 4%. A lot of wealthy people who can afford to buy houses with cash choose to get a mortgage for this reason along with the tax benefit.

    1. I would tell someone to rent until they could pay down on a house, yes. Remember that you don’t “own” your house until you’ve completely paid off the mortgage.

      I would argue the argument that you should invest in …. whatever you want to invest in …. rather than paying off a house. I would recommend both, and simultaneously if possible, but also remember that once your home is paid off it is an asset. In the case above, a $200,000 asset that hopefully has gained a decent amount of value over 30 years (assuming they paid the minimum, which I hope they did not). It’s not just 4% you’re fighting.

      As for the tax break, would you rather pay $1100/mo for a year and get a fraction of that back in a tax break? Or would you rather not pay $1100/mo?

      If I were wealthy (I am not), I would pay cash for a house. No question.

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