Morningstar posed this interesting question on its website recently, "Are you paying extra on your mortgage?" And it attracted some very interesting comments. The following is my answer.
My wife and I bought our first house in 1990. It was not a good time to buy. We were in a market with very high demand. Home buyers were actually camping out in front of new homes to have any chance to buy before home builders sold out their inventory. Interest rates were high (10%ish) and home prices were also high so we bought a home that had been a rental for years. It was in rough shape.
We replaced the roof, remodeled the kitchen and one bathroom, replaced windows and some doors, painted inside and out, landscaped, etc. Incidentally, we did this right after we were married. That was not a good idea and is a story best left untold :o). As luck would have it, home prices almost immediately started to fall about a month after we moved in. Great timing Ray!
We could only put 10% down on our loan so we had mortgage insurance, as well as, those high variable interest rates. We hated the idea of paying mortgage insurance. We thought it was expensive and it was insurance for the benefit of the investor (Fannie, Freddie, FHA, etc.), not us, so we started paying extra just to get rid of the mortgage insurance. Once we paid that off, we just keep on paying a little extra each month. We would also pay extra whenever we had a financial windfall, such as, a tax refund. I do not believe in total austerity so we would use some of the windfall for fun and some for the mortgage.
In 2000, it was time to sell! And it was not good. After ten years of ownership and many upgrades, our house appraised for less than our original purchase price. A lot less. Dang!!! We decided not to sell and turned our home into a rental. Another 5 years went by and the loan was paid off 15 years early. Still, our home was not a great investment. We did enjoy our home for 10 years, had some great tax breaks and still have it as a rental today, but we bought high and just made it work.
I think that when you buy a home, it is a time to be conservative. Buy something that is a little less money than you qualify for. Use a thirty year loan to get as low a payment as possible and lock in today's low interest rates. Once you buy, though, start paying a little extra every month. If you are lucky enough to get a financial windfall, use some of that money to pay extra on the loan too. If life gets difficult financially, just pay the regular payment.
Fifteen years goes by way faster than I ever thought and those extra payments really helped. If I had a crystal ball and knew tomorrow was going to be better than today, I would not be so conservative. But who knows what tomorrow will bring. Owning less on your home also brings flexibility. That flexibility can make all the difference.
If you are looking to buy or sell in Sacramento, Elk Grove or the surrounding area feel free to email me at ray.hensonca@gmail.com or call at 916-689-8414.
If you have questions regarding loan modifications, short sales and foreclosure options, an attorney from our office will provide a free one hour consultation to discuss your options.
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