I’ll be moving to Springfield Missouri with my fiancée in the coming months. The main reason for the move is that we simply can’t afford to buy a house here in San Diego. The cost of living is outrageous here and is very affordable in Springfield.
This will be my first home purchase, but I have a plan. I plan on buying a home well below my means and pay it off as quickly as possible. There are 3 main reasons I want to do so.
#1 – I want to save myself as much interest as possible on the loan. When you pay off a mortgage over the full term of the loan, you end up paying so much money in interest, that the house becomes an expense instead of an investment.
#2 – I want a paid off home that so that my family will always have a roof over their head. I am looking at the house as my safety net. There are many plans rattling around in my head for business ventures that I hope to take in the coming years.
Some of them are more risky than others. The up side is great, but as with all business ventures, so is the downside. If I lose everything trying to strike it rich, I want to at least have a house to live in.
#3 – There is nothing like owning your own home. There is a sense of accomplishment and pride in it. I realize that this is emotional reasoning and not in tune with the doing the most financially appropriate thing. However, this reason only plays a minor role compared to the more important first 2 reasons. Which are obviously financially objective.
I hope to buy a $130,000 house with a 15 year mortgage at 7% interest. The estimate for the interest rate is purposely overestimated so that I have some cushion. Hopefully I’ll be able to secure a loan for under 6.5% interest. A lot of the rate I will end up getting depends on how much the Federal Reserve raises interest rates in the next year.
The payments on this house will be $1169 per month. The plan is to make an additional prepayment to the principle of the loan of $1200 each month. Doing so will allow the house to be paid off in 5 years and 7 months.
When they home is paid off I will end up paying $26,600 in interest. This will save me about $48,000 in interest payments if I had paid the home off over the 15 years. To me paying $156,600 for a $130,000 home is a heck of a lot better than paying $230,300 for the same $130,000 home.
I would then be able to invest the interest money I am saving into other potentially more profitable investments.
There are people out there that would argue that doing so is missing out on a chance to earn more money. The say that the prepayments of $1200 would be better spent on stocks. However, there is no guarantee that the stocks will beat the interest savings of the prepayments. If you prepay, you are guaranteed to save the interest.
If you do plan on paying your home off as soon as possible. It is essential that you have a 6 month living expenses safety net set up. That is, you should have enough money in savings to life off of if you lose your job, or you cannot work for whatever reason.
The bank will not care if you have made prepayments, if you suddenly find that you cannot make the mortgage payments. That being said, you should already have the 6 months savings in your accounts.
Prepaying on your house is a guaranteed way to make you some money by saving you some interest. There are few investments out there that can offer a guaranteed return. This is one investment that you won’t lose any sleep over.