The Math of Mortgages
There's no way around it: mortgages are about money and numbers, so there's some math involved.
Lucky for you, we love numbers. So let's do this thing.
Show Me the Money
Let's say you want to buy a house. You drool over the $6.8 million Malibu McMansion with access to the water, but realize that what you can afford is a smaller and cuter house for $300,000 (it has more character, anyway).
Before 2008, if you had a good job and $50,000 to plunk down as a down payment, a bank would generally lend you the $250,000 you needed, and getting a 30-year fixed rate mortgage at 6% wouldn't be a big deal. You'd probably pay about $1,500/month with total interest over the life of the loan almost equal to the loan itself.
Today…you're going to have to work a little harder. You might need to dig deep into the swear jar to come up with more of a down payment or take out a mortgage with your spouse, the brain surgeon, to convince the bank that you won't take off with their cash in the middle of the night.
The Really Important Numbers
When you sit down with your nice, smiling banker, you may expect a quiet, civilized conversation. After all, this is someone who wears sweater vests and bowties without irony. But pretty soon you realize that this person is flinging numbers at you—huge numbers—and talking about ARM mortgages, amortization, and a bunch of other words you can't pronounce.
First tip: save yourself the sticker shock by checking out an online mortgage calculator to decide how much you can afford and what your monthly payments look like.
Once you actually sit down, there are a few numbers you will want to pay attention to:
- The interest rate. It might be 6%, 8%, or something entirely different. Even tiny changes in your interest rate can mean a lot of money, so bargain every fraction in your rate.
- The total loan amount (or principal). This is the amount you will need to borrow (and pay back) to pay for your house. If you need $300,000 to buy a home and you have $50,000 in savings to put towards it, your principal is $250,000, and you'll be applying the interest rate to that number.
- The mortgage term (how long you're going to have this puppy for). Mortgages can be 10 years, 20 years, 25 years, or 30 years. The higher the numbers, the less you'll pay each month but the more you'll pay in interest and the more gray hairs and dentures you'll have by the time you finally pay the whole thing off.
- Monthly payment amounts. What's the total amount you'll pay each month (mortgage insurance and every other cost included)?
These numbers will help you figure out whether you're in over your head. If the monthly payment is a few times what you pay in rent, you may be scrambling each month to pay. And if your mortgage term is really long, you'll end up paying more for your house overall. And don't forget: no matter how nice and low that monthly amount is, it doesn't include property taxes, maintenance, and new designer furniture for your place.
Doing the math now is a little painful, but it's a lot less excruciating than having your house taken away because you couldn't spring for the home loan.