What would you say if I told you that the origin of the word “Mortgage” literally means “Death Pledge” (Mort=Death Gage=Pledge)? Might be cause to stop and think before getting one, right? One of the pillars of adulthood in western culture is home ownership. In general, it seems to be a good idea to own the place you live rather than renting for your entire life. However, when to buy a home is the big question for most people. The purpose of this post is not a “when to buy a home” post (I don’t even own a home yet). Instead, I did some research on the 30 year mortgage and I am simply sharing what I found. To be honest, the math is startling! I will also note that this post will not address the variable rate 30 year mortgage or 30 year mortgages with “balloons.” We will save those for another post.
Okay. Let’s say we have a family who hopes to buy a $160,000 home and they have $5,000 saved for a down payment. This family goes to the bank and is approved for a 30 year fixed rate mortgage at 4% interest. This means they will have a mortgage for $155,000. So, what will it actually cost them?
Monthly Payment: $739.99
Annual Amount Paid: $8879.88
Amount Paid After 30 Years: $266,396.40
Interest Paid After 30 Years: $111,396.40
In the above example the 30 year mortgage cost us an extra $111,396.40 above the cost of the home! This excludes fees that the mortgage company tacks on to the amount that you borrow. This also does not include Private Mortgage Insurance (PMI). PMI is insurance the bank forces you to buy for them so that they are covered in the event that they have to foreclose on you. PMI is charged until the bank has a 20% equity position on the property. In other words, until you have paid up to 20% of the home’s value, you will be paying PMI. Side note: PMI can be avoided altogether with a 20% down payment. PMI is typically about $100 per month for every $100,000 borrowed. In our example PMI alone would cost $16,785.02 over the life of the loan! Now, let’s consider the appraisal fee (~$500) and the lenders home inspection fee (~$250). At this point we can update our cost list:
Monthly Mortgage Payment: $739.99
Monthly PMI: $148.54
Annual Mortgage Amount Paid: $8879.88
Mortgage Amount Paid After 30 Years: $266,396.40
Total Interest Paid: $111,396.40
Total PMI Paid (Paid until 20% or mortgage gone): 16,785.02
Appraisal Fee: $500.00
Lenders Home Inspection: $250.00
Total Cost: $283,881.42
Cost Above the Initial Home Value: $128,881.42
The 30 year mortgage cost us an additional $128,881.42! We could have bought our initial house and another one just like it with a few less amenities! If nothing else, this example illustrates that the 30 year mortgage is designed to benefit the BANK! Not to do you and I a favor. Just something to think about.