Monday, February 27, 2012

My Thoughts on...Home Mortgages

Home mortgages are a rip-off. Working in combination with credit cards, I believe they are the reason national mega-banks have the biggest buildings in major metropolitan areas. These “Goliaths” have built their empires off the backs and dollars of the uninformed and unprepared public. But rather than rant and rave like an “occupier,” I’m going to offer my anecdote: informing and empowering the same public so that we can make the best decisions for ourselves.

Personally I will never pay anyone or any entity another penny in interest ever again. I do not and will never borrow money again for the rest of my life. I cannot stand the idea of adding a monthly payment on top of paying interest rather than investing and making interest for myself.

I will admit though that most people are not as fanatical as I in their hatred of debt. So in an effort to inform I will play the “if I were to take out a mortgage” card. My ultimate goal would be to pay as little interest as possible. Arm(s), variable rates, balloons and jumbos are all out of the question. I would want to control as much as I can every month which includes the interest rate paid and the monthly minimum payment. Sure rates are at historic lows today, but why would you want to buy a variable interest rate loan when rates are at the bottom? Because take a wild guess at where they are going to go?!

Dave Ramsey advocates only taking out a 15 year fixed rate mortgage, putting at least 20% down and having monthly a minimum payment that does not exceed 25% of your household take home pay. Personally, I advocate as well with “The Ramsey Way,” but would recommend putting as much as humanly possible down. Also, when shopping for a mortgage, use fees as a screener to filter who you want to buy your loan from. If the geniuses at a bank have an option for bi-weekly payments and want to charge you a fee for the privilege, then kick them to the curb and look for someone not trying to take advantage of you. The goals here are simple: pay as little interest as possible and pay little to no fees. Putting at least 20% down helps you avoid PMI (prepaid mortgage insurance), but don’t let these bastards pick at your pockets all the way home. Between the costs associated with inspections, land surveys, appraisals, home insurance, replacement costs and earnest money, the last thing you need is the mortgage provider nickel and diming you to setup a “special payment schedule.”

Why a 15 over a 30 year fixed rate mortgage? In two words, interest savings. Using Dave’s handy-dandy mortgage calculator we’ll take a look at a $200,000 mortgage, using fixed rates as of today from a nation-wide mortgage lender. As of today, a 30 year fixed stands at around 3.75% If taken out today, paying monthly minimum payments of over $900, when everything is said and done and the balance stands at 0, I would have paid $133,446.41 just in interest to the lender on top of the principal borrowed: this is not a smart plan. So you see, it’s in the lender’s INTEREST to chain you inside a 30-year mortgage. The illusion of paying a lower monthly payment versus a 15-year mortgage generates more income for the lender thanks to the power of compound interest. The end result is that I ended up paying $333,446.41 over 30 years for a $200,000 home.

Onto the 15! At the same lender a 15 year fixed rate mortgage stands at 3.125% Monthly minimum payments went up to over $1,300, but the total interest paid when the balance hits 0 having only paid monthly minimums is $50,782.98
The difference between a 15 and 30 year loan on the same amount borrowed is over $80,000!!!

The last piece that I want to touch on is a myth regarding qualifying for a home mortgage if you live “Ramsey.” Yes, if you live “Ramsey” you have 0 credit cards, paid off your student loans, buy used cars, and disdain all forms of debt. So yes, a mega-bank that uses a credit score lending for dummies approach to their business will turn you down. Who will lend to you? Responsible lenders that do actual underwriting in their lending business. This means they look at meaningful financial details in your life like: historical payments on utilities and rent, your income over the past few years and that you are not taking on too big of a loan. This mean’s that you will end up shopping around with responsible regional banks, local credit unions and community banks: I.E. ENTITIES SMART ENOUGH TO STAY AWAY FROM SUB-PRIME LOANS AND LEND TO RESPONSIBLE BORROWERS.

Which is now you J

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