The US Census Bureau reports that in the United States, the average first marriage lasts just under eight years. My first mortgage (one year into my marriage) was scheduled to last thirty. Thirty! I only know two people who’ve been married that long—my grandparents—and they’re married to each other! (So do they count as one?)
I don’t know about you, but every day that I wake up still married, I’m thrilled. Every day I wake up with a mortgage… well, notsomuch.
I’ll never have another thirty-year-mortgage
Yes sir, I would like this house, no, I cannot afford it. Sure, over thirty, forty or eighty years, I imagine I could come up with enough dough to pay it off… provided I don’t loose it in the divorce. If I’m lucky, I might even die before the balance is due—then my kids can worry about it. I’ll even be able to take that spiffy mortgage interest tax deduction last a really long time—provided I stay broke and never make enough money that I’m not allowed to take it.
Five years into our marriage we wised up and decided to be rid of this mortgage. We refinanced into a 15 year mortgage, and are sitting at just a hair above a 4% interest rate. With a few extra snowballs, we think this mortgage will be history in seven years. Now that’s a reasonable number.
Homeownership is the American dream, but a lifetime of debt is not
In future home purchases, I’ll be “acting my wage” as Dave Ramsey likes to say. I don’t ever want to undertake a debt that has a substantial chance of outliving myself, my kids, or my marriage.
When we first jumped into this grand homeownership adventure, we hadn’t done the math to realize just how ridiculous it was.
We purchased our home zero-down, five years ago with an interest rate of a screamin’ five percent.
I pulled out our original loan paperwork today and found our purchase price and our cost of financing from the original 30 year loan.
The sum of the finance costs and interest are equal to 120% of the actual purchase price of our home. (This shouldn’t be a surprise to me—everybody gets a 30 year loan, right?)
If I went to buy my house again and had a zero-percent loan but was asked to pay a price $300,000 higher, I’d tell the realtor to kiss my rosy red… um… checkbook… goodbye!
My new 15 year loan is charging me 42% of the mortgage amount. In these terms, even this sounds like highway robbery, but realize that most people are in the earlier category!
Before accepting a loan, you should really bust out your calculator and go over that TILA report in the mortgage package.
The most powerful force in the universe
Albert Einstein was once asked by a journalist if he thought that gravity was the most powerful force in the universe. He replied by informing the well-intentioned journalist that the most powerful force in the universe was actually compounding interest.
This tricky little equation didn’t get us in debt, but for many of us, it keeps us there.
A thirty-year mortgage keeps compounding interest until the bitter end. The very roots of the term mean “death pledge” . Here’s to hoping I’m back here in a few years explaining how I’ll always pay cash for homes—because even 15 years is too long to be chained to a “death pledge.”
Disclaimer: No marriages, mortgages or realtors were harmed in the making of this story.
{ 6 comments… read them below or add one }
Great post and really good food for thought, especially when you throw in the divorce numbers, I was only with my ex for 4 years or so, but I have the mortgage from the houses (yes multiple) for the next 30 years. Thanks for putting it all in perspective.
Oh Dawn! The ex left you with MULTIPLE mortgages? What a pain!! I’m not sure if I enjoy the new perspective I have on mortgages. It’s kind of an “igornance is bliss” scenario… but I guess I’m glad to know better now.
Socking it away for 10 years will allow most people to pay cash for a modestly priced house. Ask yourself — what have you been doing for the past 10 years? I am not sure why most people don’t run the numbers. Perhaps rent is unaffordable and they can’t save anything? High earning folks need the mortgage interest deduction. Other than that, I can’t think of any other reason to make the bank’s richer.
Good for you! What a smart move…. Last night I wrote a post on exactly this subject, which isn’t scheduled to go up until August 4. I definitely will have to link to yours!
Jessica, great article. As a real estate broker, I once had a lender give me an article about how the 30 year mortgage came into existence. Prior to the 30 year mortgage most people paid cash, bartered or got a 15 year mortgage. The 30 year mortgage actually came about for people that had less chance of getting a mortgage and it penalized them heavily for this. It wasn’t long before rising home prices and the fact that this mortgage had been around for a while that it became the norm.
Because you wrote this article, now I am going to have to go though all my stuff and find that old article, I know I kept it. One of the very interesting facts in the article was that, if you keep the 30 year mortgage for the whole 30 years you actually pay the interest you agreed to pay. BUT if like 99.9% of the population you keep it for less time, the interest you pay is actually MUCH higher. As you know by looking at any amortization schedule your first payment is nearly all interest and each payment afterward your interest decreases slightly and as you pay a little more principal. So your homework is to imagine if you will, if you were to keep your home for the average 5 to 7 years how much your interest payment actually is. For example if your loan was a fixed 6% but you only kept that 30 year loan for 5 years your interest actually paid is probably triple digits. Yes, not only true, but it is sobering. Get an amortization schedule and calculator and figure it out for yourselves. See how much interest you would pay in the first 5 years. What is the true interest you would have paid? I will say this again because it is so important to understand. A 30 year fixed rate mortgage at say 6%, is only 6% if you keep it for the entire 30 years. The less time you keep the loan, the higher the interest rate truly is.
Do the math and you will be shocked!
@DPease, what a great thought. I really hadn’t considered the net annualized APR. Dear Heavens Almighty, I shudder to think what we’d paid. I don’t think I’ll figure it out, as I really don’t want to know. (Our first mortgage was zero down, and we kept it for five years).
Yes, I do believe now that I’m forever in “cashland” (Or VERY short term mortgages) when it comes to these major purchases. Even a low interest rate on these large purchases is a HUGE load of money. Granted, I don’t know where you are, but where I’m at a good “starter” condominium (about 900 sq feet) is running $200K, so it’s a long haul to come up with that kind of money too.