Pressing The Reset Button On Our House

Let's Go Back in Time

One of the biggest beefs that I still had after discovering my budget saviness, paying down debt, and changing the direction of my family's finances was my mortgage.    When I purchased our house back in 2010, I did what most "normal" people did and what most finance sites tell you to do.  I purchased our house for about $89k on a 30 year mortgage.  I knew something was wrong with this when I signed the forms and saw that if I waited 30 years to pay off the house, I'd be paying $80,000 in interest.  Interest!!!  So I'd be paying in total about $172,000 total after 30 years of payments.  Does that sound smart?  But I was a young man so I didn't know any better.

What Changed?

Now that I'm budgeting my money and have control over my spending, I have the flexibility to better understand and control what goes towards my house.  In my previous blog when I laid out typical percentages for what you should be spending towards housing, I put that a maximum of 25 - 35% of your take home pay should be going towards your house.  So if your making about $50,000 and bring home about $3,500 a month, you could handle a $875 a month mortgage payment easily.

I did the math and noticed that I could afford to put in my budget for housing much more than what I was spending.  My mortgage was only about $731, but it was over 30 years.  That's the draw of the 30 year mortgage to a lot of people, the payments seem really low.  But the interest you pay makes up for it.

Mortgage Reset Button

There's a lot of talk in the finance world about interest rates rising, falling, stagnant, etc...  But to us common folk, we need to break it down.  The interest rate is the rate at which you borrow money from the bank to purchase your home.  Similar to credit cards that have interest rates, mortgages also have interest rates.  The less the interest rate, the less that you owe back.  The interesting thing is that interest rates go up and down.  So the interest rate that you had when you purchased the house isn't the same one that you necessarily could have now.  So that's why we have mortgage refinancing.

Refinancing is the mortgage reset button.  It's saying to the bank, "Hey, I see that interest rates are smaller now, and I want that rate instead of the one that I have now"  This is typically done to reduce the amount of monthly payments for your mortgage or amount of interest that you will end up having to pay for your mortgage.  Thousands of people have done this in the recent years because after the housing crisis that caused the recession, interest rates on mortgages dropped drastically.  Many people used to have 7% interest rates and they were able to refinace to get around 3 - 4% rates.  That's a big difference.  Wouldn't you want to go back press reset on your mortgage and change it if you could?

Let's Get Weird

So Mrs. Budget and I considered moving to a bigger house.  We decided to stay in our current house for some time because I recently started a new job.  Also, we now have Budget Baby #4 coming, so it's better to have some consistency in the Budget Household.  So an opportunity appeared to fix that lingering pain in my finances: the mortgage.

So I decided that I don't want to make payments to the bank for 30 years and I don't want to pay $80,000 to the bank in interest.  I did some research and some math and decided to get really weird.  The Budget Family decided to change our mortgage from a 30 year mortgage to a 10 year mortgage and from a 5% interest rate to a 3.25% interest rate.  We signed the paperwork on Thursday so it's official now.  Do you know how much money this is going to save us?  If I don't pay extra on top of my mortgage to pay it off quicker, I just have to pay $15,000 in interest.  This is a savings of 20 years and $65,000 of interest.  I would gladly love to keep that $65,000 for myself and not give it to the bank.  Now it's true that my mortgage payment will be going up.  So instead of $731, my mortgage is now $1,056.  But remember the 25% of take home pay.  We're still within that number.  So budgeting allows me to understand that I can take the increase in payments.  Again, that's the beauty of budgeting, it allows you to make these types of decisions and know that you're in the position to afford it.

I know some will say that you can easily just make extra payments on top of your mortgage and treat it like a 10 year mortgage.  That sounds good in theory, but then life happens and most people don't do it.  They make other things their priority and they don't pay extra on their mortgage.  It's like when we talked about tithing, you have to be very intentional about it.  So to me refinancing our mortgage to a 10 year mortgage forces us to be intentional about paying it off quicker.  I'm even planning to make extra payments on top of what I'm supposed to do to get it paid off in under 10 years.  I don't know many people not over the age of 45 who have a paid off house.  30 year mortgages are "normal", maybe it's time for all of us to be "weird".

There's other options other than a 10 year or 30 year.  There's a 20 year mortgage and 15 year mortgage as well.  I recommend 15 year mortgages for people to buy houses with a decent size down payment

I'll have to write another blog post about how to refinance your house and the details around that.  But I at least wanted to give the high level view of what we did and why we did it.

Question of the Day:

How much longer do you have on your mortgage?  Do you have the chance to cut that down?  How about cut it down in half?

Video/Song of the Day:

Until next time........Happy Budget, Happy Life