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Mortgages seem simple enough, especially after the mortgage crisis winnowed the field of lenders, changed the standards for borrowers and gave everyone in the business a cold, hard reality check.
However, unbeknownst to many prospective homeowners are several key facts about mortgages that range from tangential to crucial. In short, there is far more to borrowing $200,000 to buy a house than you probably know. Here are three facts about a typical $200,000 mortgage that might shock and surprise:
1. That bank that lent you the money will probably back out of the agreement soon after your mortgage is processed.
Sure, you might still make your payments to Chase Bank or one of the other giants for a few months’ time, but in many cases your mortgage will be sold to an association of mortgage investors, such as Fannie Mae or Freddie Mac. In fact, your mortgage could be sold several times over the course of your agreement. That shouldn’t cause you any problems, but it could make re-financing a challenge as you have to start at zero every time you begin to interact with a new mortgage servicer. Fortunately, and many would say ‘unfortunately’, the federal government has enacted all sorts of safeguards, most notably the Dodd Frank Law to save you from getting into trouble. If you ask many in Washington they would claim the entire industry was cleaned up. The jury is still out on that! So, don’t go getting too sentimental about your mortgage. You might not have a very long relationship with your mortgage servicer if the mortgage contract is sold several times during its duration.
2. Nearly half of your monthly mortgage payment could be going to interest over the next 30 years.
First of all, most people don’t realize that even though they have an amortized loan (meaning equal payments over the next 30 years), that a huge chunk of those payments early in the agreement will NOT go towards their principal. Early in the loan, most of your payments will go towards interest charges. Later in the life of the mortgage contract, more of your payments will be applied to your principal as the interest charge decreases when more principal is repaid. By the time you reach the end of your mortgage agreement, most of your payment will go toward principal. This fact should give pause to anyone who anticipates making a huge dent in his/her home’s principal and then being able to perhaps borrow off of that principal early in the agreement. That’s not going to happen! And, by the time you are done paying off a $200,000 mortgage at 3.5% interest (if you are fortunate enough to qualify for that low rate), at the end of a standard 30-year loan, you will have paid a whopping $322,728.84 for your home, not $200,000. That means that a full $122,728.84 went towards interest over those 30 years, and that’s with a rock-bottom interest rate! So you see, this is how the association of mortgage investors make their profits.
3. Your mortgage payment is only about 2/3 of your total home-owning cost.
If you have been paying a certain amount in rent, for instance, and find a mortgage agreement where your payment will approximate what you pay in rent, don’t forget to factor in the additional costs of home ownership. What are those?
- Property taxes. These could be enormous, depending on where you live.
- Homeowner’s insurance.
- Home repairs. You can’t pass these costs onto the landlord anymore. If you need a new dishwasher or shingles on the roof, you and you alone are going to have to pay for them.
All told, these extra costs will add up to about $400/month on a $1,000/month mortgage payment, and no, the tax breaks that you will get for owning a home will not offset these costs. Just be sure to factor in about 40% more than your monthly mortgage payment when you make your budget and embark on your dream of owning a home.
So, to all you prospective homeowners, when all is said and done, here is the reality of your $200,000 mortgage loan in 30 years time:
- You will probably be making payments to the fourth mortgage servicer.
- You will have paid at least $125,000 in interest
- You will have paid another $125,000 or so in upkeep, insurance and property tax
That makes a grand total of $450,000 spent for a $200,000 home. If you are ready for that challenge, then by all means pursue the American Dream and put your 10% payment down on a new home.