Over the last several months, I have been looking at the real estate market in Portland. Last week, I put in an offer. I didn't end up getting the place, but I am not sad about it. I decided to back off, and stop looking for a while, and see where life takes me.
When I put in my offer, though, I was interested to know what this mortgage would cost me, all in.
So, like all things, I went to the internet, asked my question, and got a pretty decent answer. The calculator is used was on Zillow, but there are a million other mortgage calculators out there.
The condo in question was listed at $165,000, so I typed in all of my variables (10% down, 1.45% property tax, left the homeowners insurance at the default since I have absolutely no idea, $283 HOA, and $73 PMI, since I won't be putting 20% down) and the thing spit out this lovely graph:
My total payments would be $1272. Not bad. A bit more than I'm paying now, but the condo had three bedrooms and two bathrooms! So, completely doable. Especially if I wait until I'm completely out of debt, then there would be two payments I'm no longer making.
I noticed, though, in the upper left hand corner, a drop-down menu.
It was set on 30-year-fixed, which is what everyone does. Right?
Curious, I changed it to a 15-year-fixed, fully expecting that number to double, or nearly double.
But a funny thing happened. Now, don't tease me, but this was truly the first time I saw the magic of compound interest at work.
Reducing the time from 30 to 15 years only changed my minimum mortgage payment by $346.
I scratched my head, thinking, no, this can't be the case.
But it was.
And here's what I learned: the reason they push you into a longer term is so they get more money!
The interest rate drops by 3/4 of a percent, and paying an extra $346 a month for 15 years means I would no longer have a mortgage in 15 years!
Now, I'm not all that comfortable committing to that high of a payment, when right now, my rent and utilities sit pretty at $825 a month. But it got me thinking.
Thoughts on Condos and Compound Interest
One, I'm glad, actually, that I didn't get that condo. It wasn't perfect. It was fine, and lovely, and would have worked, but it was a little too far away, and I wouldn't be able to get rid of my car and live close-in like I had been dreaming about doing. It was still inside the city limits, but not walking distance to anything fun.
Two, I'm happy to spend this year getting rid of the last bits of consumer debt (less than $5K total on the student loan and the car loan) and start saving. I'll increase my earning potential (if that raise I asked for ever gets put into place!) and I'll only buy something when I can afford to do a 15-year mortgage.
Three, I realized that there really is magic in compound interest. It's just not on my side, really. It's on the side of the lenders. As usual.
Is it smarter to pay an extra $3-400 a month on a 30-year-note? That's the more conservative thing to do. My goal is to continue to save half of my after-tax income each year, and perhaps only the 30-year rates would fit into that scheme. Then, I could throw any additional income (from side projects and part time work) to an additional payment each month.
What do you do? Do you pay your mortgage more than once a month?