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Our bank tried to convince us we wanted a $700,000 house.
They said we could "afford it."
They said everyone "deserves a nice house."
We bought a $270,000 house instead.
Here's why.
// THREAD //
They said we could "afford it."
They said everyone "deserves a nice house."
We bought a $270,000 house instead.
Here's why.
// THREAD //
1. Background
We WANTED to be mortgage-free quickly and we didn't want a bank telling us where to put our money each month.
We didn't want a mortgage we'd HAVE to hold for 15+ years.
We also didn't need a big house.
We NEEDED a house we could pay off in <5 years.
We WANTED to be mortgage-free quickly and we didn't want a bank telling us where to put our money each month.
We didn't want a mortgage we'd HAVE to hold for 15+ years.
We also didn't need a big house.
We NEEDED a house we could pay off in <5 years.
2. Scenarios
We bought for $270,000.
If we had bought that house in a city 45 minutes away, we would have spent $400,000.
We were bank-approved for $700,000.
So let's run these to see what was ACTUALLY doable:
- $270,000
- $400,000
- $700,000
We bought for $270,000.
If we had bought that house in a city 45 minutes away, we would have spent $400,000.
We were bank-approved for $700,000.
So let's run these to see what was ACTUALLY doable:
- $270,000
- $400,000
- $700,000
2. Assumptions.
- Based on our 2018 income.
- $205,000 downpayment.
- 3.49% interest rate.
- 15-year amort'n.
- Monthly payments.
- Annual 15% principal pre-payment used annually.
- $13,000 in savings account at start.
- The object is to pay off the house in 5 years.
Let's go.
- Based on our 2018 income.
- $205,000 downpayment.
- 3.49% interest rate.
- 15-year amort'n.
- Monthly payments.
- Annual 15% principal pre-payment used annually.
- $13,000 in savings account at start.
- The object is to pay off the house in 5 years.
Let's go.
3. The $270,000 House.
$205,000 = 76% down.
$65,000 mortgage.
Payment: $464/month.
15% principal pre-payment applied at 2 weeks.
Pay-out at 282 days.
Total interest/penalties paid: $2,269.
$205,000 = 76% down.
$65,000 mortgage.
Payment: $464/month.
15% principal pre-payment applied at 2 weeks.
Pay-out at 282 days.
Total interest/penalties paid: $2,269.
4. The $400,000 House.
$205,000 = 51% down.
$195,000 mortgage.
Payment: $1,391/month.
15% prinicipal pre-payment applied at 5 months, then every 12 months.
Pay-out at 3.07 years.
Total interest/penalties paid: ~$16,500.
$205,000 = 51% down.
$195,000 mortgage.
Payment: $1,391/month.
15% prinicipal pre-payment applied at 5 months, then every 12 months.
Pay-out at 3.07 years.
Total interest/penalties paid: ~$16,500.
5. The $700,000 House.
$205,000 = 29% down.
$495,000 mortgage.
Payment: $3,530/month.
15% annual principal pre-payment never reached ($74,250). $25,480 saved and paid end of each year.
Pay-out at 8.8 years.
Total interest/penalties paid: ~$80,700.
$205,000 = 29% down.
$495,000 mortgage.
Payment: $3,530/month.
15% annual principal pre-payment never reached ($74,250). $25,480 saved and paid end of each year.
Pay-out at 8.8 years.
Total interest/penalties paid: ~$80,700.
6. Recap.
$270,000:
- Paid off in ~9 months
- $272,269 total costs
- Freed up cash flow early
$400,000:
- Paid off in ~3 years
- $416,500 total costs
- Wouldn't save for retirement for ~3 years.
$700,000:
- Paid off in ~9 years
- $780,700 total costs
- Super house-poor.
$270,000:
- Paid off in ~9 months
- $272,269 total costs
- Freed up cash flow early
$400,000:
- Paid off in ~3 years
- $416,500 total costs
- Wouldn't save for retirement for ~3 years.
$700,000:
- Paid off in ~9 years
- $780,700 total costs
- Super house-poor.
7. Bigger Isn't Better.
The $700k house wasn't doable.
We couldn't pay it off in 5 yrs.
We also would have tied up too much cashflow.
We'd be broke & house-poor.
And why buy $400k in the city when same option 45mins away is cheaper?
Then, there's the space itself.
(con't)
The $700k house wasn't doable.
We couldn't pay it off in 5 yrs.
We also would have tied up too much cashflow.
We'd be broke & house-poor.
And why buy $400k in the city when same option 45mins away is cheaper?
Then, there's the space itself.
(con't)
Pricier house = bigger house.
Bigger house = more stuff.
More stuff = more spending.
More taxes, utilities, maintenance, time cleaning, etc. etc.
Compounding CAN work against you.
Don't be a slave to stuff.
Or your house.
Or a bank.
Bigger houses aren't better for anyone.
Bigger house = more stuff.
More stuff = more spending.
More taxes, utilities, maintenance, time cleaning, etc. etc.
Compounding CAN work against you.
Don't be a slave to stuff.
Or your house.
Or a bank.
Bigger houses aren't better for anyone.
