Written By: Mr. Horizon
When Mrs. Horizon and I started house hunting we had a lot of decisions to make. Where did we want to live? How were the schools in the area? What were taxes? Is it in the city, suburbs, or country? How many bedrooms do we need? How much square footage is necessary? How big is the yard? How close is it to public parks? Is it the right size for our future?
There were so many questions but none of these had anything to do with how much money the bank was willing to give us. I think for many the first question asked when the house hunting begins is how much can we get approved for. Herein lies the problem. The bank is not looking out for us. They are a business, after all. Their primary concern is providing a mortgage that will make them money. They sell us on a 30-year fixed with a payment that is somewhere around 35% of our income and tell us we can easily afford the payments. The fact is they are not wrong, we probably can afford the payments. What most don’t realize is paying off the mortgage over this 30-year time horizon will cost us typically double the cost of the home. An average home in the US is around $250,000 and at historically low interest rate of 5% it would cost you over $233,000 in interest. This brings the total cost of your home to over $480,000. The bank is hoping we take all of those years to pay it off. In fact, they will be offering to refinance after about 10 years. Banks will tell us we could save so much and have a bunch more extra money to spend. The reason for this is clear, the bank is looking to maximize their profits. Mortgages are the most profitable in the first 10 years. You can see why below. The blue line represents the principle paid on each loan payment and the orange represents the interest paid to the bank on each of these payments for the $250,000 case discussed above. As you can see the first 120 payments or 10 years of the loan are extremely lucrative to the bank. We pay off such a small amount of principle while the bank collects over $800 in interest on every payment for the first 10 years. That is over $96,000 in interest in the first 10 years! Then we are pushed to refinance and start this debt cycle all over again. The banks want us to take as much as we can afford and pay it back slowly. Mrs. Horizon and I discuss how we chose a home the met our needs and provided us with the opportunity to pay the debt back faster while pursuing our financial independence goals. We will then explain how we use the Amortization Tool found on the FI COMPASS page to beat the bank at their own game and buy a house on your terms.
Early in our house hunt we came across a beautiful, well-kept house on .75 acres that the couple had lived in for over 40 years. It was a beautiful, 1800 sqft home that was for sale by owner and we fell in love with it. After looking at it at an open house we excitedly asked our parents to take a look without the rose-colored glasses that we were no doubt wearing. When they came in they showed us the reality of what we were getting into. It was a house that hadn’t been updated since the 70’s both in decoration and electrical. The house was on heating oil and the possibility of asbestos was also suggested. On top of all of that it was over 35 minutes from our work. The longer we stayed the more issues cropped up and eventually our excitement of the house turned into apprehension. When we sat down with the couple, we made a significantly lower offer than they were expecting and we walked away. After this experience we decided to be firmer with what we were looking for.
The first thing Mrs. Horizon and I worked on is the location we wanted our house to be in. The key factors that came into this decision for us were. The home must be within 30-minute commute from our work, preferably 20 minutes or less. We both already work fairly long hours and adding more than an hour commute was unacceptable to either of us. It had to have a large open yard with mature trees minimum of .35 acres. This mean we were going to be living in an older suburb or country lot. Mrs. Horizon hates new suburbs because they have no mature trees. Local parks and recreational areas were also very important. On top of that we found the city tax rates to be much too high. Nearly double the township tax rates in our local area. We wanted a highly rated elementary, middle, and high school which our future children could attend within 15 minutes of the house.
Next, we looked at what we needed from a size standpoint. This is where we really struggled. We wanted the amenities of a larger home on a smaller footprint. We knew we wanted a minimum of 3 bedrooms and 2 full bath rooms to have our family grow into, but we also did not want a 2500 square foot home. In our area typically, there are homes that do not have this many bedrooms or bathrooms under 2000 square feet. We really looked hard here because we wanted a smaller home that had all the needs of a growing family in a small footprint. The result was a beautiful home with 3 small bedrooms and 2.5 small baths with a footprint of under 1500 square feet. In essence each room was shrunk and it is exactly what we were looking for. This means for now it has extra space, but as the family grows it will fill nicely.
We also were looking for a house that didn’t need an excessive number of repairs and updates. Since we work long hours and we generally like to adventure on weekends, we didn’t want something that needed too much TLC like the first house would have needed. We decided that it needed to be newer than 1980 to try and avoid whole house renovations. We wanted a house that was move in ready.
After many months of searching for houses, Mrs. Horizon suggested that we stop at an open house on the way home. We were both getting discouraged but I begrudgingly agreed. We pulled up to a small colonial style house in a nice neighborhood with mature trees. We toured the house with the couple who was selling it themselves and we thoroughly inspected it. It wasn’t too big but had the number of bedroom and bathrooms we were looking for. There were essentially no renovations or repairs needed. The house had been so well taken care of, it was hard to believe that it was over twenty years old! The house was in immaculate condition. The yard was larger than .35 acres and the elementary school was less than a mile away. Multiple parks were within a mile or two and our drive to work would be 18 minutes. When we got in the car after the open house, we both knew that this was the house we had been looking for. We drafted the offer and a few days later our offer had been accepted! The best part of all was that this package came in right in the price range we were comfortable paying and we never paid any realtor fees, saving us and the sellers a bunch of money.
Even though our mortgage was less than we were told by the bank that we could “afford” it was still a large debt so we sat down to make a plan on how to pay it but not pay all that extra money in interest. We started with the amortization schedule that we got at closing. First, we would pay ahead 6 months as a buffer and then pay larger payments that covered additional principle once a month to reduce how much we paid in interest. At this point we opened up excel and our amortization tool was born! We wanted to keep track of how much of our principle we had paid and how much interest we were able to save by paying singular large payments. Once we started making payments it turned into a game… a nerdy game. How much interest could we save this payment? How much principle were we able to pay off? In a weird way, paying our mortgage became a fun numbers game! We have added a blank version of our amortization tool to the FI Compass page or you can click here to take a look at it and maybe make a game out of your mortgage too!