How much is your mortgage costing you?
I’ll bet you can tell me what your mortgage payment is. It’s probably your largest bill, and each month, five days before the due date, you remember.
Hopefully not in a cold sweat at 3 am. “Ahhh….The mortgage is due!”
If it’s automatically drafted, you double-check to make sure the money is in your checking account. Maybe you write a check, mail your bill (people still do that), and hope it gets there before you incur a penalty.
If I ask you “What does your mortgage really cost?” You’d probably answer in dollars-for example “$2,350/month.”
But is that really what your mortgage costs you?
What’s the easiest way to eat an elephant (just a metaphor, I’m a fierce advocate for four legged creatures)? Piece by piece, right?
So, let’s pull this apart. There are usually other expenses built into your mortgage payment, like homeowner’s insurance, real estate taxes and possibly PMI (more on that toward the end).
Let’s say I’m buying a home for $350,000 and I’m putting 20% down. It looks like this:
$350,000-$70,000=$280,000 Easy, right? But the buyer pays closing costs (usually between 2 and 5%), and I can’t afford to pay them out of pocket. Add them to the loan amount, on the high side and maybe I’ll get some cash back for improvements.
Now I’m financing 294,000, but I’m so exhausted by this process that I’m just signing what they put in front of me.
I’m paying a point to bring my interest rate down. My mortgage professional said most people do that. Tack on 1%, or $2800. Do I want to finance that, too? Are they asking me to come up with another $2800? YES-I want to finance that, too.
My mortgage principal amount is no longer 350,000-$70,000=$280,000. The new total is $280,000 plus closing costs $294,0000 plus a point $2940 for a grand total of $296,940+$70,000=$366,940.
I just bought a house for $350,000 that is costing me $366,940. No one said the American Dream would be cheap, right?
Is it possible that I’m already underwater on this house that appraised for $355,000?
And we’re just getting started.
Let’s circle back to the beginning. You can easily tell me the amount of your payment, but what’s the interest rate on your mortgage? You may not have thought about it for years! If you can’t remember, look at your last statement. Knowing where you stand will make these calculations more meaningful.
As closing day loomed, new expenses appeared. I have a $298,000 mortgage. I want to keep the payments low, and the mortgage company didn’t really offer any other options, so I’ll make payments for 30 years (the term). My interest rate is 6.75%. Over the life of my loan, I’ll pay a total of $660,371.45. Is that good or bad? We’ll revisit that in part 3 when we dive into the cost of a mortgage in lifestyle. Remember, this is just about dollars.
Let’s dive deeper by looking at an amortization table. The mortgage company had to show you one of these when you purchased your home. Remember those intimidating columns of numbers? Maybe you closed your eyes, said a prayer and flipped the page, signing up for 30 years of payments you hoped you could afford.
| Year | Interest | Principal | Ending Balance |
| 1 | $20,071.68 | $3,184.46 | $295,615.54 |
| 2 | $19,849.95 | $3,406.18 | $292,209.36 |
| 3 | $19,612.79 | $3,643.35 | $288,566.01 |
| 4 | $19,359.11 | $3,897.03 | $284,668.99 |
| 5 | $19,087.76 | $4,168.37 | $280,500.62 |
| 6 | $18,797.53 | $4,458.60 | $276,042.02 |
| 7 | $18,487.09 | $4,769.05 | $271,272.97 |
| 8 | $18,155.03 | $5,101.11 | $266,171.86 |
| 9 | $17,799.85 | $5,456.28 | $260,715.58 |
| 10 | $17,419.94 | $5,836.19 | $254,879.39 |
Notice anything interesting (or horrifying)? Why isn’t my loan balance going down? Well, I’m paying a ton of interest in the first 10 years. Not so much toward what I owe.
Let’s recap. I bought a house for $350,000. I put $70,000 down, which left me with about nothing in savings. On closing day, the grand total of my mortgage was about $298,000.
Real dollars, what did my mortgage cost me?
At the end of 30 years, I’ll have paid $398,000 in interest.
Fast forward ten years.
Life has changed. I have a real job, a few kids and financially, I’m much savvier than I was ten years ago. Interest rates are going down, and I just got an offer that I can’t refuse. No down payment, my mortgage payment will go down and the closing costs don’t seem so bad. I don’t think. I’m waiting for the nice agent who called me to get back on that.
Having a lower payment will free up a big chunk of my paycheck, so I’m going to refinance for 30 years.
My mortgage is a tax deduction, right? Why give that up? Let’s not get into the weeds on taxes just yet. We’ll cover that in the next article.
NEON SIGN! If you have one eye on your phone, and one eye on this (albeit lengthy) article, tune back in here.
After 10 years of paying on my mortgage, I owe $254,879.39.
How is that even possible? I borrowed $298,000?
In the first 10 years, I paid $186,640 in interest. No one told me that interest is front-loaded on a mortgage.
At least my interest rate will be lower when I refinance. My monthly payment will drop from $1938 to $1216 (plus taxes and homeowners insurance). That’s huge!
But, look at my new amortization table. Remember, I’m starting over with a new mortgage, $254,000 plus closing costs estimated at $2500.
| Year | Interest | Principal | Ending Balance |
| 1 | $10,177.78 | $4,517.06 | $251,982.94 |
| 2 | $9,993.75 | $4,701.09 | $247,281.85 |
| 3 | $9,802.22 | $4,892.62 | $242,389.23 |
| 4 | $9,602.89 | $5,091.95 | $237,297.28 |
| 5 | $9,395.44 | $5,299.41 | $231,997.87 |
| 6 | $9,179.53 | $5,515.31 | $226,482.56 |
| 7 | $8,954.83 | $5,740.02 | $220,742.54 |
| 8 | $8,720.97 | $5,973.87 | $214,768.67 |
| 9 | $8,477.59 | $6,217.26 | $208,551.41 |
| 10 | $8,224.28 | $6,470.56 | $202,080.86 |
Just for grins, I’m going to look at the amortization table from my original mortgage. I see that I’m saving almost $55,000 in interest. Take that, mortgage bank! Ha.
Hold on. I would have paid off about $86,000 of principal (what I owe, or my debt). Now, I’m only paying off a little over $54,000. You see it now, right? I’m about to pay another $92,529 over the next ten years, and then I’ll still owe $202,080.
Tricky. But don’t lose hope. This is still winnable! How about only financing for fifteen years? Equally divide your mortgage payment and pay that amount every two weeks. Or keep making the payment you’re used to paying and watch your mortgage debt drop. Get crazy, create your own amortization table and pay off that puppy when you want to. There are so many alternatives! The point is, knowledge is power. And even better, you’re learning how to use it to your advantage.
Overwhelmed? Call me. I’ll help you. All I ask is that you extend a hand to the next guy who is stuck in the mortgage trap.
And stay tuned for Parts 2 and 3! Let’s see how many HUNDREDS OF THOUSANDS OF DOLLARS you can save in fees, interest and taxes.
Before you go. About PMI. If you don’t make a down payment of 20% or more, you’ll pay for Private Mortgage Insurance (or PMI). PMI protects your lender. If you default on your loan, they get paid anyway. Yep, you’re paying the insurance premium to protect the mortgage company, and it is likely to cost you another $100/month. Don’t do that.