About 17 years ago, my family of five (me, my husband, and three kids) were living in a rented townhouse. There was no basement and the kitchen was in the style of a very tiny galley. It felt like only one person at a time could fit in the kitchen so it was extremely difficult to teach my kids how to cook or have them help me bake. There was also very little storage space so we ended up putting our bikes in the small front room next to our computer desk.
Still, I was grateful it wasn’t a tiny apartment.
Less than a year of living there, our patience was wearing thin. This impatience led us to be willing to break our one year rental contract and start looking for a place of our own without having much in the way of a down payment.
Booming was how many described the housing market in 2004.
Every few days, I would see a bunch of houses with my realtor, then tell my realtor which ones I wanted to go back to with my husband. It was crazy how many of those houses ended up being under contract by the time my realtor tried to make the next showing appointment for me which often was the next day.
My husband and I ended up looking at a place that we initially avoided because the picture of the house was not especially nice. After seeing the house in person, we thought differently.
It was a townhome with a basement and 4 bedrooms. It was getting old and was being sold “as is” because it needed work, but we thought it would be perfect for our growing family. The blessing with this house was that while the other houses around us were being sold at higher than asking prices, we were able to get our house at a lower price because of the things that needed to be fixed.
Over the years we put in new windows (the original ones leaked air and that first winter was extremely cold!) Then we added a new roof, new siding, took out the old carpet in the living room (with plenty of stains), put in laminate wood flooring and changed the flooring in the kitchen. We also renovated the guest bathroom.
But let’s get back to how we bought our house.
The mortgage type we used was an ARM which stands for Adjustable Rate Mortgage. This means that after a few years (the initial fixed rate lasts for how long the contract states) the interest rate can change from month to month.
ARMS are sold to people that are anxious to get into their own place, but often don’t have much money for a down payment and want to get a lower interest rate just to get into a house. It is also advertised as something great for people who don’t plan on owning their house for many years.
In the beginning our mortgage payments didn’t change since it was part of the initial fixed rate time period. After that time however, our payments started fluctuating. Sometimes it would even go down, but after less than a year, we saw it steadily going up.
We knew it was time to refinance so that’s what we did.
But while we started off with a 30 year mortgage, we refinanced to another 30 year mortgage. We just prolonged our payments a few more years. At least our payments were now consistent every month.
A few years later we again wanted to lower our interest payments so we refinanced a second time – to another 30 year mortgage.
Many people do this thinking they are saving money, but while it may help in the short term, people forget it doesn’t help in the long term. By refinancing every few years, the payments will keep on going with no end in sight.
I’ve heard people, including financial advisors, say that one should always have a mortgage because the interest rate is tax deductible. While the interest rate is tax deductible, not having a mortgage payment will save you a lot more money.
We finally realized what we were doing every time we refinanced, so the next time we looked at our numbers, we decided to only refinance if it was going to lower the amount of years we were going to have to pay off our house.
Now let’s go back even further into the past.
Before moving to Maryland, our family lived in New Jersey for 3 and a half years. There, we bought a house with a regular FHA 30 year loan. Because the interest rate went down, we refinanced the following year, but this time for a 25 year loan. The following year we did the same for a 20 year loan. Here we did the right thing.
So why did we make all those mistakes in Maryland?
That’s a great question. I believe it’s for the same reasons why others do the same thing. We were led by emotion (not wanting to wait), not by our brains.
The smart thing to do would have been to educate ourselves by researching the different kinds of mortgages, ask our realtor questions about things we didn’t understand, and to have waited a little longer before getting our Maryland house.
So here are the lessons we learned and I hope you will learn from them to:
- Have patience. It might not be fun to live in a place where there’s not much space, but think of the long term results.
- Save for a minimum of a 10% down payment so your monthly payments will be less.
- Understand the different types of mortgages out there before deciding on which one to use.
- Do NOT get any kind of ARM or adjustable rate mortgage. Try getting an FHA or Conventional loan.
- If you want to refinance because the interest rate is lower, then lower the years on the loan. Think long term even if you’re not going to be in the house for many more years.
- By paying off your mortgage faster, you’ll be saving that monthly payment. This will save you a ton more than whatever you would save on tax deductible interest rates. The average monthly mortgage payment in the US is $1029 so if you have that paid off, you’d be saving $12,348 per year. That’s way more than what you’d save at tax time.
I hope you were smarter than we were and either are saving your down payment and waiting for that right house or are already in a house and got there the right way. But if not, then hopefully you’ve learned from your mistakes and won’t be repeating them for any future house purchases.
Either way, happy home buying!