The following is a guest post.
Mortgage interest rates are at historic lows and home values dropped – Isn’t it a great time to buy a house? Well, to be honest with you, my wife and I have been dreaming of buying a house for a long time.
We want to start with a small house (in a good school district though and that is a non-negotiable point on my checklist) and affordable mortgage payments. We also want to take out a short-term mortgage loan and not a 30-year mortgage loan. We know it is harder to qualify for the shorter period, but we want to be debt free.
Well, we are almost there. We just saw a nice small house with a beautiful garden. I wanted to share with you the two steps that helped up get there:
- Saving for a down payment
- Paying off our credit card debt
Down payment
We started the path to getting our house by putting aside money for a down payment. We have always wanted to own our own house. Ever since getting married, we have saved money on our housing expenses. (We even lived with my in-laws for a few years and saved on rent and childcare expenses, thanks to Grandma). We also put aside any extra income (from bonuses or side jobs) in our “housing saving account”. We have now saved up $120,000 to use for a down payment and any extra closing costs. We figure that we can easily put down a $100,000 down payment.
Wait a Second: Credit Card Debts
We also know that in order to get a mortgage loan, you have to have good credit (and for the best rates excellent credit), stable income, and a low debt to income ratio. (Okay, I have been speaking to too many loan officers). Fortunately, I have a good job and have been working at the same company for more than 5 years.
Our credit scores are excellent and we just finished paying off all of our credit card debts. We have friends who run up credit card debt by overspending, buying expensive cars, fancy vacations and rent expensive apartments. Honestly, we are careful with our money. However, a number of years ago, we had some heavy medical expenses, which were not all covered by our insurance. We ran up our credit card bills to pay for some of the treatment and medicine. We had $35,000 in credit card debt. (Sure we could have just used up our savings, but to us that would have been pushing our dream too far away).
Well, we were fortunate. We did have savings, but we also came across a Web site, Bills.com that had a nice minimum payment calculator. We saw that by maintaining a payment of $875 per month on our credit card debt, we would pay off our debt in 4 years and 4 months, instead of 25 years and 2 months by making the minimum required payments. We did cut back a bit on our savings (and it did take a little longer, but not much, to reach our down payment goal. We showed this tool to some of our friends and they told us that they finally understood how expensive their credit card debt was. (In fact, Bills.com had another tool, the Debt Coach that helped them find a solution to their debt problems and get them on the road to be debt free. However, that’s another story).
Moving In
We saw a beautiful house for $300,000. That means that we can borrow $200,000 and put down $100,000. Because of the low interest rates, we were able to take out a 10-year mortgage loan. Our mortgage payments came out to $1954 for a 3.25% loan. The realtors were pushing us to take out a 30-year loan and max out with a $400,000 mortgage. But we like the idea of an affordable house. Our 10-year mortgage payments including property insurance and property tax comes out lower than the 30-year mortgage for a $500,000 house. And the best thing, we will be debt free in 10-years!
How would you deal with your credit card debt? What kind of mortgage would you choose? A 30-year mortgage, 15-year, or 10-year?
