The Money Map: Destination Five

Screen Shot 2015-09-03 at 11.20.41 AMDestination Five on the Money Map tackles one very large expensive item: Buying a home and paying off the mortgage. It is also the benchmark where you have the children’s education fully funded.

If you are in the market to purchase a home, make sure to look carefully at your budget so you don’t end up “house poor.” In other words, the cost of owning a home is more than an affordable mortgage payment.  Usually the mortgage payment includes Principal, Interest, Taxes and Insurance (PITI), based on the terms of your mortgage. In addition to the mortgage payment home ownership costs include utilities, furnishings, homeowners dues and maintenance. If the total cost of all these items exceeds 40% of your income, you’ll need to cut back other areas of spending.

If you are moving from an apartment where some of the utilities were included in your rent payment, the cost of utilities in a home may be shocking. The larger the home, the larger those utility payments will run.  Sometimes the sellers are able to provide utility records from prior years, which can help calculate your utility costs and plan your budget.

Moving from a one bedroom rental to a three bedroom home will leave you with lots of unfurnished space.  Furniture costs can be a real budget buster if you try to buy furniture for the whole house all at one time. We’ve found that living in a home for a while before buying furniture allows you to see how the house functions and leads you to make better decisions when purchasing furniture. It is also better to keep the large, expensive pieces of furniture simple and classic.  If you love patterns and bright colors, use pillows or other decorative items to bring in the patterns and bright colors instead of purchasing a couch or chair that will be soon be outdated.

In addition to furniture, a new home comes with other minor costs–do you need to buy a lawnmower? Tools?  A ladder? Fertilizer? Paint? And the list goes on and on. Then there are the major items to consider–how old is the roof? The air conditioner or furnace? The appliances?  Does anything need to be replaced immediately?  Sometimes it seems like home ownership entails moving from one expensive maintenance item to the next.  Do your best to anticipate the complete cost of home ownership to avoid a costly mistake and driving yourself deeply into debt.

Another expense that needs to be factored in is commuting costs.  If you’ll be driving, your insurance costs and gas consumption may change depending on the new proximity to your job and various amenities that you will be frequenting such as the grocery store or the gym. You may also have increased commuting costs due to tolls.

Once you have settled on the right home and bartered for the right price, eventually you will find yourself in a position to accelerate paying off the mortgage (if you took on a mortgage obligation, as most people do).  A simple way to do this is to take one months’ payment and divide it by 12.  This number represents a good starting point for making one additional mortgage payment per year.  For example, on a $1,000 per month payment, by adding an extra $83 each month, you will have actually made 13 payments throughout the year rather than 12.

Another way to tackle paying down the mortgage is to use an amortization chart.  This is a calculation that defines how much of each monthly payment is applied to the loan principal and how much is applied to interest. You can accelerate your mortgage payoff by paying the next month’s principal when you make each payment. Each time you do that, you eliminate that month’s interest payment.  Even adding a small amount of extra principle to your payment helps you payoff the loan more quickly. If you use any of these strategies, be sure you notify your lender to apply the extra money to reduce the principle balance, and you will reduce the amount of interest you are paying.

Many people think it’s a good idea to maintain a mortgage due to the advantage of deducting home interest on their income tax return. If you are in the 25% tax bracket, for each $1,000 you pay in home mortgage interest, you will save $250 in taxes–25% of the interest paid. So while there is a slight savings, paying $1,000 to save $250 isn’t really a very good deal.

Paying off your mortgage is a marathon, not a sprint.  It will take many years to completely payoff the mortgage, but if you are faithful and prayerful in your efforts, God will give you the grace to succeed.

“Steady plodding brings prosperity; hasty speculation brings poverty.” ~Proverbs 21:5

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