My mortgage principle that I broke (sort of)

Photo courtesy of Jônatas Cunha

 

Finances and emotions. They go together like one explosively codependent couple.

Don’t be fooled by my focus in the numbers side of the situation; I’m not immune to fear and anxiety either.

I’m going through the process of becoming a first-time homebuyer. And because of this, I’m going back into debt for the first time in years, and to an amount that dwarfs the total amount of debt I’ve ever had.

So you can imagine I’ve been a little on the anxious side.

I’ve had to make large-scale, will-affect-my-life-for-years decisions effectively on a dime. And while I’ve been prepared for all of them in the abstract, being confronted with these decisions in the moment really tests you.

So far I think I’ve done okay. But there’s one place where I question if I went back on my principles a bit. Or, to put it another way, I think I chickened out.

The terms of engagement

Once you’ve decided that you want to get a fixed rate mortgage over any other kind (and you do), the next step is to figure out the terms. I think in years past, you used to have two options (15 years or 30 years), but now it’s pretty common to see 20 years, 25 years, and I even found one broker who would do almost any increment, even a 27 year if I wanted!

You can read more about my thoughts on mortgage terms. In it, I came down pretty hard on the 30 year fixed mortgage as being unnecessarily usurious. You’ll just pay so much interest over the long haul that it’s hard to rationalize. But I equivocated somewhat:

I’m not saying you have to get a 15 year fixed mortgage. Personally, I think splitting the difference and going for a 20 year is fine. But there’s a huge difference between 5 extra years and 15 extra years. If you want to give yourself 15 extra years of payment to give yourself “wiggle room,” that seems like a whole lot of wiggle room.

And in fact, a 20 year was just what I was going for in my own case.

Running (away from) the numbers

My broker and I eventually discussed the real-life numbers for my situation. To make the emotion of the situation more obviously apparent, I’ll I’ll give you the relative numbers instead of the absolute numbers.

My broker told me the following:

  • If I went with a 30 year, my monthly payment would be [$500 more than I pay in rent now]
  • If I went with a 25 year, my monthly payment would be [$80 more than the 30 year, or $580 more than I pay in rent now]
  • If I went with a 20 year, my monthly payment would be [$120 more than the 25 year, or $700 more than I pay in rent now]
  • If I went with a 15 year, my monthly payment would be [$220 more than the 20 year, or $920 more than I pay in rent now]

I eliminated the 30 year option for reasons stated previously. Too much interest. Too much looking at the short term at the expense of the long term.

I then eliminated the 15 year option. I could afford it, but just barely, and it didn’t seem worthwhile to lock me into to something that would push me up against the wall right now.

I eyed the 20 year option; It was $200 more per month than the 30 year option.

I wanted to the do the 20 year option. I really did. It felt like such a stronger decision.

But I couldn’t do it. I went with the 25 year option.

The fear

The difference was $120 a month. Which maybe isn’t a lot, especially when compared to the other figures. But since I was already “electing” to spend $80 more a month (by going with the 25 over the 30) I choked at “electing” to pay $200 more a month than I “had” to.

And the reason why I choked is because I don’t know what the future holds. And since all these numbers are so much higher than what I’m paying now, it gives me the fear that down the road I could be more likely to encounter a situation that would be untenable for me.

$80 difference? That’s not so much of a big deal. But a $200 difference could be a bigger deal. And these numbers are on top of the $500 extra that I’ll be paying regardless, which is itself on top of how much I’m paying now.

From a practical sense, it maybe doesn’t matter all that much. With no prepayment penalties, there’s no downside for me to just pay $120 extra than I need to, at least while I’m able.

Que sera sera

I feel good that I didn’t completely backtrack on my principles and go with a 30 year. But I still feel like my fear got in the way of my decisions. That may cost me over the long run, but it’ll at least then it’ll be a lesson that I’ll learn well.

But enough about me. Do you think I made a bad call? What would you have done?

 

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

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Mike Pumphrey
Posted on October 8, 2015