**I’m purposefully not writing about COVID-19 right now. I know that this comes from a place of privilege and own that. Honestly, I’m a bit overwhelmed with the constant news stream and I’ve started limiting my news consumption. I may write about how we coped with social distancing at a later date.**
I cannot believe that we have already owned our home for six months. I guess time flies when you buy a house and have a baby in the same month. Next time, we’ll plan on fewer life milestones occurring at the same time. Today, I’m writing about the financial side of our home purchase. I’ll get into the nitty-gritty of why we decided that PMI wouldn’t be the end of the world and about our latest BIG goal.
Justin and I moved to Denver in May 2018. We immediately fell in love with the city and the state. We love the weather, the people, the food, the access to things to do, the hiking, the dog-culture, and many other aspects. So, we decided that if we were going to live here long-term that buying a home would make sense. One look at Denver’s housing prices will tell you that renting is extremely expensive. We also knew that we wanted a home to raise our child in. As a kid, my family moved around A LOT and I want to give our little person stability.
We started talking about what we would want in a home almost as soon as we moved here. We knew from our previous two houses that we wanted a home that was the right size for us and that we didn’t want much of a yard. We also knew that we needed at least a four-bedroom house because Justin works from home. Given the market, either an existing home or a built home would cost about the same. But, our previous home-owning experience taught us that buying an existing home would come with some renovations and/or maintenance needs. We looked at a lot of different neighborhoods and builders. We finally settled on a builder in Northeast Denver.
Our home is one of two interior units in a quadplex. It’s a four-bedroom, 3.5-bathroom home with a finished basement. We have a tiny front yard and a finished back patio. Much to our chagrin, we have a 20×5 foot stretch of grass that we’re responsible for. When it was all said and done, the house cost exactly $460,000.
After doing the math, we decided to put 5% down on the house and we took out a 30-year mortgage at 3.875%. Our monthly payment breakdown is below.
The principal and interest payment won’t ever change. This is how much that must be paid every month, at a minimum, for the loan to be paid off in 30 years. The rest of the payment consists of escrow payments, or monies we deposit with the lender for them to pay for things for us. Since we live in a quadplex, our HOA dues cover the building’s insurance. Our homeowner’s insurance only covers the interior of our home. As a result, our insurance is lower than we initially expected but should stay about the same for the foreseeable future. The county property taxes are paid by the mortgage company from that part of the escrow payment. I have a feeling that the tax portion of the payment will be going up because we were taxed on vacant land for the first installment. You’ll notice that I haven’t talked about the PMI yet.
|Principal & Interest||$2,054.94|
|Total Scheduled Payment||$2,561.81|
Why do we have PMI?
Lenders require PMI when the down payment on a home is less than 20%. PMI protects the lender if the borrower defaults. It does absolutely nothing for the home buyer. So why do we have it? Simply put, we did the math for our situation. To avoid PMI, we would need a down payment of $92,000. We had these monies available in a couple of different ways but accessing them would have cost us something. For example, we could have taken a loan from Justin’s 401k (something I never advise). Doing so would cost the origination fee, interest rate to pay back the loan, and the loss of time in the market for those monies. When you compare those costs to the cost of PMI for three years (~$3300), the PMI was cheaper. We could have also pulled from my 457b without penalty, but with the addition of income tax. We ran a couple of tax scenarios and still found that the PMI was cheaper. So, we put 5% down as we already had it in cash. We could have done more, but I’m glad we didn’t since we ended up being matched with the baby the same month that we closed on the house.
Our BIG Goals
Right now, we have two big financial goals related to the house.
- We want to have the PMI removed in three years.
- We want to pay the house off in ten years.
How in the heck are we going to get there?
There are a couple of options for having the PMI removed. We can pay the mortgage down to 78% loan-to-value (LTV) with value based on the original purchase price. We can have the house appraised in a couple of years and hope that the value has increased enough to get us to the 78% LTV threshold. But, most lenders heavily prefer option one. Going the appraisal route often requires refinancing the mortgage, but if the numbers work out, that’s an option too.
At this point, we’re focusing on the first option. I like nice, round numbers. So, we’re adding $538.19 to our monthly mortgage payment which brings it to $3,100 per month. (We’re adding another $100 per month to the mortgage payment starting in May due to Justin’s annual raise. Woot!)
The other thing that I do is pay extra principal each month to get the balance to a round number. For example, I paid an extra $88.63 this month to bring the balance down to $426,600. You might think that these small amounts are silly, but since we’re so early in the mortgage the small payments have an outsized impact because that’s principal that never compounds. This month’s “round-up” payment took 6 months (!) off our amortization table. That is HUGE!
One common piece of advice given to reduce mortgage payoff time is to pay bi-weekly since most people are paid every two weeks. In general, following this advice will take 7 years off a 30-year mortgage. BUT this assumes that the mortgage company is applying the payments bi-weekly when they receive them. Most mortgage companies do not do this. Instead, they hold the half payment until the entire payment has been deposited with them. Thus, negating some of the interest savings. However, you would still end up making 13 payments a year and have a positive effect that way.
Since our mortgage lender requires us to keep a checking account with them, we have half of the mortgage payment sent to that account every two weeks by Justin’s employer. Half the mortgage payment goes to that account and the rest of his paycheck goes to our regular spending account. Then twice a year, we have an “extra” $1,550 to send to the mortgage principal.
This year, we plan to send at least half of Justin’s annual bonus to the mortgage. We don’t know how much his bonus will be yet. Right now, I’m estimating that we’ll have $6,000 to send to the mortgage from it, but that could always change. Going forward, we plan to send his entire bonus to the mortgage.
If you’re adding it all up, we plan to send an extra $16,458.28 (plus miscellaneous “round-up” payments) to the mortgage this year. With the already scheduled principal payments, we should be at 88% loan-to-value by the end of 2020. We use Mortgage Professor’s online calculators to figure out how various scenarios change our numbers.
With everything I’ve outlined, we should have the PMI removed in April 2022 and the house paid off in May 2032. We’re on-track for the PMI goal, but we still need to figure out how to shave off 42 months from the estimated house payoff. Some that will come from making those small, monthly “round-up” payments and some of it will come from increasing our monthly payments slowly as Justin gets additional raises or we find new ways to reduce our expenses. Even so, the math – yes, it’s always about the math – shows that our goals are doable!
So, there you have it. We bought a new house and now we’re laser-focused on destroying the mortgage at lightning speed.
I won’t be posting much about the mortgage goals on the blog, except for when we hit milestones. But, I do post weekly about the mortgage on our Instagram account (@SmithHappens2019). Check out progress there!