Lazy Man and Money

Mortgages: To Pay Off Early or Not to Pay Off Early…

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… that is the question. Whether ’tis nobler in the mind to be free of debt, or to invest, perchance to dream of outrageous fortune.

If you thought I was going to continue writing in pseudo-Shakespeare, you don’t know me very well. Or maybe you know me too well, because I do love a good writing challenge.

Pay Off Mortgage Early?There’s a lot of debate in the personal finance community about whether you should pay off your mortgage early if you can afford to. I’ll share my opinion on that in a little bit. Before I do, I want to make it clear that this is a topic with no definitive answer. Even with my own strong feelings on this one, I can look at the other side and say, “I understand and appreciate your view.”

So if you aren’t going to find any definitive answers, why continue reading? It might help you decide what is best for you and your situation.

Let’s review what each camp has to offer:

Pay Off Your Mortgage Early

There’s a psychological weight to being in debt. While most will agree that mortgage debt (especially at current rates) is good, responsible debt, it is still debt. Until you’ve paid off your mortgage, it’s likely your biggest expense. After you’ve paid off your mortgage, it may be transportation, or food, or property tax. You are a lot closer to financial independence when you eliminate such a big expense like a mortgage.

There’s also a component of certainty. If you have a 5% mortgage, you are getting a guaranteed 5% return on your money by paying off the mortgage early. You can’t get that in a bank account – especially now. You can’t get any kind of guarantee in the stock market which can move in crazy directions from day to day. We’ve seen that happen a lot this year.

Invest the Mortgage Money Instead

Another school of thought is that it’s best to invest any extra money instead. Most people expect the stock market to earn about 7% or more over the long run. That’s a lot better than most of the mortgage rates out there which are probably around 4% (or could be less with refinancing).

Most mortgages are 30 years long – plenty long enough to smooth out the gyrations of day-to-day stock market. Even 15-years (like the other popular fixed mortgage option) is almost always enough time to see stronger returns on stocks.

Almost no one disputes the math of investing in stocks is better than mortgage debt. Even the people in the “pay off your mortgage early” camp typically won’t argue the math. Instead they’ll point to the psychological benefits of alleviating the burden of debt. They’ll also point to the guaranteed X% return noted above.

My Choice: Pay Off Mortgage or Invest?

I strongly prefer mathematical solutions to psychological ones. Sometimes our brains play tricks on us. Math is consistent – it doesn’t play tricks on us.

Let’s say that I have $200,000 left on my mortgage (4%) and somehow lucked into $200,000 (it’s hypothetical, work with me). That mortgage has 25 years left on it. If I pay off the mortgage right away, I’ll save myself from having to pay $533,167 in mortgage payments and interest [Calculation: ((1.04^25)*200000)]. That sounds like a great move. However, if I invest instead, I would have $1,085,486 [Calculation: ((1.07^25)*200000)]. There are some minor things like taxes and inflation to consider, but they are not enough to make up for the fact that investing is mathematically speaking almost twice as good as paying off early.

I’ve heard some people say that they are so happy that they paid off their mortgage – especially now*. With unemployment so high and income so uncertain, being mortgage-free has to be a great stress reducer.

However, we’ve been saving and investing since we bought our house in 2012. We’ve enjoyed a fantastic ride on the stock market. However, even if it was an average ride, we’d have enough saved up that we could choose to be mortgage-free as fast as the banks can make the money move.** Plus we’d have a lot of money left over. That’s what I consider my great stress reducer.

One of the problems I have with paying off your mortgage faster is that the money is gone right away. You don’t have the money under your control any more. If you put all $200,000 into paying off the mortgage, lose your job, and your car breaks down, can you come up with the money to fix it? If you’ve invested the money and still have control of it, you can continue to make mortgage payments, fix your car, and eat if you lose your job. You have the money to buy you time in making all those payments in such a terrible scenario.

As strong as I feel about investing, we went with a middle ground. We got a 15-year mortgage with a lower interesting rate (a very, very nice bonus!). This forces us to pay off the mortgage earlier than most people. This past weekend, a friend of mine said that she’d never be able to pay off her mortgage. (It’s done in 2037, which can feel like never, but probably comes up on us quicker than we think.) In 2012, it seemed like 2027 would be “forever”, but it doesn’t feel like that anymore.

We are also able to save money each month to invest. We saved and invested a lot over the last decade. I feel that a 15 year mortgage is ideal if you have the income.

Final Thoughts on Paying Off Mortgages Early

I was inspired to write this by an article that had nothing to do with mortgages. Miranda Marquit wrote about her Taxable Investment Account/Emergency Fund and I thought, “That’s somewhat similar.”

Most gurus would say that you shouldn’t put your emergency fund in a taxable investment account. Emergency funds should be very safe liquid investments. However, she has a tiered approach with some safe liquid cash and more in invested in equities. It’s worked out very well for her and provides her with a larger emergency fund today than she would have had otherwise:

This tiered approach allows me immediate access to cash while I liquidate investments. It works for me because I end up with a higher rate of return with the money in a taxable investment account. For example, I’ve got a 13.3% cumulative time-weighted return with the taxable investment account, since the beginning of 2010, when my return with my savings account has been 3.6%.

Marquit has some safety, but also a lot of growth. This seems similar to investing with extra money instead of paying off your mortgage early. I feel I get that safety of control over the money, while growing my nest egg for more safety (or enjoyment) down the line.

What do you think? Let me know in the comments below.


* Is that the 4th or 5th time I made use of “especially now”?

** Most of our investments are in retirement accounts, so we would get a penalty if we cashed out to pay off our mortgage. However, we could do a partial cash out of a little of our investment profits to buy us a year or two of mortgage payments.

How Much is Condo Maintenance?

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Condo MaintenanceIt’s been a few years since I updated my assumptions of our three rental properties – all condos. I’ve been going off the estimates that I created back then. In some ways these estimates are accurate. The insurance and property taxes don’t change much. In other ways, they aren’t accurate – condo fees continual climb up is the biggest example of that.

Three years is too long, so one of my goals was to create a fresh update early in 2020. I especially wanted to get early start on it so that my alternative income reports will as accurate as they can be. (Look for January’s report next week.)

All three condos have 15-year mortgages on them. We are about halfway through paying them off. To figure out how much money we are making or spending, I needed to come up with the cashflow of each property. That’s simply what we are making in rent minus what our expenses are.

The rent side is simple. It’s the check the tenant pays us.

The expense side is more complicated. A good place to start with that is a common real estate investing acronym, PITI. PITI stands for:

  • Principal
  • Interest
  • Taxes
  • Insurance

These are the core costs for owning a property, with the big missing factor being maintenance. I’m not sure why there’s no PITIM acronym, but maybe it’s because maintenance can vary widely depending on the size and state of the property. For now, let’s fill in the PITI.

Principal and Interest were easy to find our mortgage statements.

Taxes were much more difficult since we rolled them into an escrow. I had to go digging through my city’s assessor website. I wasted a lot of time trying to use Zillow or Redfin, but going to the source turned out to be much faster… and much more accurate. Unfortunately the city didn’t include an easy tax number. Instead I had to take the city tax rate and multiply it by the assessed value of the property. That’s not too hard, but it required looking for two numbers in slightly different places.

Finally, there’s insurance. That was easy to find. I simply dug up last month’s bank statements that had the payments we sent to the insurance company.

Adding in Condo Fees

Since these are condos, they all have a condo fee. I prefer to invest in condos because some of the maintenance is covered by the association for me. I don’t have to worry about hiring landscapers or snow plows. There can be amenities like pools and gyms that are attractive to potential renters – and those costs are shared by everyone. Like some of the previous costs, this is an easy one to figure out. The condo association tells you what the fees are going to be. You pay them every month, so you should have an easy record around.

Just because I like to invest in condos, it doesn’t mean it’s right for you. For example, Rocky Balboa is not really a fan:



Special Assessments: The Hidden Beast

Before I get into the main topic that I wanted to discuss today, I wanted to take some time to cover something very specific to owning a condominium.

One thing to beware of with owning a condo is that there are occasional special assessments. These are repairs to major infrastructure. One of my properties had to put new roofs everywhere due to a structural defect. Two of the other properties needed completely new siding. Neither had planned those costs into the fees. It was tens of thousands of dollars. Fortunately, when it’s this much money, the condo associations usually work together with a loan provider to make it easier to pay.

How Much is Condo Maintenance?

No one seems to talk about condo maintenance aside from the standard condo fees. Appliances need replacing. Plumbing goes bad. Since these are rental properties, we have to paint more often than other people might. (When one tenant leaves and the furniture is gone, dirty walls become the focus of all potential new tenants.) Every so often you have to replace the kitchen and bathrooms. There’s also heating and cooling units to replace. We’re slowly switching to durable vinyl flooring because replacing carpet is a pain.

So how much do you budget for all this condo maintenance?

I could take each item, one by one, create a spreadsheet with expected life and amortize it. That would be a very thorough way to get a very accurate number. However, after calculating all the above numbers, I simply wanted a “rule of thumb” that was “close enough.” I didn’t want to spend another couple hours on each property to get a final cashflow number.

I had an idea for a rule of thumb, but I reached out to Twitter to ask for some advice. Here are some of the best responses:

Stop Ironing Shirts pointed out that the rule of thumb is to budget 2% of the value for 20-year old houses, so 1% would make sense with the condo fee covering the rest. I hadn’t read it was 2% for 20-year old houses, just that it was typically 1%. I was going to go with 0.5% for half of that 1%, but instead found that Mr. Shirts’ number was better.

Next Aron from Nine to Thrive came up with this:

I love the simplicity here. It’s a very easy calculation. This was very close to my 0.5% of the total value rule above, but well shy of the 1% estimate.

I decided that both approaches have their merits and averaged each of the numbers. Again, the goal is to come up with something quick and hopefully close to accurate over the long haul. After all, maintenance costs are always going to be an inexact science where an estimate is the best we can do. This math satisfies my requirements.

Results of the cashflow of our three condos

I put together a spreadsheet of our condos’ cashflow and this is the result:

There’s some extra data here, simply because I’m a nerd. I have “active rent”, which is the rent that we get. I also record Zillow’s estimated rent. This helps me calculate a potential rent (the simply average) of where some kind of fair value should be. In this case Zillow had a weird data point in estimating the other two condos at nearly $1800. Previous months topped out at $1500 and Zillow’s fixed their estimate to be back towards that number.

The first and third condos were ones that my wife and I owned before we met. They lose money every month. One reason is that they had a big assessment. Another is that we have 15-year mortgages on them, so our payments are high. Ordinarily, it wouldn’t be a good idea to buy a rental property that loses money every month. However, it’s a better situation to make the equity than it would be to sell.

The last four rows are my favorite. These show how much we’d make if the mortgages were paid off. This gives me an estimate to what kind of monthly and annual income we make from each property in 2027. Since these all depend on the rent that we are charging, I put three scenarios together. It’s a fairly wide range, but it looks like these properties will roughly supplement our retirement with somewhere around $28K-$30K a year (picking a low-end between the actual rents and the Zillow estimate.)

The downside to this income is that we have to be landlords. Maybe for $25K a year we can have a rental property manager do all that work for us.

For now, let’s stick with the $28-30K number. If we were to try to make this kind of passive income through the stock market we’d need $1,120,000 invested in a stocks that produce a 2.5% dividend. If we wanted to draw down on a large nest egg using the 4% rule we’d need around $700,000. In this later example, the 4% rule may only last for 30 years.

So while the cashflow of the properties doesn’t look particularly good now, the end result should give us the financial flexibility to cover most of our typical living expenses.

Do you have a good (easy) way to estimate condo maintenance expenses? Let me know if the comments.

The Basics of REIT Investing for Passive Income

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It’s been a little while between posts. I’ve been on a short family vacation/road trip. We brought the kids to New York City for a day before moving on to Hershey Park. We’re trying to squeeze every last drop of fun of summer before school starts. It’s been nice to put down the laptop and be blissfully ignorant of whatever is going on in the chicken sandwich wars. However, I’ve been fortunate enough to have a guest post from sureDividend on two of my favorite topics – REITs and passive income. I plan to be back next week with an article (and maybe one before that), before taking another break for the FINCON financial blogger conference.

Passive Income Pyramid
My Passive Income Pyramid

Real estate is a highly popular method of investing for passive income, and for good reason. It has proven to be one of the most reliable long-term investments capable of delivering consistent, sustainable, and inflation-resistant cash flow.

However, it has the main drawback of potentially requiring extensive hands-on management and the hassles that come with being a landlord, which prevent it from being a truly passive investment. Additionally, real estate often requires considerable capital just to purchase your first investment, making it a cost-prohibitive investment for beginning investors.

However, for those looking for true passivity, a less cost-prohibitive, and/or a potentially even more lucrative and lower risk means of investing in real estate, publicly traded real estate investment trusts (or REITs for short) offer investors a compelling alternative. REITs are also attractive for their high dividend yields.

Why Real Estate?

Investopedia defines REITs as real estate portfolios that receive income from a variety of properties and then distribute at least 90% of that taxable income to investors in the form of dividends. Additionally, the REIT itself qualifies as a pass-through entity which means that it does not have to pay any corporate income taxes and most, if not all, of its dividends qualify for a 20% tax write-off after the latest tax reform bill.

Real estate is a tangible asset that provides clear value to its user. Additionally, the nature of its value is limited, necessary, and flexible – giving it remarkable durability and stability in value and making it extremely unlikely to become worthless over time unless it is grossly mismanaged and overleveraged.

Furthermore, real estate often generates cash flow through a variety of means. This means that it can be repurposed to fit whichever business is in demand at the time.

Finally, its finite supply makes it inflation-resistant. While the fiat currencies of the world continue their inevitable march towards zero, the amount of available land actually declines as the population increases. This has resulted in the value of real estate, on average, growing in a direct positive correlation to the rates of inflation and population growth over time.

This aspect of real estate is extremely valuable for early retirees as it leads to cash flow growing in line with consumer prices over time, making it a great way to ensure stable buying power to fund a retirement lifestyle.

These positive qualities are also supported by the data, as commercial real estate scores as the best possible risk-adjusted investment over long periods of time.

Why REITs?

As previously mentioned, while real estate investors enjoy many advantages that often lead to stellar long-term results, real estate still has some drawbacks as a passive income source. In fact, some would argue that it is not really passive income at all. Being a landlord necessitates going through the sometimes arduous and stressful process of finding good tenants, completing the necessary legal work, performing routine maintenance and occasional repairs or hiring contractors, and keeping your tenants accountable to paying their rent on time.

Furthermore, if you ever need to liquidate your investment, preparing, listing, and ultimately selling your property can be a costly, time-consuming, and stressful endeavor. If you have to liquidate it quickly, you will quite possibly have to settle for far less than market value to attract an immediate cash buyer.

Of course, you can always hire a property manager to mitigate many of these stresses, but the costs associated with that will eat heavily into your cash flow and total returns. Additionally, there is the personal liability of getting financing and making mortgage payments if you do not buy your property with all cash as well as the potential for a costly law suit from tenants. In all, these costs could make owning physical real estate a much less appealing long-term investment compared to alternatives.

Finally, there is substantial concentration risk. Unless you are a multimillionaire who can afford to purchase a large empire of rental properties, you will be focusing much of your wealth on a concentrated selection of assets. If that real estate market turns south, or a couple of your properties suffer from prolonged vacancies and/or bad tenants, your investment returns will be significantly harmed.

In contrast, REITs provide investors with all the benefits of traditional real estate investing without the aforementioned downsides. Instead of dealing with the dreaded “triple Ts” (tenants, toilets, and trash) of landlording, shareholders in a publicly traded REIT can kick back and relax, knowing that a professional management team is caring for their real estate portfolio 24/7. This makes REITs a truly passive investment.

Furthermore, publicly traded REITs are very liquid investments. With a simple click of a mouse (and without costly transaction fees), investors can buy and sell shares of a REIT at the current market price. This means that if an emergency strikes or some other reason arises that causes investors to want to liquidate their real estate investments quickly, REIT investors can get out immediately if they need to.

Finally, REITs offer investors much less risk than physical real estate. A single REIT share in some cases can be purchased for a few dollars, providing a stark contrast to the thousands of dollars’ worth of equity typically needed to purchase a piece of physical real estate. This enables even small dollar investors to diversify broadly across a large number of different REITs. Additionally, each individual REIT typically holds dozens, hundreds, or even thousands of different individual properties, often across multiple cities, regions, and even countries. This gives REIT investors an enormous diversification advantage over their real estate landlord peers as their cash flow tends to be much more stable and secure against market, tenant, and vacancy risks.

A final advantage of investing in REITs is that over long periods of time they have proven to offer superior average returns than investing in individual properties by a score of 11% per year to 7% per year (source).

While this outcome may sound surprising at first, it’s very much expected and even normal. There are real economic reasons why REITs outperform and why this outperformance is expected to continue. First is because REITs generally experience faster growth rates than individual property investments. This is due to the fact that REITs have better access to low-cost capital and enjoy professional management and economies of scale. Second, private investors have a tendency to take on far too much leverage and are lulled into a false sense of security during prosperous times. REITs, meanwhile, take a longer-term, full-cycle approach to investing and typically maintain a responsible “happy medium” level of leverage. This enhances long-term returns without putting them at excessive risk of suffering permanent loss or even bankruptcy in an economic downturn.

Final Thoughts

Real estate has proven to be a great way to build long term wealth and a steady and growing stream of passive income. With access to publicly traded REITs, every investor can begin building wealth and an entirely passive income stream today. In fact, many investors would be better served over the long term by investing solely in REITs instead of physical real estate.

Despite this, many investors lack the proper mentality to invest in publicly traded securities as they will panic at the first sign of extreme market volatility and sell their REIT shares at a loss. Other investors prefer to have as much control as possible over their investments and therefore also prefer to invest in physical real estate. For those that can handle the volatility and prefer total passivity to their income-generating investments, however, REITs are the ideal passive income generating investment.

This article discussed REITs to fill out the top of your Passive Income Pyramid. To see our favorite dividend growth stocks today, start your free trial of The Sure Dividend Newsletter.

The Sure Dividend Newsletter includes our Top 10 dividend growth stock buys each month, a portfolio building guide, and more. As a bonus, Lazy Man and Money Readers can save $31 off on The Sure Dividend Newsletter by starting their free trial at this link.

One Solution to Planning College Expenses?

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Nearly three years ago, I wrote, College Planning is Impossible (But Do It Anyway!). At the time My kids were just 2 and 3. The idea behind the article is that college costs vary so much, that there’s no easy way to plan for them.

If you want to be aggressive you could save a ton of money in a 529 Plan. That’s assuming you have a ton of money… which most people don’t. The downside to that (other than the lack of a ton of money) is that if you put too much in, you have to deal with penalties or other creative uses for 529 plans. Perhaps the best thing to do is just let the kids have the remainder for their kids… or maybe some schooling down the line.

Essentially, if you overshoot the 529 savings, your money is trapped. That’s not a terrible problem to have, but it’s less than optimal. You may even think that you are planning it well, but what if Jack/Jane gets a scholarship/grant or goes to a public school making the costs very different than what you planned?

College has just too many variables and you can’t plan for them…

… except we did. And I swear it was completely by accident.

Before I get to that I’d like to cover some ways to cover college expenses. Not all will be applicable to all families or students. There’s a lot of tools in the tool box and we hope utilize them all.

Covering College Costs

I focused on 529 plans above, because that’s the traditional savings vehicle for 529 plans. Sorry Mr. Coverdell… I have you, but you are mostly obsolete. Like Smelly Cat, it is not your fault. One of the reasons I got a Coverdell was that it could cover private school costs before college, but 529 Plans can do that now, thanks to the recent changes in the tax law.

How could one cover college expenses? Here are a few ideas:

  • 529 Plans – That’s obvious one. It’s a great vehicle to saving money
  • Schoralships/Grants – It would be nice to get these. Some schools may give more than others, so our plan is probably to apply to a lot of schools?
  • Pay off adminssions – Just making sure you are paying attention. This certainly wouldn’t save you money. You might end up in the news… and not in a good way.
  • Student Loans – The old standby. It’s a big problem nowadays, so hopefully we can keep this down.
  • GI Bill – My wife’s military service gives benefits that we can split between the kids. I realize that not many people may have this option.
  • AP credit – If you can test out of a few classes, you can get some credit without having to pay for it.
  • Community College – Most community colleges are cheaper than traditional public and private universities. It may be possible to take some basic pre-requisits for cheaply and then transfer.

I feel that it is like having multiple income streams. The hope is that through some combination of the above (with minimal loans) paying for college won’t be impossible.

But we have one secret weapon that’s not listed above. We have rental properties. The mortgages will be paid off around the time the kids start college.

This means that we’ll likely have some $35,000 or so (after expenses) each year. Is it enough to cover college costs in 11-12 years? Who knows, but it will certainly help. The benefit of this accidental plan is that we don’t have to think about whether we are saving enough or too much in a 529 plan. If there’s extra money left over, that’s just living expenses.

So how might you be able to plan this more intentionally? Unfortunately, you’d need have the money for a good downpayment around when the children are born. Then with a 15-year mortgage, the timing should be right. Of course, it’s not great being a landlord while raising newborns. OF course if you have the money for a downpayment, you put it in a 529 plan and mabye expect it to quadruple (assuming 8% annual returns) by the time the child is in college. I think prefer the real estate plan, because it is more flexible.

I’m not saying you can do it too. Like my 6 year old’s new catchphrase, “Nope, not at all.” However, it is something that you may want to explore.

Your First Home Comes With Your First Mortgage – Here’s What You Should Know

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buying a home

Recently, I had a Twitter interaction that has had me thinking of going back to the basics in an attempt to reach some readers who may be towards the beginning of their personal finance journey. Around the same time, I had a guest post hit my inbox covering a topic that I had long forgotten – buying my first home. Enjoy this post from Lazy Man and Money reader, Ivana.

If you’re anything like me, you consider the purchase of your first home a milestone in your adult life. After all, nothing quite says “I’ve made it” better than owning a home of your own, and it signals a kind of stability that wasn’t really there in your younger years.

Of course, to get that far, you’ve got to get approved for a mortgage (unless you’re independently wealthy, and if so, I congratulate you). When I first went through the process, I hadn’t the faintest clue what I was getting myself into – and that’s a scary thought because my mortgage represents the largest single debt on my personal ledger.

As it turned out, I learned a great deal from the process. I just wish someone had sat me down and given me the lowdown on what to expect before I jumped in head first. If you expect to be in a similar position soon, you’re in luck. Here are some of the important things you need to know about getting your first mortgage, but didn’t even know to ask.

Lay the Groundwork, or Suffer the Consequences

The first bit of wisdom that I’ll impart here may seem obvious to some, but it never occurred to me before I applied for my mortgage: check your credit reports (all three, I’ll explain why later). The reason I say this is that your credit report may be hiding some surprises that you’d rather not encounter while sitting in front of a loan officer. In my case, I found out from my mortgage specialist that Experian was under the impression that I owed Verizon Wireless about $550 from an account I had closed in 2001. Interestingly, Equifax and TransUnion had no record of the balance.

It turned out that Verizon had not closed my account when I requested it, and instead let the balance continue to build until they sent it off to a collections agency. That agency had never contacted me and only reported the “debt” to Experian. The good news is that I was able to get it worked out and it didn’t impact my ability to qualify for a mortgage, but the lesson is clear: don’t let the fact that you’ve never paid a bill late fool you into thinking your credit reports are accurate. Make sure everything’s right in advance, and also do everything you can to lower your debt-to-credit ratio. Be aware that lenders extend the best offers to applicants with FICO scores of 720 or higher, so that’s where you’ll want to be before applying.

Choose a Mortgage, Don’t Let One Choose You

Another thing that I hadn’t considered when looking for a mortgage was just how many options there are. Seriously, if you’ve never shopped for a mortgage, you’ll likely be astounded by how many lenders there are out there. What’s even more shocking is that you’ll feel like you need an advanced degree to tell the difference between all of the mortgage products you encounter.

So first things first – learn all of the lingo and as much as you can about the various available mortgage types before you try to tackle a mortgage comparison on your own. You’ll need to understand not only the way interest rates work, but also what kinds of fees may be part of the loan (origination, title search, insurance), and any other closing costs that might (or might not) get rolled into your loan. Be aware that it’s going to seem like lenders go out of their way to make it difficult to compare these products, with opaque documentation and the like. Don’t be afraid to admit that you’re in over your head. Use a mortgage broker if you must. Whatever you do, make sure you understand your mortgage before you sign it – you’re going to have to live with it for a while.

Look Out For Gotchas

The last major thing I wish I’d been counseled on before getting my mortgage was all of the various little considerations that go into the mortgage package you’re offered. I call them “gotchas”, only because if you don’t understand what they are before you take out your mortgage, you don’t get a do-over. First, you’re going to want to make sure that your lender has approved you for a mortgage you can actually afford. That means informing them about your real monthly expenses as opposed to just what’s on your credit report. For example, if you have financial obligations like supporting an ailing parent, child support, or any other ongoing monetary responsibility, speak up! Remember that it’s the lender’s job to look out for their own interests – not yours.

Second, scour the details of your mortgage offer to look for things that may come back to bite you later on. The biggest one I encountered is known as a prepayment penalty. This common little trap is the lender’s way of extracting their pound of flesh from the borrower, come what may. The idea is, you’re bound by contract to only pay back a certain amount of your mortgage within specific timeframes. It exists so you won’t be able to save on interest by paying down your principal when you’re flush with cash. The thing many don’t realize, of course, is that such an arrangement doesn’t only apply to unexpected financial windfalls.

It also means (depending on the language in your agreement) that you’ll get hit with the penalty if you sell your home (since you’d be paying down the mortgage with the proceeds). It could also mean you can’t refinance if interest rates improve without paying the penalty, too. And if you’re thinking it’s no big deal, consider that the typical prepayment penalty is equal to 80% of six months’ worth of interest, which can be a hefty sum. The good news (if there is any) is that prepayment penalties typically phase out after one to three years, but if you’re subject to one, it may mean you’re trapped in your mortgage for that amount of time even if you have an emergency and need to sell your home.

Welcome to Homeownership

If you’ve made it this far, that should mean you’re at least twice as prepared to go out and get a mortgage than I was the first time out. Don’t rest on your laurels, though. What I’ve covered here is by no means encyclopedic – far from it. On the contrary, getting a mortgage is one of the most complex and consequential financial decisions anyone can make, and they come in all shapes and sizes.

That’s why the best bit of advice I could ever give to anyone who’s about to look for their first mortgage is to take their time. Do as much research as you can beforehand because the more you understand in advance, the less daunting the process will be. The results will be better, too. After all, the last thing in the world that anyone should want is to have the home of their dreams come with the mortgage of their nightmares. With any luck, I’ve done a bit to spare you that fate – the rest is up to you.

Editor’s View

My own experience was helped quite a bit by the support system I had. My mother was right there with me. My older brother was buying a house around the same time. One of my best friends, who I had lived with previously had recently bought his first house. My real estate agent was the spouse of a good friend. My closing agent was a groomsman at my wedding. It was almost impossible to imagine a better “Dream Team” of support.

Despite all that, I was still very nervous. So if you feel nervous, that’s to be expected. I hope you can surround yourself with at least a few people who have a lot of experience.

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