September 5, 2017

Buying a house is not a good investment strategy and is a major transaction that should be entered into thoughtfully.


1)      I am buying a house with an agreed price of $300,000

2)      I have a mortgage for the full amount

3)      I qualified for the financing at 3% fixed rate over 25 years

What is it going to cost me?

First of all I have the purchase price of the house (we are assuming that my down-payment was used up for legal fees and other conveyance costs) so $300,000 is what most people think of but let’s consider the rest of the cost:

Interest costs – over the first five years of your mortgage I will pay $41,608 in interest that is an average of $8,322 per year or $694 of after tax income just for interest payments.  I will also have paid $43,577 in principal payments which works out to be $8,715 per year or $726 per month.

If I never add new money to your mortgage and make regular monthly payments for the next twenty five years my $300,000 house will have cost me $425,920 plus maintenance costs, and taxes and utility costs.

What happens when I renew my mortgage?

Based on the assumption that my mortgage renews after five years and assuming that interest rates have gone up to the 100 year average of 6% one of three things is likely to happen:

1)      I renew the existing outstanding principal for the remainder 20 year amortization; or

2)      I renew for twenty-five years in order to control your monthly outflow; or

3)      I add new money to the mortgage to consolidate some debts.

So in the first scenario I will pay a total of $181,868 in interest added to the $41,608 already paid and the $300,000 for the original purchase resulting in me paying a total of $223,476 in interest charges or $523,476 for the house

In the second instance I pay a total of $235,760 in interest payments which are added to the $41,608 already paid and when coupled with the original purchase price of $300,000 my house will cost me a total of $577,368

Our final scenario assumes that I have refinanced for $300,000 over twenty five years at 6% and if I did so I would pay $275,826 in interest plus the $41,608 already paid for a total of $317,434 in interest charges plus the principal amount of $300,000 and the reconsolidated amount of $43,576 totaling $661,010 (for my $300,000) house.