officially over the hump

We just sent off our first mortgage payment in which the principal that we're paying is more than the interest. Gwyneth and I are planning on going out to celebrate later this month. I figured in honor of this I should post some of the things we learned while buying a house. Some of this information may have become more obvious thanks to the Sub-prime crisis, but I'll post it anyway.

1. Don't even think about buying a house unless you can put 10% down, and 20% is better - I know that it's frustrating to rent while your friends are buying and your family is telling you that you are "throwing your money away", but you are really asking for trouble buying a house with very little down. We know people who can't move because the market went down and now they owe more on their house than it's worth (or at least more than they would clear after paying the realtor's commission). This is a bad position to put yourself in, especially if God is calling you to move. I used to not say anything when friends told me they were considering this, but I've decided that being a real friend means saying things that are hard and that people don't want to hear.

2. Make every effort to get the best rate you can (i.e. look at lots of different sources). Don't trust that your mortgage broker is doing right by you (our mistake), and definitely don't get a mortgage from a big bank (credit union rates usually are up to half a point better). A tenth of a point doesn't seem like a lot, but over the course of the loan it will be several thousand dollars.

3. Under no circumstances use one of the online calculators that tell you how much house you can "afford". Sit down and look at the budget to figure out what kind of payment makes sense. Chances are good that the number you come up with will be several hundred dollars per month less.

4. Consider a 15 year mortgage instead of a 30 year. I'm not going to be dogmatic about this since I see both sides of the argument, but at least consider getting a 15 year mortgage. You'll get a better rate than a 30 year and save tons of money on interest over the course of the loan. The downside is that if your job situation changes, you need to have the flexibility to meet the higher monthly payment. My favorite online calculator to figure this stuff out is Karl's mortgage calculator. If you do go with a 30 year loan for safety reasons, definitely consider prepaying principal to finish off the loan before 30 years.

5. This one is obvious now that we've had the credit crunch, but you don't want an ARM, get a fixed rate mortgage.

6. Avoid paying "points". This is money that you pay up front to get a better rate. Any cash you have lying around should go to principal, not thrown away in closing costs. Don't forget that if interest rates go down anytime between now and the next 30 years, you can always refinance and that most people will either refinance or move WELL before the crossover mark of when paying points pays off.

7. I know it's tempting to get a house that you can "grow into", but if you assume that property values do about the same as inflation (this one obviously depends greatly what market you're in), you save a TON of money if you buy a starter house and then move into a bigger house 5-7 years later even if you include the realtor's commission. Play with Karl's Mortgage Calculator to see the details.