Mortgage Factors
Most readers will likely be homeowners multiple times throughout their life if they aren’t already. This means going through the house buying process a few times.
If you are seeking a full writeup on how your living situation ties into your finances, the TFC course goes into detail about buying vs renting, home ownership expectations, and house purchase criteria. Today’s blog post addresses how different personal finance areas influence home ownership costs.
Down Payment
Mortgage loans require a down payment between $0 and 10%. A higher down payment translates to a lower mortgage and therefore a lower monthly payment.
Typically, VA loans are no money down. Physician loans have low down payments. Conventional loans require a 3-5% down payment.
Federal Housing Administration (FHA) loans require a 3.5-10% down payment dictated by credit score. A score above 580 will have you on the low end. A score of 500 will still qualify for a loan, but expect 10% down.
A 20% down payment was the recommendation I grew up with because it eliminates the need for private mortgage insurance (PMI). PMI costs 0.5-1.5% of the mortgage amount annually. Good credit leads to a lower PMI rate.
Here is a $450,000 house. All mortgages are at 7%. Anything less than 20% down carries $300 per month PMI. Payments shown account for PITI (principal, interest, taxes, and insurance).
Not much difference in the monthly payment when comparing $0 down and $45,000 down. It requires a great deal of cash to significantly impact mortgage payment.
The Financial Cocktail recommends spending no more than 20-25% of net income on housing costs (among other recommendations found in the course). Why? Because housing as a personal residence is not a wealth building investment. We all need a place to live, but costs associated with home ownership make the expected 4% annualized growth unappealing.
For this reason, home equity counts towards net worth, but not your FI number. The only way to access funds is selling the house or taking a home equity line of credit (HELOC).
Bottom line, enjoy your house, but don’t be house poor and invest in assets that will actually fund your retirement.
Housing Affordability
It’s important to understand how mortgage factors influence monthly housing costs to maximize the effectiveness of your dollars.
If you want to see how much house you can afford, look at this chart showing the absolute minimum monthly NET income and annual gross income to afford the various monthly payments.
I understand there are many variables at play with NET income such as retirement contributions and insurance payments, but you get the idea.
If you NET $14,000 per month and want this $450,000 house, save up a 10% down payment. Increase the down payment from $22,000 to $45,000. Continue renting or living in your current place a few more months. You net $14,000 after all. It won’t take long to have $45,000 in a sinking fund.
Maybe PMI is the difference. Saving $300 per month on PMI decreases the annual gross income requirement by $20,000.
Even if you qualify for a lower down payment, play by your rules. Or The Financial Cocktail rules. Don’t listen to the lender because they aren’t in it for YOU. Apply a great enough down payment to have a monthly payment that allows you to pay off lingering debts and invest for the future.
Interest Rate
Historical average mortgage rates are 7.5%, so the rates we are seeing in 2025 are average. Not average for millennials, but average for the history of mortgage rates.
You may have heard, “date the rate and buy the house.” This refers to buying a desirable house with an undesirable rate hoping to refinance in the near future.
This is the dark horse. Same $450,000 house and 5% down payment. Different fixed 30-year mortgage rates. As you can see, a small rate change drastically changes the outcome.
Pre 2022, not only were houses more affordable, but interest rates were low. Home owners and buyers locked in 3% mortgages. The price to move is not only a higher home price but also double the interest rate. The exact same $450,000 house in this example would have cost $300,000 and had a monthly payment of $1,800. That’s a good reason to stay put.
It’s possible to buy down the rate. Expect a 0.25% interest rate decrease for 1% of the mortgage amount. In this situation, it would cost $17,100 to move the rate from 7% to 6%.
This decreases the monthly payment by $281. The break-even point is 5 years.
Apply an extra $17,100 to the down payment and 5% down becomes 8.8% down. Monthly payment decreases from $3,506 to $3,392 – A $114 per month difference.
Based on current rates, it’s generally more advantageous to buy down the rate as opposed to increasing the down payment. If the seller offers credit, have it applied towards buying down the rate.
Refinancing
Refinancing is essentially obtaining a new mortgage with a new rate. Look at your timeline in the house, the rate difference, and the cost to refinance. Expect to pay 2-6% of the loan amount in fees.
Be sure of two things…
The new rate and costs of refinancing are mathematically beneficial
It’s worth resetting the amortization on the loan
Loan Rate Modification
This is simply paying a fee to adjust the rate on your current mortgage. Way more beneficial than refinancing. Not offered by many institutions, but worth asking.
15 vs 30 Year Mortgage
Mortgage duration is another commonly debated variable. On that $450,000 house, it looks like this…
Pros of a 15-year mortgage…
To no surprise, the 15-year mortgage is more costly per month, but has great savings over the life of the loan. This same concept applies to extra mortgage payments. Basically, more dollars towards the principal balance of the loan sooner.
Debt free status is achieved quicker. Really great going into retirement. This lowers perceived risk and frees up capital for other endeavors.
Cons of a 15-year mortgage…
It costs more and demands more capital. Not always bad.
Pros of a 30-year mortgage…
I don’t mind the 30-year mortgage because it keeps housing costs fixed for a longer duration. A lower monthly housing cost allows for cashflow allocated elsewhere. I’m thinking high interest debt or tax-advantaged accounts.
Investing the $1,000 monthly difference into an index fund would build a $340,000 portfolio after 30 years. It’s playing interest arbitrage at this point.
Very advantageous for those who don’t plan on relocating PLUS have a low interest rate.
Depending on mortgage size, a slower payoff allows for more years of mortgage interest deductions if itemizing taxes. I’m not yet in the “spend $1 to save $0.40” crowd, so don’t buy too much house solely for the deduction.
Cons of a 30-year mortgage…
Ultimately paying more in interest. Like $450,000 more. This has the potential to be okay and not okay.
The argument against fixed housing costs is the average person buys a new house ever 7-10 years. This means more sunken closing costs and the amortization on the loan resets. Back to 80% of the payment going towards interest.
For anyone making the argument for fixed housing costs, ensure you don’t relocate.
Credit Score
This is a metric used to determine worthiness to pay back a loan. As previously mentioned, credit score impacts down payment and interest rate. I have an entire blog post dedicated to credit scores here, so I won’t ramble.
Along with solid credit, lenders look at income and debt-to-income ratios. CRNA income is solid. Possibly not so solid for the self-employed crowd.
CRNA DTI ratios may be rough. 43% is considered high. 35% is considered manageable. Well, $200,000 in student debt doesn’t exactly meet these metrics. This is where physician loans and manual underwriting come in.
Regardless, consider credit score an impact on interest rate and loan worthiness.
Pay with Cash
One day, if not already, there will be the option to pay with cash. This has its own pros and cons. There is no mortgage, so I’d consider that a major impact on a mortgage. Great to remain debt averse. Great to limit cost to the sticker price plus closing costs.
I’d enjoy hearing your take on housing. Thanks for reading!
