Why are mortgages so expensive?

Buying & Selling Real Estate
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Why are mortgages so expensive?

Jose Corbera
Investor · Miami, FL · Member since 2016 · 47 posts · 12 votes

Hi All,

I'm about to purchase my first home with the intent to rent it out in due time. The cost of the home is 225k with 3.5% down. My monthly principal and interest is 1054.72, but when including hoa fees and the other misc. fees it will come close to $1895 per month. My loan is locked in at a 4% interest rate over 30 years. 

Are mortgages this expensive? Essentially, I will be paying almost $379700.99 for a home that costs 225k. So the true cost of the loan will be about 158k when all is said and done?! Is it just me or does anyone else find this ludicrous? Maybe because it's my first time buying and I feel that I am getting buyer's remorse I may be overreacting. 

Lastly, would it be better to buy a cheaper place or is all just relative to what is being bought?

Any advice would be much obliged? 

Thank you ,

Jose

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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y

Funny thing is that buying a personal home is a life style decision that through out the life of ownership with payments, utilities, taxes, maintenance etc will cost,in 90% of the country, more than it will ever be worth. It is not a investment it is simply forced savings and in reality is actually a liability.

Reality .... renting is far less expensive than owning and you can afford to save even more money than the forced savings of a mortgage.

There is zero financial logic in owning a personal home yet we all seem to do it. We are strange creatures.

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    You're paying PMI because you're putting down less than 20%- it's basically paying insurance because you didn't wait to save up more.

    You're also paying an HOA- how much is that each month?

    That's an extra expense that's not really related to your mortgage- that's related to the neighborhood you're choosing to buy in. 

    I'm guessing your HOA is several hundred a month to get your monthly payment that high?

    $225k Loan should land closer to $1400-1500 a month so....$400a month HOA?

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  • Jose Corbera
    OP
    Investor · Miami, FL · Member since 2016 · 47 posts · 12 votes
    9y

    Absolutely, I am paying $157 per month. $215 in hazard insurance, $185 in taxes, and $284 in hoa fees. I know it's a sound deal, I've ran the numbers, just getting cold feet as this is my first property. Thanks!

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    9y

    Yes, that is how mtg.s work.  You have to realize you are paying 4% interest PER YEAR on your outstanding balance.  If you paid it back in a year, you'd only pay about $6000 in interest.

    2Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    Can I ask you @Jose Corbera ....will this property be able to rent for over $2,000 a month? 

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  • Jose Corbera
    OP
    Investor · Miami, FL · Member since 2016 · 47 posts · 12 votes
    9y

    Previosuly it was renting for $1800 per month. With the upgrades I'd like to do, I can rent it our for either $2000 per month or a bit more. That is what similar properties with slightly less upgrades are asking for. Why do you ask? 

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    You just mentioned that being the goal for the property. That's a fairly high payment because of the PMI and HOA just wanted to make sure you'd still have cash flow ...

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Funny thing is that buying a personal home is a life style decision that through out the life of ownership with payments, utilities, taxes, maintenance etc will cost,in 90% of the country, more than it will ever be worth. It is not a investment it is simply forced savings and in reality is actually a liability.

    Reality .... renting is far less expensive than owning and you can afford to save even more money than the forced savings of a mortgage.

    There is zero financial logic in owning a personal home yet we all seem to do it. We are strange creatures.

    3Reply
  • Tommy F.
    Investor · Charlotte, NC · Member since 2015 · 183 posts · 146 votes
    9y
    Jose Corbera 4% for 30 years is cheap. Plus your after tax cost of debt is even lower. Moreover, inflation and appreciation are working in your favor. Assume a mere 2% inflation, your debt devalues at that same rate. Assuming you didn't buy at a market high price, consider a mere 2% appreciation each year. Your mortgage is a great financial tool. Now, the PMI you're paying is because you only put 3.5% down. And the HOA is another fee you could've avoided or minimized by selecting a different property. I encourage you to study more in depth about mortgages and you may come to better appreciate the deal you have. All the best!
    0Reply
  • Russell BrazilBusiness Member
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    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    4% is near the all time low. Just think what it was like paying 15% interest plus int he 80s.

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  • Jose Corbera
    OP
    Investor · Miami, FL · Member since 2016 · 47 posts · 12 votes
    9y

    Thanks  I'd like to learn as much as possible but there is just so much info out there, I sometime just don't have the time. Will def keep learning though! 

    Thanks @Russell Brazil. 

    @Natalie Kolodij I understand that the payment is fairly high but the comps for surrounding townhomes are in the 275k range. My current strategy is to buy and hold this particular property, rehab it, have my tenant pay my mortgage payments, and sometime down the road, either decide to sell it or keep holding on to it as rents are quickly skyrocketing in this neighborhood. Any further advice is surely still appreciated. 

    0Reply
  • Tommy F.
    Investor · Charlotte, NC · Member since 2015 · 183 posts · 146 votes
    9y
    Jose Corbera Pros and Cons to HOA. Your last post clarified this is a townhouse. Pros - the HOA takes care of exterior and grounds maintenance. Cons - there may be a limit on how many units can be rented, check the HOA covenants. Other Con, special assessments. Just when you think you're cashflowing nicely, the HOA hits everyone with a special assesment for some underfunded captial expenditure. Read the HOA financial statements when they're released.
    0Reply
  • Ben Zimmerman
    Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes
    9y
    Originally posted by @Thomas S.:

    Funny thing is that buying a personal home is a life style decision that through out the life of ownership with payments, utilities, taxes, maintenance etc will cost,in 90% of the country, more than it will ever be worth. It is not a investment it is simply forced savings and in reality is actually a liability.

    Reality .... renting is far less expensive than owning and you can afford to save even more money than the forced savings of a mortgage.

    There is zero financial logic in owning a personal home yet we all seem to do it. We are strange creatures.

     If renting were truly cheaper and a better way to go, we wouldn't have tens of thousands of investors here on BP finding ways to make money by BUYING houses and renting them out.

    1Reply
  • Arianne L.
    Investor · Fort Walton Beach, FL · Member since 2015 · 568 posts · 966 votes
    9y

    @Jose Corbera 4% interest is really cheap. I usually pay my private lenders 10% or more and that's actually very reasonable. Being able to buy a house for only 3.5% down is also amazing. 

    You said the unit usually rents for $1800 and with some upgrades could potentially rent for $2,000. Just understand that even in your best case scenario, you would only "make" $100 more than your fixed monthly expenses. What if you had to pay a property manager? They usually charge 10%, so instead of making $100, you'd lose 100 a month if you did rent it out. Then what if the roof leaks? What if the HVAC needs to be replaced? Make sure you set aside money every month for those expenses

    Have you looked at using a 3% down conventional loan instead? Usually you can have the lender cover the PMI in exchange for a raised interest rate and it usually ends up cheaper plus you can deduct mortgage interest from taxes but not PMI

    2Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y
    Originally posted by @Thomas S.:

    Funny thing is that buying a personal home is a life style decision that through out the life of ownership with payments, utilities, taxes, maintenance etc will cost,in 90% of the country, more than it will ever be worth. It is not a investment it is simply forced savings and in reality is actually a liability.

    Reality .... renting is far less expensive than owning and you can afford to save even more money than the forced savings of a mortgage.

    There is zero financial logic in owning a personal home yet we all seem to do it. We are strange creatures.

     Greg I think this can vary by region. In most of my market (not all) it costs about a $500 to $1500 a month more to rent than to own. There is a also parts of my market where it is more costly to own, typically in the higher price points. I couldn't afford to pay the rent on most of my rentals actually. 

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Russell Brazil:

    4% is near the all time low. Just think what it was like paying 15% interest plus int he 80s.

    I totally agree ... in the interest rate sense, mortgages are ridiculously, bubble-lishously cheap right now. From another perspective, though, prices are higher ... so lower rates on higher prices may be more expensive in dollar amounts, as I suspect would be the case in many markets (yours and mine, for example) for a mortgage payment at 15% in the 80's vs the mortgage payment at 4% for the same exact property today, even after adjusting for inflation. The thing about that is, if rates go down, you can refinance to the lower rates. If prices go down, you can't renegotiate your purchase price. No reason not to invest in RE, just food for thought to put a different spin on. Affordability is therefore a better metric IMO as it combines median price, median income, and interest rates rolled into one.

    2Reply
  • Tommy F.
    Investor · Charlotte, NC · Member since 2015 · 183 posts · 146 votes
    9y

    @Jose Corbera You mentioned you want to learn, but don’t have time. I invite you to enroll in Automobile University. As you’re rolling through beautiful south Florida, listen to podcasts, courses on CD, whatever you can find. I’m going to get you started with two.

    The first easy lesson is a podcast episode that will require you to listen several times to understand the concept. The speaker is a bit hard to follow on first listen, so give a few tries. Also, the first few minutes of the episode is not helpful, so bear with it, and on your follow-up listens just speed through to the key points. You can listen on Sound Cloud with your PC or download the podcast. Be sure to read the show notes.

    https://moneyfortherestofus.net/mny044-mortgages/

    The second easy lesson for you is an 8 minute Youtube clip and you can read the same article on the other link to better understand the info.

    https://www.youtube.com/watch?v=zP0rP3X-nMg

    http://www.edelmanfinancial.com/education-center/articles/1/11-great-reasons-to-carry-a-big-long-mortgage

    0Reply
  • Tommy F.
    Investor · Charlotte, NC · Member since 2015 · 183 posts · 146 votes
    9y

    @Jose Corbera  Forgot to mention, the podcast is about paying-off a mortgage so don't dismiss it.  The speaker goes in more detail and will explain the benefits of a mortgage.  Take care!

    0Reply
  • Nic A.
    Flipper/Rehabber · Chandler, AZ · Member since 2017 · 35 posts · 10 votes
    9y

    I am a Loan Officer who has done roughly 1500 loans in the last decade. The reason it costs so much is because its Florida. Everything about FL is pretty spendy when it comes to housing. Insurance sucks because of hurricanes and flooding. HOA doesnt help. No state income tax so higher real estate taxes. I am one of the few Loan Officers that has done a loan in all 50 states. New York and Florida are pretty much the two worst states to do business in because of how expensive it is. NJ is a close 3rd. Ask your Loan Officer why you cannot do a conventional #1 and then ask about Lender Paid Mortgage Insurance. Conventional mortgages only require 3% down these days. Yes the rate will be higher but your payment will be lower overall.

    2Reply
  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Jose Corbera - As others have mentioned, your mortgage is actually on the low side. But no one has mentioned the viability of this as an investment. If you truly plan to rent out your first home, and are "about to buy" but have still have outs in the contract, you need to find a better deal!

    If your best case scenario for gross rent is $2000, you are almost definitely going to lose money in the long term. All it's going to take is a one extra expense per year, or slight increase in HOA, taxes, or insurance to eat up that $105/mo in cashflow. While the HOA will take care of all exterior things, you will also have to make minor repairs as necessary, and maybe pay water/sewer or trash collection, too, depending on what's including in the HOA. This might be a great place to live, but is probably not a good long-term rental investment.

    Just wanted to get that perspective out there for you. Good luck!

    0Reply
  • Jeff Dulla
    Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes
    9y
    Greg S. I am completely biased but if what you say is true, then why is the gap between the wealth of homeowners and the wealth of renters still so wide? Jose Corbera - the cost may seem high to you but what you may not realize is that we are still near the all time historic low for rates. Affordability is just coming off of an all time high. This could be one of the cheapest mortgages you ever have in your lifetime.
    0Reply
  • Aaron Z.
    Investor · Virginia Beach, VA · Member since 2015 · 83 posts · 34 votes
    9y
    Originally posted by @Jose Corbera:

    Hi All,

    I'm about to purchase my first home with the intent to rent it out in due time. The cost of the home is 225k with 3.5% down. My monthly principal and interest is 1054.72, but when including hoa fees and the other misc. fees it will come close to $1895 per month. My loan is locked in at a 4% interest rate over 30 years. 

    Are mortgages this expensive? Essentially, I will be paying almost $379700.99 for a home that costs 225k. So the true cost of the loan will be about 158k when all is said and done?! Is it just me or does anyone else find this ludicrous? Maybe because it's my first time buying and I feel that I am getting buyer's remorse I may be overreacting. 

    Lastly, would it be better to buy a cheaper place or is all just relative to what is being bought?

    Any advice would be much obliged? 

    Thank you ,

    Jose

     Jose, that's awesome that you are about to jump in to RE, but I'd recommend looking at this as an investment that you will live in temporarily and therefore evaluate it as such initially.  If the highest rent you can charge is 21-2200 after your improvement and your payment is $1900, you are going to have a thin cushion when expenses arise. Repairs, vacancy, capitol expenditures for things that will need to be replaced every 10,20,30 years, all need to be accounted for over a long period and then determine what you need to be setting aside each month to cover these.  I think you'll find that you'll be losing money every month.

    To your question, yes, in absolute dollar amounts, mortgages are expensive..i.e. 158k expensive in this case, but there are lots of ways that they allow you to get ahead if used properly so think of it as spending money to make money.  As long as you can make more than you are spending then its a win for you.

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    9y

    Mortgages are DIRT CHEAP; not expensive.  The opportunity cost for stuffing cash in that property are in excess of 20% annually if you invest your cash in decent projects.  Imagine not receiving 20% on your money for 30 years.  Go do the math on what that is worth and compare it to the measly amount you pay for use of the money.  I think that will change your perspective on how much the money costs.  

    2Reply
  • Pedro Diaz
    Miami, FL · Member since 2017 · 6 posts · 0 votes
    9y
    Hi Jose Corbera When you financed for 30 years that's usually what happens. If am not mistaken 30 years @ $1895.00 is 682k plus 3.5% you put down comes up to 706k. Just make sure you can get rid off the PMI later and is not for the 30 year loan. So in reality you pay one house for you and two houses for the bank.
    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    @Jeff Dulla

    The gap is due to the fact that the majority of renters live a different life style. If they saved the difference between what they pay in rent and what it costs to own a home they would be much farther ahead in life, problem is most spend it on useless junk.

    Renters exist because it is less expensive than owning. This is also one of the reasons that long term hold mom and pop investors rarely make any profit.

    Those that are saving usually end up buying their own home. It all comes down to life style choices. Owning is more costly in the long term than renting.

    Mortgage, utilities, maintenance will match or exceed the purchase price and out strip normal appreciation which historically track annual cost of living increases. Long term 30-50 years stats are fairly consistent.

    0Reply
  • Dave Howland
    Northern, NJ · Member since 2016 · 16 posts · 1 vote
    9y

    Can someone remind me? Once he's reached 20% equity in the house can't he eliminate the PMI? Or, with more work, but worth it, refinance and leave PMI out?

    If that's true that number is not your forever number. Keep that in mind when calculating some costs will shift. 

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