Buying a house is a BIG DEAL.  For many people, it will be the largest asset they own!  We spend massive amounts of money on this place we call “home.”  Because we call it “home,” there are all sorts of emotions tied up in the buying and selling of them.

Plus there’s so much information swirling around out there.  The bank, your friends, your parents saying “Buy a home!”  The news talking about the ups and downs of the housing market.

Too often, we get caught up in two figures that don’t tell the entire story about a home purchase:

1) Purchase Price
2) Monthly Payment

Example: I’m buying a home for $175,000 home with a payment of $913/month.

Seems like a pretty decent deal, right?  But those two numbers alone don’t tell the whole story.  There are two sides to your home purchase, the front side and back side.

The front side is the cost of purchasing the home, including the purchase price and closing costs.  The back side is the cost of the loan to you.  Yes, it costs you money to get a loan – in many cases, a whole lot of money.

Many times we can find a great deal on the front side of the home purchase – we can find a good deal on a home, get a fixer-upper, get the seller to cover closing costs.  But then we go and get a bad deal on the loan, one that will cost us more than the money we saved on the home purchase!  We do that often because we aren’t financially ready to purchase, so we do whatever it takes to get into a home, and we make decisions that aren’t the best.

Allow me to illustrate with an example: Let’s say you’re purchasing a home that costs $175,000.

Option 1: With a $20,000 down payment (11.5%), you take out a conventional 15-year, fixed-rate mortgage of $155,000 with a 4.5% interest rate.  That makes your payments $1,186/month.  If you pay the mortgage off as scheduled over 15 years, you’ll pay $58, 433 in interest.  I don’t know about you, but $60k is a lot for me.

Table 1

Option 2: Let’s say you don’t have $20,000 to put on a home, you only have a $5,000 down payment.  But you find a 30-year FHA/VA/USDA/etc. loan where you don’t need a huge down payment.  The interest rate is 5%, just a half-point higher, but the payments are just $913/month.  Here’s the rub: if you pay off the home as scheduled over 30 years, you’ll pay over $158,000 in interest, $100,000 more than with a 15-year conventional mortgage!

Table 2

But some might say, “I’m not staying in this home 30 years!  We plan to maybe be here five years.”

That’s fine, let’s look at how our two options compare over 5 years.  Keep in mind, the payments are not equal.

Option 1: At the end of five years with this option, you have paid $30,000 in interest but built $40,000 in additional equity by paying the mortgage down to around $115,000.

Option 2: At the end of 5 years, you’ve paid $40,000 in interest, and only built about $19,000 in additional equity by paying down the mortgage to $156,000.

That’s a cumulative difference of $31,000 after 5 years when you consider interest paid out and equity built!

If you’re still with me, one of the biggest things I remember from Robert Kiosaki’s book Rich Dad, Poor Dad was this:  For most people, a home never actually becomes an asset.  It remains a liability, because as soon as their income goes up, they go and buy a bigger house with a bigger mortgage on it.  And so it goes on for life – a home never really becomes an asset, because there is an ever-increasing debt on it.

So what I tell people is this:  Slow down, walk away, stop shopping.  Get your financial house in order, save up a big pile of cash, and that will help you get a good deal on both sides of your home purchase.