a tale of two couples

Two couples want to buy a house. Each of them earn $2,600 after taxes and tithing each month. They are committed to buying a house, and preparing for the future. They each pay $680 a month currently in the apartments they each reside. They have included a $1,300 mortgage payment into their budget each month. For the next 10 years each of them will automatically pay $1,300 towards home ownership.

 

Couple A

We want a home that’s all done. The area is perfect, the price is a little high, but we can get in for 5% down. The rates are really good right now too, just 3.88%. We know we’re going to pay a lot, but we’ll be in the home we want to be in for the next 10 years plus.

 

Couple B

We are going to save every penny we can. I know our house will need some work, but we’re budgeting for that. If the rates change, oh well, at least we won’t be paying mortgage insurance every month. 20% down, and paying cash for the finance fees, or no deal!

Starting in July of 2012 each couple starts saving for their home. $1,300 – $680 for rent = $620 extra each month. By January 2013 they each have $3,720 in their savings. Couple A decides they have to be in a home by the end of the year. Couple B decides to work side jobs and earn an extra $3,000 dollars this year, and $3,000 the next.

 

December 2013 December 2013
Couple A Couple B
11,160 14,160

 

Couple A has earned enough for a 5% down payment on a NEW $180,000 house. They do it! They get a slick 3.88% rate, and in 30 years they’ll be home owners! Oops they forgot to save $7,500 for closing costs, oh well, just roll it into the principal. Couple B decides to save for just one more year. They think they can find a nice home in town that will suit their needs, but maybe not their wants.

Couple A has a new house payment of $1,027.38 each month, and they decide to stick with the $1,300 they are already used to. It’s smart to pay a little extra each month anyway! If they pay just $272.62 more each month, they will pay only $319,576.90 toward their home. This is a savings of $50,281.26. In addition, they will get the loan paid off 11 Years 1 Months sooner than if they paid only their regular monthly payment. Just 20 years from the day they started, they will see the American Dream come to fruition! Here’s where they stand as of January 2015.

 

Payment Debt Owed Interest Lost Savings Account
1,300 171,960.27 6,810.32 2,160

 

Couple B likes the NEW home Couple A has, but they stick to their plan. Here’s where they stand as of January 2015.

 

Payment Debt Owed Interest Lost Savings Account
1,300 0 0 25,320

 

Wow what a difference a year makes! Couple B has found a house. It’s a quaint little 3 bedroom home in town. $80,000 is their offer. $16,000 down, and $5,000 for closing costs. They know the home needs about $5,000 in repairs to make it liveable, and they know they’ll need to spend about $20,000 over the next 10 years to make their house a home! Their payment will be $384.47 each month.

If they pay just $915.53 more each month, they will pay only $70,261.75 toward their home. This is a savings of $38,145.81. In addition, they will get the loan paid off 25 Years 2 Months sooner than if they paid only their regular monthly payment.

January 2020 arrives, and both couples are doing really well. It’s been seven and a half years since they decided to save for a house, and boy do we ever have a tale of two tales. Couple A still has 14 years of that same $1,300 payment to make each month. Couple B on the other hand made their last payment in September of 2019. By paying so much extra, they only paid a total of $6,264.70 in interest in just under 5 years. They paid a total of $91,261.75 toward their house, that appraises for around $125,000. They still need to improve it some, and they are thinking to upgrade too.

 

Couple A January 2020
Payment Debt Owed Interest Lost Savings Account
1,300 135,176.89 36,775 7,560
Couple B January 2020
Payment Debt Owed Interest Lost Savings Account
1,300 0 6,264.70 3,900

 

After 10 long years, they both have a different story to tell. Couple A loves their home, but they are sick of the debt! Couple B is ready to upgrade to a newer home in Couple A’s neighborhood.

 

Couple A January 2023
Payment Debt Owed Interest Lost Savings Account
1,300 100,166.02 55,163 11,160
Couple B January 2023
Payment Debt Owed Interest Lost Savings Account
1,300 0 6,264.70 50,700

 

Both can pay 1,500 a month now. Couple B finds the smallest home on the block listed for $180,000. It’s a step up, but they decide to do it. $36,000 down, and $7,500 for closing costs, all at 4%. They have two places now, and decide to rent the other home for $750 a month. They continue to make the $1,500 payment each month, and add the $750 from their other property to it. The house payment is $874.98, and they will be adding an additional $1,375.02 a month.

If they pay just $1,375.02 more each month, they will pay only $164,184.62 toward their home. This is a savings of $83,305.18. In addition, they will get the loan paid off 23 Years 3 Months sooner than if they paid only their regular monthly payment.

So time goes on. Kids move away and go to college. The year 2033 rolls around and Couple A is ecstatic to finally pay off their home! The numbers are in and let’s take a look.

 

Couple A January 2033
Payment Debt Owed Interest Lost Savings Account
1,500 0 73,576.29 25,000
Couple B January 2033
Payment Debt Owed Interest Lost Savings Account
1,500 + 750 0 26,453.48 81,000

 

After all is said and done, Couple A owns their home, but they lost $73,576 in interest, and they don’t have an income property like the other couple. Couple B on the other hand, only lost $26,453 in interest. They own two homes valued at over $300,000. They also have a large savings account to help with sending the kids to school, and early retirement. After just 5 more years of saving, they’ll have $216,000 in the bank if they so choose.

The reality is, you are both couples. It’s your choice which one you’ll actually be.

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