MY LOFT STORY

I love my loft. I'll love it even more when it's paid off. At 620 square feet and with one bedroom, it's small, but it's still nice and has even been featured in magazines. BF and I could have bought something much bigger and much more expensive but this space is all we really need for the two of us right now and we're budgeting to pay it off in 7 years since the mortgage is the only debt we have. We will probably move in a few years and rent this place out since it's in a prime location. Anyways, there are some people in our lives that snicker and sneer behind our backs and say things like, "Why would they buy that place?" Meanwhile those people live in a huge house that they can't even afford just to show off what they have. This drives me crazy!

WHAT I CALL THE "LIFETIME" MORTGAGE

I personally don't agree with buying a house and only paying the minimum monthly payment for a full 25 year amortization period. I also don't agree with taking out a huge mortgage just because you can. I know so many people who have gone to the bank to see how big of a mortgage they qualify for and then they go out and find a house that costs the maximum amount. Let's look closer at this situation:

If you take on a $400,000 mortgage because that is the most the bank will give you and you make a monthly payment of $2300 (minimum), at the end of 25 years you will have paid nearly $300,000 in interest alone at an overall interest rate of 5%. With the economy the way it is, you can get an interest rate between 3.5% and 4.5% if you qualify to take on a mortgage but the average is generally around 5%.

THE FAST TRACK

On the other hand, let's say the maximum mortgage you can take on is $400,000 and you can afford to do that. If you choose to buy a home that costs much less than $400,000, even though you can afford more, you will be able to increase your payments and pay more towards the principal so that you can pay off your house much faster. Let's say you take on a $200,000 mortgage instead (this may or may not be possible depending on the city you live in) but you still make payments of $2300 which you would have with the $400,000 mortgage. Now you pay off the mortgage in 9 years instead of 25 and you only pay a total of $48,000 in interest. $48,000 is a lot of money to spend on interest but it's low for a mortgage.

WHAT YOU WANT VERSUS WHAT YOU NEED

When buying a home consider the size of space you need to live in rather than the space you want to live in. With the housing markets being so low right now it's a buyer's market. Just be careful not to get in over your head. Mackenzie Financial has a great mortgage calculator you can use whether you are a first time buyer or if you already have a home and are looking to pay it off faster. The first few years of your mortgage is when you put the most towards the interest. If you can make extra payments in the first few years, you will knock a lot off the overall interest. You can play around with this on the mortgage calculator.

Another recommendation if you already have a mortgage right now is to go to the bank and see if you can get a lower interest because of the economy right now. BF and I knocked 1% off the mortgage interest last month just by asking. One last point: As a rule of thumb, the absolute most you should spend on a home is 2.5 times your annual income although 2 times your income is ideal.

Note to readers: I live in Canada where mortgage interest isn't tax deductible like in the United States. I know this tax deduction effects the decision of Americans to pay off the mortgage faster. I have read many articles that argue in favor of paying off the mortgage faster and not letting a tax deduction deter you. You can read a really good article about why you shouldn't keep a mortgage just for the tax deduction here.