When it comes to mortgages and refinancing, there’s no shortage of details and questions that come up. How much should I put down for a down payment? What length of mortgage should I choose? Should I do a variable rate or fixed rate? Is it better to escrow property taxes and insurance or not? How do I know whether or not it makes sense financially to refinance my mortgage? In this episode, we dive into these questions (and more), providing a full rundown of everything home financing-related and sharing tips and guidance for how to approach the various decisions that come with it.
Outline of this episode
- How does home financing work from a big picture perspective? [1:32]
- How much should you put down for a down payment? [2:38]
- How many years should your mortgage term be? [10:44]
- Should you do a fixed or variable rate loan? [13:46]
- Should you escrow taxes and insurance? [15:41]
- The biggest potential opportunity for anyone who already has a mortgage [17:25]
- Recap [21:41]
What’s first when looking at the financial side of buying a home
At a basic level, buying a home is typically the single biggest purchase people will make in their lives. Due to the sheer dollar value most can't pay for a home in cash so they borrow money from a bank or a mortgage company in order to make the purchase. Most commonly you'll pay a certain amount of money upfront as a down payment, typically 20%, and then the bank will lend you the remainder of the money to buy the home. The exact details of the loan and the amount of interest you will pay vary greatly on the decisions you make.
First, how much should you put down? When deciding on a down payment amount we prefer the traditional 20%, but you'll want to weigh the interest rate and cash flow benefits of putting down 20% with your alternative use of money such as investing or paying down other debt, as well as your ability to come up with the 20% down payment, especially if earlier in your career.
How long of a term and what type of rate should you choose?
You get to choose how long you want your mortgage term to be and when choosing between a 30-year loan term or a shorter term, such as 15 years, we prefer the 30-year option. However, you'll want to weigh the higher interest rate for 30 years with the cash flow flexibility and options it provides for you in your situation.
You also get to choose between fixed and adjustable-rate loans. We prefer fixed-rate mortgages for their visibility and certainty, but if you're planning to stay in your home for a shorter period of time, you can look at an adjustable-rate option to see if one offers a lower interest rate for your time horizon.
Escrow and Refinancing
Whether or not to escrow your property taxes and insurance is another personal preference, but choosing to do so can be helpful for planning month-to-month expenses and cash flow while eliminating the need to come up with lumpier amounts of money every year. We generally prefer the escrow approach because of how it helps when planning monthly cash flow. Most people tend to look at and plan for their expenses and income on a monthly basis so smoothing these costs out makes it easier to manage rather than having to come up with a large amount of cash once a year.
Lastly, if you have a mortgage that you've taken out more than a couple of years ago, whether it’s your original mortgage or even a refinance, it's worth looking into your options to refinance it and lower your interest rate. Compare the cost of refinancing with a monthly interest saved to calculate your break-even period in terms of how many months it would take for the refinance to pay off.
Resources & People Mentioned
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup