Mortgages!

I realize plenty of people understand how mortgages and mortgage amortization works.  If you are one of those, then this probably won't be that helpful. If you are new to this, I hope my explanation and tips help.  I am also going to keep this in the context of an Earthship. For credibility sake, I'm almost done with my BBA degree in accounting, and I enjoy managing my finances so....here we go:

I posted a blog article on how much an Earthship can cost to build.  I said that a lot of it depends on how much you are willing to do yourself.  If you can take time off work and find lots of recycled materials, good for you! You will save yourself thousands of dollars and this is of great benefit, as you will see.

I also realize that some people can't just quit their jobs, but they still want the freedom an Earthship has to offer.  This is me included.  We may have to get higher mortgages than the above folks.  Therefore, in the interest of trying to help people get to freedom and realize their dreams, I hope the following will motivate you to take extra time to save up and then pay off your mortgage as quickly as possible.

Tip #1 If you have to mortgage your Earthship then then you should avoid paying more than 35% of your net (after taxes) household income for said mortgage.  This is not to say that the bank will not loan you more than 35%.  Oh you bet your sweet *** they will give you more than 35%.  In fact, they are totally cool with giving you 35% of gross (pretax) income! That is NOT to your benefit.

I hate to have to explain why this is important, since it seems obvious, but if you borrow more than 35%, you are taking a risk.  The world economy is not stable.  Your job is not necessarily secure.  You are likely to have other debts. At least at 35%, the risk of you not being able to pay your mortgage should something nasty occur, is much lower. Especially on dual incomes.  I'm taking this advice from Gail. Love her or hate her (she is pretty blunt), her advice is still reasonable.  If you want to risk it however, that is your business. I just don't recommend it.

Tip#2 If you are concerned that the Earthship + land will cost more mortgage than you can afford (35%), then save up a large (20% or more) downpayment.  If you don't know how much mortgage you can afford, go here. A large downpayment may help your mortgage to be more affordable.  Yes it will take longer. And you can't buy a house in Canada anymore without a small (5%) downpayment. But it will reduce your mortgage size and thus reduce your monthly payments.  In the bank's eyes, it also makes you "less risky", therefore they will reduce your interest rate and save you thousands on interest.

Tip#3 Even if you CAN afford your mortgage, you are still better off for saving a 20% downpayment.  (See mortgage amortization below!) Part of the reason is less interest paid. The other reason is that this will also save you on your mortgage insurance premiums.  (In Canada).  Anyone who puts less than 20% down MUST pay mortgage insurance.  While it is optional for those who pay the 20%, you will typically get a worse interest rate and other fees if you don't have it, so it's unlikely you will not have insurance.  Obviously, the more you put down, the lower your premium will be.  On $500,000 and a 20% down payment, your mortgage insurance will be $4000.  Total. Put down only 10% and your mortgage insurance will be $9000.  You get the idea.

Tip#4 Pay an extra $100 on your mortgage each month.  As long as the terms of your mortgage don't punish you for early repayment (Make sure when you negotiate a mortgage that they won't punish you for making extra payments), paying a bit extra each month will save you thousands on interest and you will pay off your mortgage a few years earlier.  See below for how this works!

Tip#5 Do semi monthly payments if you can.  This means instead of paying 12 times per year, you will pay 24 times per year.  This will also save you money on interest.  Why? Mortgage interest will either accrue daily or monthly.  Interest charged is based on what you still owe.  The faster/more you make payments to pay down the principle (what is remaining on what you borrowed), the less interest they charge you.  See below for how this works!

Amortization Calculations (not including downpayment, property taxes or mortgage insurance).  
Note: I did these in excel.  If you notice any errors let me know.  It was acting funny.

On a $400,000 house at 3% interest rate for 30 years, you will have paid $207,110 worth of interest.

• You will have actually paid $607,110 back to the bank. 
• Your minimum monthly payment for those 30 years would be close to $1700.  (not incl tax/insur)
• Side note: In order for that to be 35% of your net income, you will need to bring home about $5000/month after tax. 

Reduce the length of that mortgage to 25 years and you will pay only $169,050 worth of interest.

• You will have actually paid $569,050 back to the bank.
• Your payments will increase to $1900 per month.  
• But, the extra $200 more per month, saved nearly $38,000 in interest payments.  

You can see how that game works.  The less you borrow at the lower rate, and the faster you pay it back, the more you save in the long run.  Obviously this example is a bit ideal.  Many things can affect your interest rate including economic factors, amount of downpayment, your debt load and your credit rating.

However there are some things you can do.  Lets look back at Tip#4 and Tip#5.

Tip#4 Pay an extra $100 on your mortgage each month
On a $400,000 house at 3% interest rate for 30 years, by paying an extra $100/month, you will pay $187,021 in interest.  That saves you an extra $20,000 in interest. You will also pay back your mortgage in 27.4 years instead of 30.

Tip#5 Do semi monthly payments if you can
On a $400,000 house at 3% interest rate for 30 years, by doing semi monthly payments, you will only pay $179,260 in interest. You still pay close to $1700/month, but instead of doing it all in one big lump sum, you will make two payments of $850. That will save you $28,850 in interest!

Now if you do Tip#4 and Tip#5 together (if your mortgage will let you that is, I'm sure they hate this!)
On a $400,000 house at 3% interest rate for 30 years, paying semi monthly and adding an extra $50 to each payment (for a total of $100/month) you will pay $170,401 of interest.  This will save you $36,709 in interest.  

That is amortization in a nut shell.

If you would like to try more figures with amortization, try this calculator
If you have excel, you can also create them and save them.  Right click on your sheet tab, select insert, select spreadsheet solutions (tab) and choose "Loan Amortization".

If you have any tips, feel free to share! Ending slavery to mortgages and big business is a good thing. :)