Mortgage Rates and the Good Life

When Aristotle wrote Nicomachean Ethics back in 350 BC, he said that “eudaimonia” – happiness – meant “doing well” and “living well,” and coined the concept of the “good life.” More recently, MetLife did a study and discovered that the concept of a “good life” means different things to different people. One common thread was shared, though – the good life meant living with purpose, having a clear vision of your path, and focusing on what you need to get you there.

Owning a home can play a huge part in your ability to live the good life. Not only is it typically the largest purchase you’ll ever make, it may be one of the largest investments you’ll ever make. With an historical annualized return in the range of 3 to 5 percent, homeownership can compete with bonds as a portfolio staple. Because your mortgage rate determines how much you’ll ultimately pay out of pocket for your home, getting the best rates possible is imperative. The more money you save on low mortgage rates, the more cash you’ll have to achieve your good life.

Money in your pocket
   
If you have a $200,000 30-year fixed-rate mortgage with a 7 percent interest rate, you’ll pay $1,360 per month for your loan. If you never sell or refinance, and take the loan to term, you’ll have paid a total of $480,098 for that $200,000 mortgage. On the other hand, if your mortgage rate is only 4.5 percent, your monthly payment will be $1,013, and your lifetime payments will total $364,813. You’d save $115,285 – money that could pay for college tuition, a cabin on the lake, retirement, or three or four new cars.

Fixed versus adjustable rate

Another way you could take advantage of low mortgage rates is to refinance when rates drop. There are, however, two main drawbacks with this path. First, if you don’t reduce the term of your loan, you’re starting the mortgage clock all over again, which means paying a heavy interest load during the first few years without significantly paying down principal. That may see you paying more for your mortgage in the long-term, even if you capture a lower rate.

The second drawback is a whole new round of closing costs, which can run between 3 and 5 percent of your new loan. However, if you stay in the house long enough, there’s a “breakeven period” – the point when you make back your out-of-pocket costs, and start realizing the refinancing savings. If you stay in your home past the breakeven point, you’ll get the perks of the lower interest rate.

Where will you be in 20 years? Once you have the answer, develop a plan to make your vision come true. Include homeownership in your dreams. Your property’s appreciation can help finance your retirement goals. And lower mortgage rates that leave more cash in your bank account can help you create your own good life. You’ll be free to rest in a hammock with a good book – perhaps Aristotle’s Nicomachean Ethics.