How To Turn A 30 Year Mortgage Into A 23 Year Mortgage

DVORKIN ON DEBT: CRACKING DOWN ON THE REAL ESTATE GRIDLOCK

[Cold open]
Howard Dvorkin: The American dream is turning out for some to be the American nightmare... You can take a 30-year mortgage and easily turn it into a 23-year mortgage... If their budget is tight, they really shouldn't be buying a house, because it's going to get tighter.

[Intro]
Sydney: Hello, and welcome back to another episode of Dvorkin on Debt, where we talk about all things money with our resident money expert, Howard Dvorkin. How are you doing?

Howard Dvorkin: I'm doing great, Sydney. You ready to talk about cracking down on the real estate gridlock?

Sydney: Absolutely. A lot of people are stuck in neutral, and they need to get moving. All right, let's get into it.

Howard Dvorkin: Great.

IS OWNING A HOME NOW A MATH PROBLEM?

Sydney: So, has owning a home become more of a math problem than it's become the American dream?

Howard Dvorkin: Well, the American dream is turning out for some to be the American nightmare. And I've said this before: not everybody should own a home, but those who want to own a home should have the ability to. The problem is holding off buying a house, hoping the prices go down, and that's just not happening. I'll tell you a personal story. I had a family member who wanted to buy a house maybe 10 years ago,

WHY WAITING FOR PRICES TO DROP BACKFIRES

Howard Dvorkin (continued): and they held off, thinking, "Oh, maybe the market will go down." And guess what? The house ended up doubling in price in a few short years.

Sydney: Haven't they all just gone up like crazy?

Howard Dvorkin: Well, we live in a kind of a fairy-tale world. Down in South Florida, there isn't a single house here that isn't a crazy price.

Sydney: No, they're all crazy. You can have a total dump and it still costs a fortune.

Howard Dvorkin: Oh, you could have a cardboard box, and if it's near the water, or even remotely near the water, or honestly even if it's not near the water, the fact of the matter is: demand, demand, demand. A lot of people want to live in our area versus somewhere in the middle of the country, and it's driving prices up. But that's really not the issue. It's more than the price of the house, and it's more than the interest rate.

THE HIDDEN COSTS BEYOND PRICE AND INTEREST RATE

Howard Dvorkin (continued): We're talking insurance, repairs, all sorts of expenses, electricity that goes up, and a lot of other things. People don't really do the calculation. On Debt.com, we have a homeowners guide, which is a terrific resource where people can go and see what it really takes to buy a house, and whether they should be making the move.

IS RENTING SMARTER THAN BUYING RIGHT NOW?

Sydney: So speaking of that, I've heard a lot of people say they think renting might be the smarter financial decision. What do you think about people who say renting is usually the safer choice?

Howard Dvorkin: Renting is throwing your money away, but it's not a total waste if it gives you flexibility. If you know you're only going to be in an area for a year or two, it takes out the risk of homeownership, because let's face it, real estate doesn't always go up. And some of these newer rental properties are really nice.

Sydney: They are really nice, and modern.

Howard Dvorkin: They're really nice and modern, but they're expensive, and there's no real payback on that, especially here in fairy-tale Florida.

Sydney: Well, we're not just talking about Florida. This is across the country.

Howard Dvorkin: Across the country, it's expensive to rent. But it may work out that it's cheaper for you to rent for a while than to own a house. Long term, though, if you're going to be somewhere a while, you shouldn't be renting for 20 or 30 years. You should be buying a house and building up equity, so that at least when you're done, you have something that's worth something.

THE BIGGEST MISTAKE FIRST-TIME BUYERS MAKE

Sydney: What is the biggest mistake first-time buyers make when their budget is tight?

Howard Dvorkin: Well, if their budget is tight, they really shouldn't be buying a house, because it's going to get tighter. People don't go through and look at all the extra expenses you incur when you buy a house, whether it's moving, painting, repairs, insurance, electricity, all the extra costs that come with it. When you buy a house, you want to make sure that right after you buy it, you're not house poor, so that you can't afford all those things. A lot of people end up house poor because they don't see it coming and don't understand the realities of homeownership. That's when the American dream can turn into an American nightmare overnight.

HOW TO TURN A 30-YEAR MORTGAGE INTO A 23-YEAR MORTGAGE

Sydney: Isn't a 30-year mortgage going to cost thousands more in interest than a 15-year mortgage?

Howard Dvorkin: Yes, because a 30-year mortgage is double the time of a 15-year. However, it doesn't have to cost that much more. You can take a 30-year mortgage and easily turn it into a 23-year mortgage just by making payments every two weeks instead of once a month.

Here's why: there are 26 pay periods in a year if you're paid every two weeks. Twenty-six divided by two is 13, versus 24 (if you paid twice a month on a set schedule) divided by two, which is only 12. So what I'm saying is, if you make payments every two weeks instead of twice a month, you end up making one extra payment a year, and that goes straight toward reducing your principal. It doesn't affect your day-to-day life much, but over time it saves you a tremendous amount of money.

USING YOUR BONUS TO PAY DOWN PRINCIPAL

Howard Dvorkin: The other thing is, when you get a bonus, take at least part of it and put it toward your principal, so you pay off that 30-year mortgage quicker.

Sydney: That's a really good trick.

FIRST STEPS IF YOU WANT TO BUY WITHIN A YEAR

Sydney: If someone wants to buy their first home in the next year, what's the first step they should take this week?

Howard Dvorkin: Well, first, saving money is a good start. Second, I'd say do a budget and go to a HUD-certified counseling agency to help you make those decisions. They can help you figure out how much you can afford and what kind of house you can buy, instead of going out and trying to do it all yourself. Read up and figure out what expenses you might not be calculating in your head.

[Outro]
Sydney: So if you're looking at solving the American dream math problem, please visit Debt.com for all the information you could need. Thank you for watching this week, and thank you for joining us, Howard.

Howard Dvorkin: Thank you.