TWO

BUY ONLY WHAT YOU CAN AFFORD, WHICH FOR HOUSES, MEANS WHAT YOU CAN FINANCE IN 15 YEARS AT A KNOWN FIXED INTEREST RATE

Note that this doesn't tell you how much of a house to buy—buy a million dollar mansion if you like—but only finance at most 15 years.

An easy way to finance over 15 years is to simply take a 15 year mortgage. But we are going to look into things more carefully and arrive at a few other options.

Tip Number Two says that you must know your interest rate over the full 15 years. So no adjustable rate mortgages. Why not? Because adjustable rate mortgages mean that the rate can—and will—change over time. In this low rate environment, if Jack and Jill's mortgage went up just 2% after five years—to a still "reasonable" 8% from years 6 to 30, that alone would cost them an additional $142,389.71, or about $500 per month for 25 years. That's enough to jeopardize their whole budget, and that breaks Tip Number One: Do not gamble your primary residence.

15 YEAR CHUNKS

In the larger picture, we are trying to own equity, mortgage free, in a reasonable span of time. When we weigh out the costs, we are aiming to finance in 15 year chunks because that gives us an easy, reasonable middle-ground between mitigating interest expense and leveraging principal for investment. If we are on a 15 year ownership plan, we don't want to reset the clock arbitrarily.

For conventional mortgages in the U.S., when you sell the house that collateralizes the mortgage, you must pay off that mortgage completely and entirely. You cannot "take the mortgage with you," nor pass it on to the next owner. It wasn't always like this (and in some countries it still isn't). If you move and want to buy another house, you will need to get a new mortgage at the then-current market rates.

Thinking in terms of 15 years does not mean "one and done." It is not that one will get one mortgage, in one house, and that's it. You may still end up making 30 years of payments; it may be over many mortgages, many houses. The thinking is on how to build equity quicker, and rolling that into larger down payments as one grows into larger houses. Or living mortgage-free; how sweet that is.

MOVING AND REFINANCING

Moving, in-and-of itself, and refinancing, in-and-of itself, are not reasons to reset to new 15 or 30 year horizons. If you have paid 7 years into a 15 year plan and then move or refinance, the financial vehicles available to you may lead you to a new 15 or 30 year term loan (though see the special case of adjustable rate mortgages). But this does not at all mean you need to reset your payment schedule to the full term schedule. If the new principal you are financing does not change (for example, because you have rolled over the proceeds from the sale of the first house into the down payment on the second), then you do not need to reset your plan just because you changed financing. Indeed, if in refinancing you lowered the rate without taking on more debt, then your current payment schedule will pay even greater dividends, as the lower rate will translate into a greater percentage of each months' payment going to principal.

If you move or refinance, keep yourself on track. You are seeking full ownership within 15 years. So our approach is "moving proof" and is not invalidated by the average person moving every 7 years, or refinancing as mortgage rates change.

Next: Three