(Image by CracklinTulip via Flickr) I hate paying money to borrow money. The only reason I did it for a car loan was because I could limit the interest payed to around $1000 total over the course of the loan(This was a $22000 loan). Quite frankly, the interest you pay on a home mortgage scares me. For a $200,000 mortgage you could easily pay $200,000+ in interest fees to the bank. If your interest rate was 5.3%, that would almost exactly be $200,000 paid in interest over the course of the loan. The flip side of this argument is that if you rent, you are throwing your money away each month. So I decided to do a spread sheet on rent vs own.
Of course, when you consider home ownership, there are many factors that go into the equation. So many in fact that my calculations may not mean alot to you over all. Too much is dependent on your local market conditions and your choice of lifestyle. To keep it simple I'm not going to look at too many variables.
I choose to use a $200,000 mortgage, at 7% interest, for 30 years, with various appreciation rates considered. Also taken into consideration is taxes, fees, and maintenance that the house will require over those 30 years that a renter wouldn't have to pay(such as replacing carpet or the roof). At the other end of the spectrum you have rent. You can rent a comparable home in my area for $900 a month. Since rent is not an investment, the only way you can possibly come out ahead in this deal is to invest the difference between the cost of home ownership and your rent. Here is a summary of my finding about home ownership.
| Mortgage | Term | Taxes/fees/ maintenance | ||
| $200,000 | 30 years | over 30 yrs | $168,255 | |
| Monthly Payment | Loan Interest Rate | |||
| $1,330 | 7% | |||
| Total Interest | Total Cost | |||
| $279,000 | $479,000 | |||
| Yearly Appreciation | ||||
| 5% | 4% | 3% | ||
| Start Value | $200,000 | $200,000 | $200,000 | |
| End Value | $864,388 | $648,680 | $485,452 | |
| Gain | $217,134 | $1,425 | $(161,802) | |
| Seller fees | $51,863 | $38,921 | $29,127 | |
| 6.00% | ||||
| Net Sale Profit | $644,270 | $441,504 | $288,071 | |
End value is the value of the house due solely to appreciation. Gain is the end value, minus costs of home ownership and money that you paid in interest and priciple. The table shows that for a 3% appreciation rate, you will actually have less money than what you paid in. However, you are still left with an asset worth a sizable amount. The net sale profit is the End value minus cost of home ownership and sellers fees. As you can see, a 5% appreciation rate leaves you with a very nice profit. So then the question become, what could I make if I had rented a home and invested the difference between mortgage/upkeep cost and rent payment?
| Initial Rent (monthly) | $900 |
| Appreciation | 3.00% |
| Final rent (monthly) |
$2,121 |
| Diff. invested over | |
| 30 years@ 7% | $523,189 |
I assumed that rent increased at a rate of 3% per year. Otherwise the steady difference between a mortgage payment/upkeep costs versus rent would definitely out weigh the house appreciation. Since this was a long term investment, I gave it a 7% appreciation rate, which should be about right if you invest the difference in stocks. You pretty much have to invest in stocks if you want to compete with home appreciation. If you invested in a MM account at 3%, then even the lowest home appreciation rate would beat your investment.
In the end, investing the difference adds up to a pretty sizable amount. You would still come out ahead if your home appreciated at a rate of 5% according to my scenario. But again, there are many factors to consider. Here is my spreadsheet with all the details if you want to play around with it yourself: Download Home vs rent calc
Since the historic rate of home appreciation seems to be 5%, you may actually be better off buying. Even with the housing market slowing down in the U.S. now, over a 30 year period it should correct to the historic average. Of course, if you are going to be moving around frequently( therefore buying and selling homes), that would also eat into your gains pretty quickly.
For my current situation, renting makes more sense. If you are going to stay in an area for 30 years, then buying will probably be your best investment, even if the cost of interest is more than the purchase price of the house.
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