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"Owning" a home by way of a mortgage

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"Owning" a home by way of a mortgage

Postby jswede » Sun Jul 08, 2007 4:35 pm

In the last weeks, I've done a 180 on the ubiquitous notion that buying is better than renting your primary residence. I now believe that the advantages of buying a home falls somewhere between exagerration and myth. Wanted to bounce it off the forum for some opinions, as my reasoning could be clouded or be particular to my situation - thanks in advance.

Though I have opinions as to where real estate will go from here, I'm leaving that out of this discussion because I'm beginning to believe the argument stands on its own. A few reasons I've changed my mind and think renting may be better:

* The tax deduction for interest paid is not as large as many would lead you to believe, and after property taxes and insurance - which you don't pay as a renter - it's a wash, or worse.
* The home equity one accumulates through downpayment, principal payments and price appreciation is just on paper - with a primary residence, unless you want to live on the streets or seriously downsize, that is going to be locked up in your home (or transferred to a new one) anyway.
* If paying rent is thought of as "throwing money away", so should paying interest on a huge loan. In a mortgage, you're in large part really renting money.
* Locking up capital in your home is a serious opportunity cost: looking past the last 8-10yr unprecedented run-up in real estate, you'd have done much better investing that money in stocks over the any meaningful periods of time - certainly over 15-20 year periods. Even looking at the last 5 years, your money would have doubled in the S&P 500, just like some of the best appreciating real estate markets. Further, money in stocks would not be "locked up", as it would in your home.
* Home improvements and maintenance are not going to cost you as a renter, but can be very expensive (and untimely) as a home owner.
* Rents are attractive relative to mortgage payments.

I'll reiterate that I am making these arguments in the case of a primary residence. 2nd/3rd homes can be good investments, as can apartment buildings etc. I'll also mention that I live in a city, so I have lots of choice in both the rental and buy arenas - perhaps it's different elsewhere.

Anybody agree or disagree? I would have disagreed vehemently up until about a month ago, then I crunched some numbers, thought about it, and changed my mind. I own a place right now, but we had to move out abruptly due to an expanding family, so I am now living in a rental, and renting out my old place. This is just a temporary situation - next spring I'll be looking to sell the old place and either buy or rent a new one. I'm trying to decide which is best.
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Re: "Owning" a home by way of a mortgage

Postby AcidRock23 » Sun Jul 08, 2007 4:43 pm

I dunno, we lived in our first house for like 3 or 4 years and sold it and the $7.5K we put down on it turned into about $20K in equity which we then flipped into our second house. I am not even sure where it came from but I think that owning is has worked out decently for us. I am not sure that it would match up to our best funds that have done very well lately but, at the same time, since we have to blow some money on a place to live, we might as well keep some of it.
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Re: "Owning" a home by way of a mortgage

Postby josebach » Sun Jul 08, 2007 4:53 pm

We've made about $70,000 in equity in the last 3 years on appreciation alone. Add to that the equity earned via principal payments and we're up about $80,000... in three years. We only came out of pocket about $10,000.

You always are going to need somewhere to live, right? Why pay someone rent for 50 years when you can buy a house, pay a mortgage for 30 years and live rent free for the rest of your life? Not to mention the fact that if you want to rent, you seriously limit your options as to where you want to live. Most nice neighborhoods don't have houses for rent.

It's an investment and I'd think real hard before you decide not to buy a house if you currently have the means. That's a decision you could end up regretting for the rest of your life.
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Re: "Owning" a home by way of a mortgage

Postby Pacman » Sun Jul 08, 2007 5:01 pm

In the most general terms: owning, and building equity is worth doing... if for no other reason than, over time, many years, that equity enables you to sell your house and move into a better house, then several years later, do the same thing... so that when you are in your 40s, 50s, you have a nice house to raise a family, etc.

Renting, which can be almost as expensive as a mortgage in some parts of the country (like the boston area) , doesn't do anything in terms of building toward being able to afford a large home in a safe neighborhood.
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Re: "Owning" a home by way of a mortgage

Postby jswede » Sun Jul 08, 2007 5:49 pm

AcidRock23 wrote:I dunno, we lived in our first house for like 3 or 4 years and sold it and the $7.5K we put down on it turned into about $20K in equity which we then flipped into our second house.


That fits into part of my point: your $7.5k turned into $20k, but it didn't get you more house the next time around, did it? That second home had also appreciated by about the same amount in those 3-4 years.
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Re: "Owning" a home by way of a mortgage

Postby jswede » Sun Jul 08, 2007 6:00 pm

josebach wrote:You always are going to need somewhere to live, right? Why pay someone rent for 50 years when you can buy a house, pay a mortgage for 30 years and live rent free for the rest of your life? Not to mention the fact that if you want to rent, you seriously limit your options as to where you want to live. Most nice neighborhoods don't have houses for rent.


Most folks - myself anyway - will be moving every few years as their family's needs change, so they'd not last in their mortgage long enough before they get into significant principal payments. Since they'll always be in the first, say, 10 years of their mortgage, they'd be paying more in interest+taxes+insurance than they would to rent a comparable. On a 30yr fixed mortgage, that fixed payment is, I believe, 80+% interest in the first years, and you're paying more interest than principal all the way until year 21.
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Re: "Owning" a home by way of a mortgage

Postby jswede » Sun Jul 08, 2007 6:15 pm

Pacman wrote:In the most general terms: owning, and building equity is worth doing... if for no other reason than, over time, many years, that equity enables you to sell your house and move into a better house, then several years later, do the same thing... so that when you are in your 40s, 50s, you have a nice house to raise a family, etc.

Renting, which can be almost as expensive as a mortgage in some parts of the country (like the boston area) , doesn't do anything in terms of building toward being able to afford a large home in a safe neighborhood.


ok - say the rent and mortgage payments are a wash. In most cases, I think you can rent for less, but let's just leave that out. Part of my point is that you can "build equity" by renting and taking that would-be down payment money, yearly tax money+insurance and investing it in something with a better return. Like stocks.

On a $500k house, by the time you build equity and own your house through a 30yr fixed mortgage, you've paid $500 in principal and $608k in interest. So you spent $1.1mil to build $500 in equity. That's not a good return on your money. More exactly, it's negative 50+%. Pretty safe to say you'd do better in stocks...

But what about the price appreciation of the home? Again, unless you plan to live on the street or downsize or movie out to the middle-of-nowhere, the same amount of home is going to cost you basically that same appreciated price your current home is worth. If it's your primary residency, you're not going to be able to "cash out".
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Re: "Owning" a home by way of a mortgage

Postby Pablo975 » Sun Jul 08, 2007 6:28 pm

Land is the best investment there is. Period.

Owning a home (and/or raw land) is wonderful as after that mortgage is paid off, you own it free and clear. You'd be free to borrow against it again OR just sit on it and let it appreciate more and leave it to your children. And, you don't HAVE to pay for 30 years worth of interest. Smart people bust their humps to get that mortgage paid off.

That, to me, is really the crucial difference. Renting doesn't get you anything. Ever. You cannot make money by being a renter and the savings are few if any. Owning can not only make you rich, but make you wealthy and future generations of your family wealthy. That's not to say a solid investment program in stocks, bonds, etc isn't desirable, as it's important to long term financial health too.

As far as the day to day headaches go, renting is far easier, but I'd rather do a little work and profit from it long term.

You are correct in your assessment of appreciation though. People don't think about the fact that while THEIR house went up 40k in value, the cost of any other similar house, or to build a similar house, went up just as much.
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Re: "Owning" a home by way of a mortgage

Postby jswede » Sun Jul 08, 2007 6:58 pm

Pablo975 wrote:Owning a home (and/or raw land) is wonderful as after that mortgage is paid off, you own it free and clear. You'd be free to borrow against it again OR just sit on it and let it appreciate more and leave it to your children. And, you don't HAVE to pay for 30 years worth of interest. Smart people bust their humps to get that mortgage paid off.


If you rented, then you didn't put money down to buy a house. Then you'd have that money (+appreciation, depending on where you invested it) when you'd otherwise borrow against your home. That illustrates one of my points: that value in your house is locked - you have to "borrow against it" to use it, and again pay interest!

Smart people who bust their humps to pay off their mortgage are smart, but I don't think as smart as those who rent and take the "pre-payment money" and invest it - positive return from day one. With a mortgage, you're only stopping the bleeding by pre-paying.

Pablo975 wrote:That, to me, is really the crucial difference. Renting doesn't get you anything. Ever. You cannot make money by being a renter and the savings are few if any. Owning can not only make you rich, but make you wealthy and future generations of your family wealthy. That's not to say a solid investment program in stocks, bonds, etc isn't desirable, as it's important to long term financial health too.


Renting doesn't get you anything, but it does not cost a downpayment+taxes+insurance either. That money invested, even conservatively, will create more wealth than a home over time. You can either pass down to your future generations a big paid-off house (which still costs insurance+taxes), or a huge sum of money in a diversified stock portfolio. Let's say it's a $400k condo we are talking about - taking the 20% downpayment ($80k) and investing in stocks, and re-investing the would-be tax money (~$8k) every year, will give you $1.44mil in 30yrs, assuming a modest 7% annual return. (then you could take the $1.44mil and use $800-1000k to buy that same house, and also leave a ~$500k portfolio, if you wish.)

The house would have to almost quadruple to match that return. Some may say that's realistic, but that's just because we are coming from the biggest boom in housing ever. From after WWII to the late 90's, housing prices didn't do much better than inflation.
Last edited by jswede on Sun Jul 08, 2007 7:03 pm, edited 1 time in total.
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Re: "Owning" a home by way of a mortgage

Postby josebach » Sun Jul 08, 2007 7:01 pm

jswede wrote:
Pacman wrote:In the most general terms: owning, and building equity is worth doing... if for no other reason than, over time, many years, that equity enables you to sell your house and move into a better house, then several years later, do the same thing... so that when you are in your 40s, 50s, you have a nice house to raise a family, etc.

Renting, which can be almost as expensive as a mortgage in some parts of the country (like the boston area) , doesn't do anything in terms of building toward being able to afford a large home in a safe neighborhood.


ok - say the rent and mortgage payments are a wash. In most cases, I think you can rent for less, but let's just leave that out. Part of my point is that you can "build equity" by renting and taking that would-be down payment money, yearly tax money+insurance and investing it in something with a better return. Like stocks.

On a $500k house, by the time you build equity and own your house through a 30yr fixed mortgage, you've paid $500 in principal and $608k in interest. So you spent $1.1mil to build $500 in equity. That's not a good return on your money. More exactly, it's negative 50+%. Pretty safe to say you'd do better in stocks...

But what about the price appreciation of the home? Again, unless you plan to live on the street or downsize or movie out to the middle-of-nowhere, the same amount of home is going to cost you basically that same appreciated price your current home is worth. If it's your primary residency, you're not going to be able to "cash out".


So you put $10,000 in stocks and I put $10,000 down on a house. At the end of 30 years I will be guaranteed to own a house. What will you be guaranteed?

Are you going to raise a family in an apartment? Oh, you're going to rent a house? Do you want to live in a nice neighborhood? Do you want your family to be at the owner's mercy if he decides to sell it?

I would seriously stop trying to convince yourself you're right by talking to people on a message board and go talk to somebody you trust.
Last edited by josebach on Sun Jul 08, 2007 7:09 pm, edited 1 time in total.
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