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"Owning" a home by way of a mortgage

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Re: "Owning" a home by way of a mortgage

Postby Pacman » Sun Jul 08, 2007 9:46 pm

This all has gotten way too wordy for me. I said my peace earlier, and all I'll add is that if you're weighing the "buy a house" vs. "rent and invest" debate... factor the "quality of life" piece in. Even, in the long-term, if you made out better by even 10-or-20 percent with the investing/rent.... you still never owned a nice house in a nice neighborhood.

To me, especially as a husband and a father... that's the key.
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Re: "Owning" a home by way of a mortgage

Postby Cornbread Maxwell » Sun Jul 08, 2007 9:50 pm

Good topic, jswede. You have made a lot of very good points for renting. They were mostly economic based of course, and I do want you to also weigh the non-economic quality of life issues as well. There is absolutely a pride of ownership that comes with buying. The activities each environment offers can be limited (ex: it may be difficult to have a BBQ/Pool party if you rent). Rentals are nice if you need repairs, but you also dont have much ability to garden/mow etc - an activity a lot of homeowners enjooy rather than seeing it as a chore. I guess what I am saying is that you may also want to look at it from a different angle than monetary reasons.

However, since you are looking at it from such an economic standpoint, I dont think you can overlook the market conditions. For the most part housing markets are pretty regional, so make sure you check out the state equalized value of the neighborhood if you decide to buy. For me, I am in the camp that believes the housing market in general is in a pretty large bubble and the credit issues that continue to get worse could end up being the pin.

Good luck with your decisions - and I think asking this question is good start for anyone.
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Re: "Owning" a home by way of a mortgage

Postby Art Vandelay » Mon Jul 09, 2007 12:11 am

jswede wrote: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...


Obviously from your posts you know considerably more than me about finances/investing/real estate/etc. But this doesn't seem to make sense to me. If you're saying that you've spent $1.1 million to build $500K in equity, you're assuming that the house is still worth $500K after 30 years. Chances are, it will be worth the $1.1 Million spent on it. Also (and this may be the case for you, but isn't for many), in order to make the kind of money you're talking about in the market, you have to be able to afford to pay a monthly rent, plus invest X-amount per month. Many people couldn't afford to invest and rent, but buy buying you are investing while also having a place to live. Also, your scenario doesn't take into account the fact that after that 30 year period, you no longer have a mortgage, but you still have a place to live, if you're renting, and you want to continue to have a place to live, you have to continue to pay. Now you can take what you were paying in mortgage, and invest it. There are also a lot of non-financial factors and go into such a decision, and obviously the best choice will differ depending on each individual situation, but for most people of moderate means, I think buying is the better option.
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Re: "Owning" a home by way of a mortgage

Postby TheRock » Mon Jul 09, 2007 9:38 am

I wouldn't have thought anyone could have made a good case for renting instead of buying, but you did raise some pretty good points.

In most cases, I think it is still advantageous to buy unless your situation makes it difficult. Say, if you can't stay put more than a few years at a time, or if you need more liquid assets for something else.

One thing I think you're not considering Art mentioned above, property appreciates. That $500k house will not be worth $500k after 30 years, it will easily have doubled, likely much more. And as the population continues to grow, I see the real estate market getting even more lucrative. If you have to spend that money every month, might as well be spending it investing in your own future, not someone else's.

Along those same lines, renting vs owning gets less and less attractive as that 30 yr mortgage goes by. Say renting is slightly cheaper when you start out. Well, 10 years later rent will have increased, but your mortgage payment stays the same. By year 20 , you almost feel a little guilty making that mortgage payment because you know renters are paying much more for a similar house. Ten years after that, it's free. B-)

And there are other mortgage options. A 15 year mortgage will cost you about 35% more every month, but pay it off in half the time.
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Re: "Owning" a home by way of a mortgage

Postby josebach » Mon Jul 09, 2007 10:20 am

TheRock wrote:I wouldn't have thought anyone could have made a good case for renting instead of buying, but you did raise some pretty good points.

In most cases, I think it is still advantageous to buy unless your situation makes it difficult. Say, if you can't stay put more than a few years at a time, or if you need more liquid assets for something else.

One thing I think you're not considering Art mentioned above, property appreciates. That $500k house will not be worth $500k after 30 years, it will easily have doubled, likely much more. And as the population continues to grow, I see the real estate market getting even more lucrative. If you have to spend that money every month, might as well be spending it investing in your own future, not someone else's.

Along those same lines, renting vs owning gets less and less attractive as that 30 yr mortgage goes by. Say renting is slightly cheaper when you start out. Well, 10 years later rent will have increased, but your mortgage payment stays the same. By year 20 , you almost feel a little guilty making that mortgage payment because you know renters are paying much more for a similar house. Ten years after that, it's free. B-)

And there are other mortgage options. A 15 year mortgage will cost you about 35% more every month, but pay it off in half the time.



Also, rent will go up while your mortgage will stay the same. You may be paying $1,000 in rent now and a $1,000 mortgage. In 10 years, your rent may be $1,500 yet your mortgage will still be $1,000.
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Re: "Owning" a home by way of a mortgage

Postby jswede » Mon Jul 09, 2007 9:34 pm

Thanks for the replies.

Pacman and Cornwell: agreed - there is/may be a "quality of life" consideration with a rental. It certainly doesn't feel as good to rent. Ya feel kinda naked!

Cornwell: I'm with you on house prices, but I'm trying to leave that out as I don't want to speculate on where they are going.

Art: The prices I am using are purely hypothetical chosen as to be "round" and easy to work with. I'm assuming that for a choice in rent vs buy, you can get comparable places for the same monthly payment (rent or buy). The investment portion when you are renting comes only from the would-be down payment, and then each year you put in what you would pay in taxes+insurance. Those are the hidden costs I am realizing are very significant. Those costs, and the huge portion of your mortgage that goes to interest for the first 10, even 20, years, I'm realizing are huge. As I mentioned earlier, it's not until year 21 of a 30yr fixed mortgage that more than half of your monthly payment goes towards your principal. In the first 10 years, you're paying very little in principal - and in the first 5, it's almost all interest.

TheRock: Agreed that the house will be worth more by the time you pay it off. It could be a lot more, but I found through my research this wekend that between 1945 and 2000, home prices - an average - only kept up with inflation. When you adjust for inflation you about made even in the value of your home from 1970 to 2000. (From 1945 to 2000, you actually lost a little money, or "buying power".) Put simply, in 1970 you could have taken $100k and bought about the same amount of, say, groceries as you could have if you spent the $100k on a house, held on to it to until 2000, sold it, and bought the groceries then. And obviously, you could only buy the same amount of house in 1970 as 2000: the "value" in dollars of your house went up, but the cost of every other house went up the same amount. This run-up in prices over the last 6-7years could buy you more groceries than in 2000, but still the same amount of house.

TheRock again: Agreed that by year 20 you'll be paying less in mortgage and paying off your house very quickly by then. Of course, you can't move at any point, b/c then you have to start over with a new mortgage and paying mostly interest for 10years. and if you move every 5-10 years, it'll take more than a lifetime to pay off a mortgage using a traditional 30yr fixed and not pre-paying.

JoseBach: Rent does go up - less than inflation (and a lot less than house prices of late), I was surprised to find out - but that's definitely a consideration. Your rent will not be under your control - you give that up.


I'm going to drill on this topic much longer - and again, I appreciate all the input - but there's no fantasy stats to check to day, so I thought I'd share a quick calculation I made today... Hypothetically, if I assume that I can get the "same amount of house" (not necessarily true in all places, and this leaves out the "piece of mind" etc of being an owner) for monthly rent as I could with a monthly mortgage payment, on a $400k property. If I bought, I put the traditional 20% down and get a 30yr fixed at 6.5% interest - I'm also on the hook for yearly taxes and insurance. If I rent, I pay the monthly rent, though don't pay a downpayment and no insurance+taxes -- instead, I invest the would-be downpayment right away, and the tax/insurance money yearly (when I'd otherwise pay the ins/tax if I owned). Now I look at what I spent and what I got over 30 years:


BUYING:

money spent:
> $728,146 in mortgage payments (over $408k in interest)
> $80,000 downpayment
> $240,000 in taxes (this can be different, but I pay ~2% of home value per year, so ~$8000/yr)
> subtotal: $1,048,146
> saved in income taxes by deducting interest: ~ $55,000 (that is, above the standard deduction; calculated for at 30% bracket)
TOTAL SPENT: ~$993,000

what I'd have after 30yrs:
> a 30yr old house which has probably gone up in value, but I've likely put (or need to put) a lot of money into for repairs etc... let's say it's worth $1million.


RENTING:

money spent:
>$728,146 in rent
> $80000 ("would-be" downpayment) invested in stocks
> $240,000 ("would-be" taxes) invested in stocks ($8000 per year)
TOTAL SPENT: $1,048,146

what I'd have after 30yrs:
$1,417,153 in a stock portfolio (assume 7%/yr return), less 15% in cap gains tax, and I'm at ~$1.2mil. (this even after I "threw away" over $720k in rent...)

Lots of assumptions up there, I admit - who knows exactly what your house will be worth and what expenses will be incurred over a 30yr period? Before this huge run-up since 2000, homes were appreciating around 3-4% per year - that over 30yrs would put the $400k home at ~$1-1.2mil. But then, who's to say I'll earn 7% per year in stocks? No idea, but if you put money into the S&P 30yrs ago, you got about 10.3% per year. (That would make my "rent" stock portfolio worth over $3mil.) In short, I think neither estimate/assumption is very skewed - if anything, assuming a 4% annual appreciation after this run-up in home prices is optimistic. This in my opinion (but I'm trying to stay away from my opinion on this!).

I'm also assuming my rent doesn't go up - which it will. and I'm assuming interest rates don't go up, which they may.

Another huge assumption is that you stay in that same mortgage for 30yrs. If you don't, and move every 5 years and start a new 30yr fixed every time, you'll only be paying off about 6% of your principal every 5 years.... and it'll take you nearly 100 years to pay it off and you'll have paid interest in the neighborhood of $1.5mil or more. That's what can really get you. (and why you should pre-pay if you are going to do a mortgage.)

One last thing, yes, after you pay off your house, you'll not have to pay monthly mortgage payments any longer - but you do still have to pay taxes and insurance. and after the house is paid off, if I rented, I'd still be paying rent, right? Maybe, or, I just take my $1.2mil (likely more) and buy the house...

Anyhow - this wound up being a lot longer than I had planned - but in the end, I've come to the conclusion that buying with a mortgage is not the "slam-dunk" it's made out to be. The hidden costs of insurance/taxes and front-end interest, plus the cost of having your money locked into your home when it could be doing better elsewhere, levels the playing field quite a bit, imo.
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Re: "Owning" a home by way of a mortgage

Postby stomperrob » Mon Jul 09, 2007 9:59 pm

I don't like being at the mercy of landlords - in the large city where I used to live, with a super-heated economy and a low vacancy rate on rentals, people were getting shafted by landlords who just kept raising rents and people had no alternatives because of the low vacancy rate. In addition to that, because of the economy, property values were rising sharply and apartment owners were in some cases ejecting all their tennants and turning their buildings into condo's, leaving their tennants scrambling for a place to live (not easy given the low vacancy rate and rising rents).
There's just something about the piece of mind of ownership that ya just can't put a dollar figure on!
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Re: "Owning" a home by way of a mortgage

Postby AcidRock23 » Mon Jul 09, 2007 10:03 pm

The one intriguing wild card here is that I've seen all sorts of stories, headlines, etc. that 'THE HOUSING BOOM IS DOOMED' or whatever. We live in Champaign, IL which is near the bottom end of the spectrum and prices did not go up all that much in the 14 years we've owned houses. Maybe 10 or 15%? We do have a bunch of funds that have dramatically outperformed our house although we do not have wild parties in them or keep guitar amps or several years worth of Baseball Forecaster or other goodies. My in laws, OTOH, live in San Diego and houses on their block have already started to go down, a house sold for $800K a couple of years ago was listed for $700K the last time we were out there which was kind of spooky.

They are still building new places here fairly crazily but if the market does taper off, you stand some chance of losing out quite a bit of your mortgage which is where people, particularly people cashing in equity on loans to buy Escalades or whatever. I think that if something like that hits the fan, perhaps exacerbated by health care costs and the cost of paying for foreign policy adventurism all at once, in the face of a less competitive economy overall, it might get kind of ugly.

Other factors to consider when looking at long term housing type of stuff is how a town can develop over time. When I was a kid, we moved from Endicott, New York to Naperville, IL, which was recently rated something like the #2 super dooper place to live. That was in 1974 and the house my parents moved into, for something like $50K then for a split level house w/ the garage turned into a family room and basement finished w/ paneling has gone for something like $500K in the last few years as real estate there has gone utterly bonkers. These are not real prices, adjusted for inflation but the brackets that Swede just cited may be a bit conservative in terms of your expectation of profitability with a house in a desirable location.
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Re: "Owning" a home by way of a mortgage

Postby Yoda » Tue Jul 10, 2007 10:39 am

Renting is not a great long term solution. You are at the mercy of the landlord and if you are unlucky, you may be forced to move. You also can't upgrade your house or do things you want to it. Especially when you have a family, you don't want to be forced to move when you don't want to and/or be limited as to what you can do to improve your home.
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