How do you justify paying 100’s of thousands just in mortgage interest? (2015, financial)

[MikeJaquish]

5 years ago:
Clients paid $120,000 for a house.
3% down payment.
PITI was about $350/month less than rent they paid for comparable property.

Have about $15,000 in updates and repairs.

Will sell in 2018 for about $180,000.

That is one way to justify paying interest.

[MrRational]

Originally Posted by louie0406

We pay $1100/month for a 2br, 2bath, 1200sq ft apt.
...2 swimming pools, jacuzzi, dog park, fitness center, car garage, and storage room.
We can easily afford the rent as we split everything 50/50 and are able to save/invest excess cash.

Until or unless you NEED a home... keep on keeping on as it is.

We’ve been doing some mortgage interest calculations, and it turns out...

If you can manage something for the same monthly total, maybe a bit more, maybe so.

on a 250k home, we will pay over $100k in interest at 3.75% over 30yr years.

Imagine if you were paying 7% interest!

[MLSFan]

on a 250k home, we will pay over $100k in interest at 3.75% over 30yr years.

you'd pay that much in property taxes as well, at least the bank stops calling after 30 years

[Freak80]

Unless you’re sitting on piles of cash, you have two options for keeping a roof over your head: you can rent the dwelling or rent the money to buy the dwelling (interest is rent paid on borrowed money). Do whatever option is cheapest: borrowing the dwelling or borrowing the money to buy the dwelling.

Remember that property taxes and insurance are included in rent, when you buy you will need to add property taxes and insurance to your estimated payment. Mortgage interest and property taxes are federal tax deductible. Although the Trump tax plan may have eliminated the local property tax deduction...I’m not sure. Do your own homework on that. When you rent a house, inflation is working against you; when own a house, inflation is working for you (loan value does not go up with inflation).

Both options have risk: rents can go up dramatically if someone discovers natural gas or gold in your town or if rich urban hipsters suddenly think your neighborhood is cool. Property values can tank if a major employer goes out of business or if the overall economy tanks. If you have to sell your house when the RE market is down, you could lose much of your 20% down payment.

[forzalugano]

Most states have limits to the amount property taxes can increase and the percentage is much lower than the rate rent increases we see on average.

Homeowners insurance is negligible as renters have to get a renters policy that goes up by the same percentage.

In the end both of those costs are factored into rents costs, landlords have to pay property tax and insurance and pass those increased costs on to the tenant.

When landlords buy they use what we call a CAP rape of Gross multiplier, it has to pencil out. Most of the wealthiest people in the country own numerous properties.

Originally Posted by louie0406

Mortgage payments are fixed, but property tax and home owners insurance aren’t.

A good friend of mine who purchased a home in my area said that he’s had 3 property tax hikes in the 3yrs that he’s been there. According to him, they weren’t small hikes either. He’s paying a significant amount more now than he was 3yrs ago.

[ryanfze55]

On a comparable property, a mortgage payment will almost always be less than rent. When renting, you pay the mortgage, as well as taxes and insurance and maintenance, plus profit for the landlord. I know some exceptions exist (such as rent controlled apartments), but in general, rent is more. That being said, renting a small apartment might be a better option than buying a house since they aren’t comparable. If you don’t need or want the space, don’t worry about it.

However, renting in retirement is not ideal. Even if you have a lot saved up in your 401k and IRAs, rents are going up so fast in most metro areas that you’ll likely be paying a scary amount in retirement. That will eat into your investments. And while you still have to pay property taxes and homeowners insurance, plus any maintenance, that won’t take nearly the chunk out of your investments that renting will. Ten years ago, my mortgage + taxes and insurance was $1110. Today, it’s $1240. So in ten years, my insurance and taxes combined went up $130 a month. Not ideal but certainly not inhibiting to my finances. I’ve had to cover maintenance during that time, and that’s just the way it is. But I’ll have my house paid off 10-15 years before I retire, so that’ll free up enough funds to easily cover any maintenance. Houses are a money pit for sure, but life in general is a money pit. We all pay somehow, someway. Build your own wealth instead of building your landlord’s wealth. Houses don’t always appreciate, but consider the “wealth building” to be that you won’t have to pay rent in retirement. I hear people say “rent and invest the difference.” In many cases, there is no “difference.” A mortgage payment can, and often is, cheaper than rent. There’s no rule that you can’t have a mortgage payment and invest at the same time.

[tweez]

There are other variables (tax deductions, HOAs, recessions/market crashes, financial situation changes, etc.) - real estate is NEVER a sure thing and these are just ballpark numbers but:

Let's say you buy a 300K home on a 30 yr mortgage and 3.5% interest. Your monthly P&I is about $1350/mo for a total of $486000 over 30 years (less if you pay it off sooner). Then estimate another $5000/yr for taxes, insurance, and maintenance. Total comes out to $636000.

If your rent stays exactly the same for the next 30 yrs (highly unlikely), you are at $396K over 30 years. So far the difference is $240K more for the house over the same period.

BUT - you can sell the house. Average appreciation in Florida since 2000 is about 4.5% per year. Let's say you get an average appreciation of just 2.5%/year - you could sell after 30 years for about basically the same amount as your total investment (~$630K) which means you have lived there for $0 net investment. But let's say there is zero appreciation and you sell for the same $300K. That puts your net investment at $336K - which is at least 60K less than what you've spent in rent for the same period.

All that being said, as I mentioned before, real estate is not a guaranteed investment and you have to be willing to accept that risk (some folks just don't want the responsibility of home ownership and that is cool. Or the risk of what might happen if the market does crash or you get to a position of not being able to pay your mortgage for some reason, etc). But purely from a financial "why do people do it in the first place?" perspective - this may be helpful.

[airics]

Originally Posted by Pilot1

This is why I got a 15 year mortgage instead of a 30 year, and the monthly payment wasn't THAT much more. The interest savings were considerable.

You could have gotten the 30yr and just paid the 15yr amount. The interest isn't that much different.

[airics]

Originally Posted by louie0406

My wife and I have been flirting with the idea of purchasing our first home. Both of us are in our late 30’s and have no children, nor do we plan to. We are currently renting in a wonderful gated community in Florida’s gulf coast. We pay $1100/month for a 2br, 2bath, 1200sq ft apt. Amenities include 2 swimming pools, jacuzzi, dog park, fitness center, car garage, and storage room. We can easily afford the rent as we split everything 50/50 and are able to save/invest excess cash.

We’ve been doing some mortgage interest calculations, and it turns out that on a 250k home, we will pay over $100k in interest at 3.75% over 30yr years. Call me crazy, but I just cannot justify that. Is there something that I’m just not understanding? On top of that, you’re on the hook for taxes, insurance and basic maintenance and repairs of your home.

The only benefit that I can see from owning a home is that you have more private space and nobody can evict you (unless you stop mortgage or tax payments). Other than that, I dont see the upside.

I see the argument all the time of how “you’re just throwing money away by renting as you build no equity and are just lining someone else’s pockets”. Well aren’t you lining the pocket of these banks buy paying an exhorbanant amount of interest over the years?

Why shouldn’t I just keep my $50k (20%) down payment in the bank and continue to save and invest while paying an affordable rent instead of locking myself into a long term loan paying an insane amount of interest?

Again, we are new too all of this and are just looking for some information on how buying a home rather than continuing to rent would be financially beneficial to us because I dont see it.

Thanks...

And you probably buy the place now for $150k or less. I know you can buy condos on the Atlantic side for less than 100k

[LifeIsGood01]

Every time you pay your mortgage you are contributing to your net worth. Every time you pay your rent, you are contributing to your landlord’s net worth. Currently a homeowners net worth is 35 times higher than a renter and increasing fast.