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But homes are not assets, the equity in that home is. The home itself comes as a liability because of the maintenance costs, mortgage, taxes etc
People need to view homes as what they are: Shelters. Homes, or even apartments, are nothing more than shelters for survival. Unfortunately, humans in the US put survival on the back burner. We have heat with the flick of a switch, instead of having to cut down trees, chop and stack wood, etc.. The greed in people combined with the sales pitches by the housing industrial complex changed people's views of home. They are no longer viewed as shelters, but as some sort of "investment." People started buying what they wanted, letting personal wants and desires cloud their judgements. Now lots of people are in trouble, and millions more are one paycheck away from being in trouble. People got sold on this idea that since we no longer have to cut down trees and build cabins to survive the elements and dangerous animals/people, we should just put ourselves in debt for 15-30 years for our shelters.
Like Dave's motivational message. Have used the snowball technique which works and forces you to pay off debt and live tight. Sometime Ramen Noodles can actually get you through a week you cut close to get bills paid instead of spending.... But we prefer beans and cornbread.
a $120k mortgage @ 4.2% APR for 15 years = $900 month payment
a $120k mortgage @ 4.2% APR for 30 years = $586 month payment
Monthly rent for that same type of home would = $1,200 month
For some buying and owning the home is the better option than renting a home. It would take 15 years to save enough money to buy the home with cash. During those 15 years you are renting. In those 15 years, how much did that home price rise due to inflation? Within that 15 years of renting, that person contributed ZERO dollars to equity because they were renting. If they originally bought that home with that $120k mortgage, after 15 years, the home would already be paid off.
I just don't think it is as black and white as it seems.
It is highly dependent on where you live. In many areas of Los Angeles renting is much cheaper than buying, and it's even worse when you add insurance taxes and maintenance. If those were the kind of numbers I was looking at I would have bought a place a long time ago.
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Originally Posted by DellNec
You have to live somewhere, whether you are renting or owning, you are putting money into that residence. Whether you are paying $1,200 a month on rent or $800 a month on a mortgage payment, you are throwing money at the residence. With a rental the landlord is taking your money, with a home, the bank is taking the money.
At least with a home you have a home that USUALLY will appreciate and carry equity in it. Plus it is a HOME, not an apartment. Having lived in an apartment and a home, I would never want to go back to living in an apartment. I can crank my radio in my home without getting complaints, it is my home, I can paint the walls, design it, and it is my domicile. I have a yard, a garage, and I can throw a party without being crammed into a small apartment space.
It is much more complicated than that though because there are a lot of factors to consider depending on your location. And the appreciation assumption is a fairly big assumption given the current market.
I was listening to the Dave Ramsey show on the radio. He had a caller who was proclaiming he was "debt free". The caller owed around $120k in mortgage debt on a home and the caller was boasting about how he and his wife became debt free in 4 years. The caller went on to say that as a couple their income annual income was $150k.
I thought to myself, BIG DEAL! They made $600k in 4 years. How hard is it to pay off a $120k mortgage if you make $150k a year???
Then another caller stated that he & his wife made $175k a year in income and they were debating about whether or not to get a $200k mortgage on a custom home. Dave Ramsey went on to say that they should only pay CASH for the home but he gave them an "exception" because of their income but warned them about getting into debt.
Even if they took out a $200k mortgage, if they make $175k a year they can pay off that note in 3 years if they save their money.
I agree with some of his principles but some of the calls and advice he gives seems off the wall. Most people don't make $150k-$200k a year. How is one supposed to save $150k in cash to buy a modest home if they make $30k a year? It would take a modest couple making that amount 15+ years to even attempt to save up enough cash to even buy a modest $100k - $150k home all in cash. Where do they live in the mean time? They would have to rent and renting is dumping money into someone else's pocket.
On numerous occasions Dave Ramsey totes that one should never take out a loan on a new car, the car purchase should be paid in cash.
Does anyone else find his advice unrealistic at times?
People do it every day. it involves working two or maybe three jobs, cutting out things like internet access, cable television, cell phones *and* driving a beater, not eating out and eating a lot of meals of beans and rice.
it is difficult and requires a big commitment, but it is not impossible or unrealistic.
Like Dave's motivational message. Have used the snowball technique which works and forces you to pay off debt and live tight. Sometime Ramen Noodles can actually get you through a week you cut close to get bills paid instead of spending.... But we prefer beans and cornbread.
Quote:
Originally Posted by 20yrsinBranson
People do it every day. it involves working two or maybe three jobs, cutting out things like internet access, cable television, cell phones *and* driving a beater, not eating out and eating a lot of meals of beans and rice.
I agree with saving money but there comes a point where it can become just as bad as those who spend. I personally know of people who would would never go on vacation, never buy any electronics, keep the heat at 65F in the winter, walk around in the dark to save electricity, eat rice and cheap food, they died stingy and miserable with hundreds of thousands of dollars in their bank account. They never experienced life and the joys it can offer. They were modern-day Scrooges and curmudgeons because saving money was the only thing they lived for.
Quote:
Originally Posted by pghquest
But homes are not assets, the equity in that home is. The home itself comes as a liability because of the maintenance costs, mortgage, taxes etc
Yes, but property taxes and mortgage interest is a TAX WRITE-OFF on your yearly 1040.
I know of someone who followed Dave Ramsey's philosophy of buying a home in cash. Didn't work out too well for them. They bought with cash in 2006 when RE was booming. Today, the home is worth 50% less than what they paid for it. The lost $200,000 in equity. If they would have taken a mortgage out, with 10% down, they could have walked-away from the home and just lost the 10% down payment of $40k. If you view the home as a business decision, then walking away on a failed asset is the correct business decision. Plus today they would have $360k cash in their bank account.
Also, in regards to the 15-year mortgage. I think it is a bad idea to LOCK yourself into a higher payment because if you lose your job, then that $800 monthly payment becomes hard to pay. With a 30-year mortgage rate, that payment could have been a manageable $400 instead of $800. You are better off taking a 30-year note and putting money aside to pay off the loan sooner. One can save and pay off the note in 15 years by putting money aside. It's too big of a risk to take on 15-year notes for MOST people.
Also, in regards to the 15-year mortgage. I think it is a bad idea to LOCK yourself into a higher payment because if you lose your job, then that $800 monthly payment becomes hard to pay. With a 30-year mortgage rate, that payment could have been a manageable $400 instead of $800. You are better off taking a 30-year note and putting money aside to pay off the loan sooner. One can save and pay off the note in 15 years by putting money aside. It's too big of a risk to take on 15-year notes for MOST people.
The difference between a 30 year loan payment and 15 year loan payment is never twice the 15 year loan payment.
There's also a difference in interest paid. For instance, from my small loan way back in the dark ages ...
30 years @ 5.25% was $541.16 a month. Over 30 years I would have paid $96K in interest.
15 years @ 4% was $724.89 a month. Over 15 years I would have paid $32K in interest.
I chose the 15 year, but my interest was much less since I paid it off early
Lol...well, 30+ percent of that will be eaten in taxes. Then figure in retirement, normal savings, and just day-to-day life.
It'll take longer.
I paid off a $100K mortgage (left on what was originally borrowed) making $40k/year net. I made an extra (13th) payment every year, and sometimes more. Tell me it can't be done on $600K, or 1/10 of that, for that matter.
The difference between a 30 year loan payment and 15 year loan payment is never twice the 15 year loan payment.
There's also a difference in interest paid. For instance, from my small loan way back in the dark ages ...
30 years @ 5.25% was $541.16 a month. Over 30 years I would have paid $96K in interest.
15 years @ 4% was $724.89 a month. Over 15 years I would have paid $32K in interest.
The APR is never that great between a 15 year and 30 year mortgage. Right now, one can get a 4.2% APR, 30 year fixed mortgage or a 4.0% APR, 15 year fixed mortgage. They are not separated by an entire point and a quarter (1.25%).
$150k loan @ 4.2% APR - 30 year = $733 month - $8,796 year
$150k loan @ 4.0% APR - 15 year = $1,109 month - $13,308 year
The difference of a 15 vs 30 year mortgage is $4,512 a year in payments. That can be a make it or break it difference in getting foreclosed on.
Unless you are in a very good position, where you make great money and have a lot of job security (policeman, fireman, doctor), I would play it safe and go with the 30year and save money on the side to pay it off sooner. Why lock yourself in to something that might break you if you hit hard times?
Ramsey is a pompous Christain Right wing loon. We deliberately turn the monitor down at the radio station I work at during his show and only listen when our radio station is taking a break. Numerous time I have moaned and groaned at his nonsense. The owner yells down the hall to shut up but I do it anyway.
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