People buy home with intention of never paying it off (incentive, duplex)
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I was having a conversation about buying home & down payment with a friend who works in retail bank. I thought the standard was putting 20% down which can be significant amount depending on the house price & then having that 20-30 year mortgage stress.
Then she told me something surprising that most people don't buy real estate with the intention of paying it off. They just want to make monthly payment & live there without having a landlord. Even if they pay it off, most people get home equity on it. If banks offered 60 years or 100 years mortgage, people would opt for that because owning that property free of mortgage is not the goal for most people.
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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Staying in a home long enough to pay it off is very rare now. The average stay in the home is 11.4 years for first-time buyers, and 14.8 years for people who have owned a home before. I consider us to be unusual since we have been in our house for 26 years, but it's our 3rd (1st was 7 years, 2nd was 6 years). Needs change, you start out with what you can afford, then kids come along and you need more room, they start school and you need a better district.
As long as you don't keep refinancing and taking out cash, there is no "20-30 year mortgage stress." Your payment goes up very slightly due to taxes and insurance, but the mortgage remains the same while your income goes up over those years. That 30% of your income spend on the mortgage can become only 10% well before it's paid off.
I agree to a point. There is truth there. People don't want a landlord or rent increases. Mortgages are set. One can delay a mortgage payment and still be in the house for the better part of a year. Miss a rent payment one could be evicted in months. Not all houses are private though especially in a condo, town home or duplex.
Well, I did pay off my last house in 16 years (originally a 30 year mortgage), but my new home is a 30 year mortgage as well. Since I bought it at age 68, even with extra principal payments, there's not much likelihood that I'll be paying it off in my lifetime. And fiscally, I have no incentive to do so either.
I might fall into that group. I have 20 years left on a 30 year loan. But I plan to retire in about 15 years and move closer to family/back home. If I can do it sooner, I will. So I have no intention of ever paying off the loan on my home. But I do intend to take the money when I sell and buy another place for cash. The assessed value of my home is nearly three times as much as similar houses cost back home. What I have in equity now I could buy a house of similar size back home for cash and have a little left over.
So in a way, I plan to be "paid off" at some point and not have mortgage. Just not in the house I am in.
The biggest aggregate lifetime expense for Americans is interest....I have bought ten homes in my life, and have paid cash since number 5. Makes the process so much more pleasant, and you get great discounts on homes that won't go FHA, for some reasons as simple as no floor covering.
It has far less to do with "sticking it to the lender" by virtue of not paying 30 years worth of interest....and more to do with the fact that most folks don't stay in a house for 30 years.
You buy a starter home; have a couple kids; out-grow it/want a bigger yard/better school district etc..... "move up"....live there for a decade or two... retire, downsize, etc
The "buy a house and stay there forever" mindset has been gone for a while.
According to lenders I work with regularly.... the average life of a loan in my market is about 10 years. I was surprised it was that long.
And to clarify; it's not like homeowners just "don't pay it back"....obviously when they sell the home before paying the entirety of the loan off; thus ending the loan-period......the remaining balance of the loan is paid back from the proceeds of the sale...thus the mortgage is absolutely "paid back". Check the amortization schedule for any standard 30 year fixed and you'll see the lender certainly didn't "miss out" on much interest at all even if the property is sold within 10 years.
It's sort of liking leasing a car I guess. Some feel it's not good to own financially and legally.
As the demographics change economically especially some will stay in a house more because economic advancement may not be as likely. Other's it's just a stop. The investment angle will always play 'a' factor. There are slow flips out there as well. We had a near home that was only occupied for 5 years but every single year they did a major project starting with the roof, windows, deck, yard. They doubled their purchases price but it was a foreclosure. They occupied/lived there, it never became a construction site.
Got to agree with TarHeelNick, The lender will get theirs one way or another. I think if you factor in divorce, illness and death the average life of the loan would go down to 7 years. It seems around here, everyone Re-fi's at about 3-4 years and starts all over again.
We personally practice Velocity Banking and pay off the house in 6.5 to 7 years eliminating the amortization gains of the lender drastically.(They really hate that!)
Stick-it-to-'Em!
I was having a conversation about buying home & down payment with a friend who works in retail bank. I thought the standard was putting 20% down which can be significant amount depending on the house price & then having that 20-30 year mortgage stress.
Then she told me something surprising that most people don't buy real estate with the intention of paying it off. They just want to make monthly payment & live there without having a landlord. Even if they pay it off, most people get home equity on it. If banks offered 60 years or 100 years mortgage, people would opt for that because owning that property free of mortgage is not the goal for most people.
Is that true for lot of people.
Look up the financial planner, Ric Edelman. He has a popular radio show and often appears on PBS. Very respected.
He preaches getting a 30 year mortgage and "never paying it off" or at least early. The reasoning is that if you have a good rate, the extra cash should be invested for a better return.
He admits it is counter intuitive and freely acknowledges the appeal of a paid for house and living rent free, so to speak.
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