This argument only makes sense when home prices stay flat or go up, which isn't always the case. I'd rather be "flushing my money away" each month than get stuck tens of thousands of dollars underwater on a mortgage.
Except you are not necessarily "building equity". House prices can decline and at the same time you do have to put money into the building in the form of renovations to maintain its current substance. What is even worse is that buying a house on a mortage with say a 10 or 20% down payment means three things:
1) The majority of your net worth is probably in that building so you're badly diversified across asset classes,
3) You are massively leveraged on that one position.
2) You are holding an extremely illiquid investment that could take months or even years to sell. This will probably be worst when when you want to sell the most.
All three of those are marks of a questionable investment.
You're flushing money every month with the interest on a mortgage + taxes + maintenance. You just have to hope that this is less than the amount you'd be paying in rent. (assuming property prices stay flat)
Property prices never stay flat because of inflation.
This matters because the payments on a fixed-rate mortgage do stay flat; they don't adjust with inflation.
I just refinanced to 4.5%. Long-run inflation is 3% so my actual cost to borrow is 1.5%. With the mortgage deduction it is just over 1.1%--nearly free money, in other words.
It's true that I pay property taxes. In my jurisdiction they are just over 1%, so now my actual cost to own is maybe about 2.2%.
Maintenance is a bit of a red herring...most straight maintenance is inexpensive (cleaning, painting) or optional (fancy landscaping).
Most expensive "maintenance" is actually improvements. For example last year I replaced both my A/C unit and furnace. It was a substantial cash outlay, but the new units are far more performant and efficient than the old ones. If I stay in the house another 5 years I will completely recoup that investment in lower monthly energy payments. And if I don't, the modern new appliances will allow me to set a higher asking price in a sale.
No, renting is paying to put a roof over your head. In the same way that some people rent or lease cars, because it's a better financial relationship for them than owning.
And in a lot of places, rent can actually be quite a bit cheaper than interest + taxes + whatever other costs borne by the owner. This was especially true at the height of the bubble. I was paying 6% interest on a place that would have rented for about what the interest alone cost me. So I was paying as much as rent would have cost in interest, plus taxes, plus condo fees, plus losing out on the ability to earn interest on the money I had put in for the down payment.
On the other hand, I'm now paying ~3.4% interest on a place that would rent for, again, about 6% of the purchase price per year. Even including other costs, I'm coming out decently ahead.
Of course there are other reasons to own rather than rent (or vice versa) aside from just which costs more, like stability, or freedom to move. But it is not a slam dunk easy decision as to which option costs less, even after accounting for the potential equity you build when owning with a mortgage.
+1. I live in an extremely rural community where you can afford to buy a 3 bedroom home for under $100k. If you can put 20% down on a 15 year loan and pay it off in 12 years, then yes, buying is much better than renting. If you're 25 years old, from the age of 37 to retirement you've just earned almost 30 years of free living (with the exception of taxes, utilities, etc.).
At the expense of permanantly undermining your earning power and raising other living expenses by committing to live in an extremely rural community. There's a reason those houses are so cheap.
Actually if you read the article he argues otherwise. Don't fall into the banks mentality.
> If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.
minimax|12 years ago
this_user|12 years ago
1) The majority of your net worth is probably in that building so you're badly diversified across asset classes, 3) You are massively leveraged on that one position. 2) You are holding an extremely illiquid investment that could take months or even years to sell. This will probably be worst when when you want to sell the most.
All three of those are marks of a questionable investment.
dan1234|12 years ago
snowwrestler|12 years ago
This matters because the payments on a fixed-rate mortgage do stay flat; they don't adjust with inflation.
I just refinanced to 4.5%. Long-run inflation is 3% so my actual cost to borrow is 1.5%. With the mortgage deduction it is just over 1.1%--nearly free money, in other words.
It's true that I pay property taxes. In my jurisdiction they are just over 1%, so now my actual cost to own is maybe about 2.2%.
Maintenance is a bit of a red herring...most straight maintenance is inexpensive (cleaning, painting) or optional (fancy landscaping).
Most expensive "maintenance" is actually improvements. For example last year I replaced both my A/C unit and furnace. It was a substantial cash outlay, but the new units are far more performant and efficient than the old ones. If I stay in the house another 5 years I will completely recoup that investment in lower monthly energy payments. And if I don't, the modern new appliances will allow me to set a higher asking price in a sale.
debacle|12 years ago
Also, s/each money/each month/g
huherto|12 years ago
mikeash|12 years ago
On the other hand, I'm now paying ~3.4% interest on a place that would rent for, again, about 6% of the purchase price per year. Even including other costs, I'm coming out decently ahead.
Of course there are other reasons to own rather than rent (or vice versa) aside from just which costs more, like stability, or freedom to move. But it is not a slam dunk easy decision as to which option costs less, even after accounting for the potential equity you build when owning with a mortgage.
marksands07|12 years ago
philwelch|12 years ago
addflip|12 years ago