The biggest issue I found with owning is that the equity doesn't build up fast enough at the beginning (with a 30-year mortgage), so if you sell after 10 years the costs pile up to the point that you have almost no net proceeds (5% commission, survey/title/transfer tax/inspections, plus prorated property taxes). A 200K property could easily cost you 20K or more to sell.
The best thing you could do is to put as much down as you can, on as cheap of a property as you can (condo, townhouse), then send in additional principal payments so that you could pay it off in 6 - 10 years. Then you can either put away extra savings after that, or move into a slightly more expensive place (about 60K more than your current house), and start the 6 year cycle over again.
Your scenario assumes a location (or person) with:
- Desirable housing in the $60-100K+ range
- Employment sufficient to generate high paying positions
- The will to sock away a large part of your income for close to a decade, just to have a paid-off home (which is not a big enough benefits to be a means unto its own)
(I guess it would be a prisoners dilemma situation, where individuals benefit by taking them out but the overall situation is made worse)
Everything the government does to subsidize home-ownership ends up getting capitalized into home prices and so acts as a naked giveaway to incumbent homeowners and either does nothing for or actively hurts non-incumbents. Interventions breed more interventions as the prior ones no longer provide the above general inflation price growth that homeowners demand from their politicians. The 30 year low fixed rate mortgage with no prepayment penalty is just one among many such interventions.
And what do prepayment penalties have to do with anything? As a consumer I will absolutely not sign any loan that comes with a prepayment penalty. It would be idiotic to.
- low interest rates (reduces interest payments)
- tax deductions (mortgage interest payments, etc).
Low interest rates, in particular, caused prices to rise dramatically, putting a lot of people in a lot of debt and making house ownership out of reach for many others.
I think it's possible to "game" the system by getting a 30yr mortgage but set it up so any extra payments above and beyond the minimum amount get applied against principal - in effect reducing the amount of money they can leverage interest against. Then you make as many extra payments as possible over the life of the mortgage and pay it off ASAP.
Anybody staying in a home would be insulated from the price effect, but anybody buying a first home or moving would feel it.
Using bankrate.com's advertised rates and mortgage calculators for my zip code and $300k mortgage (which is very nice with some land in my area since with 20% down that is about a $375k house):
- 30 year fixed rate (lowest): 3.500%
- 30 year fixed payment: $1,347/mo
- 30 year fixed total interest paid: $184,968.26
- 15 year fixed rate (lowest): 2.750%
- 15 year fixed payment: $2,036/mo
- 15 year fixed total interest paid: $ 66,455.68
The interest rate difference was like 0.15%.
Say your mortgage loan amount is $300K at 3.5%, locked in for 30 years. Instead of paying it off in 6-10 years with extra payments, I say invest those extra payments in the stock market, and keep paying the mortgage for 30 years at a locked rate of 3.5%. If that money that you invested makes anything above 3.5% over 30 years, then that's free returns to you.
On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. Hope that helps.
That makes no sense. You'll be better off paying a lower interest rate than you would be not having a loan in a high rate environment?
So, if you bought shares of an Emerging Markets ETF [1] with the money that you would have otherwise paid for accelerated mortgage payments. Today these shares are paying you around 3.5% in dividends alone.
Fast forward ten years to a high rate environment, and ten years of buying ETF shares and reinvesting dividends, I'm assuming that the dollar amount of your shares would be higher than the amount of debt you would have otherwise paid off already.
That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie.
You're financing two assets, you home and your portfolio with some mixture of debt and equity. Without making assumptions about the expected return of the housing market, the return on your portfolio, the variance of those returns and the horizon, its not clear that you'd still be better off.
You say take advantage of the cheap (tax-favored too) leverage -- I'd be concerned medium term variance in returns. That ETF you pointed to is down over the past 10 years and underperformed the market -- and it looks like it missed a few dividend payments during the crisis.
https://www.google.com/finance?chdnp=0&chdd=0&chds=0&chdv=1&...
> That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie.
So yes, technically some people now could have loans with negative interest rates, but there is usually an extra clause for a minimum or 0% or 1% or somesuch.
The problem is, the equation has flipped. Mortgage payments are now, in many cases, cheaper than rent and there's such a high demand for rental units in some metro areas that landlords have no problems keeping tenants increasing rent 3-10% year over year. Ideally, you could do the same arbitrage buying a house (ideally an asset that nets 0 when you sell it worst case and you get your money back) and invest the rent-mortgage delta into other assets. The problem is "unlocking" the house option. If you don't have exemplary credit, and a certain pile of cash available, banks are leery to touch you and make financing available. Ergo, you get forced into the rental market and there's a huge incentive to turn properties into rentals.
Tack on the millennial generation's hesitancy to settle down in one location and you get a set of economic conditions that encourage renting and regular rent increases.
Are we hesitant to "settle down" or are we trapped in a death spiral of student debt, rising rents and underemployment?
Yes, it's possible all of those things are factors but I'm going to argue for most it's subconscious rather than explicit factors in a settle/not settle equation. I think a lot of millennials are buying into the "extended adolescence"/party phase/single life/no responsibility/free spirit/high mobility (pick your moniker) lifestyle choices and acting accordingly - based on my anecdotal experience.
Where are the accompanying income increases coming from? Clearly not W-2 income. What can't continue forever does tend to stop. Or at least what happens on an extremely small scale can't be the case over an extremely large scale. Can't squeeze blood from a stone...
Also never forget the cost of home ownership isn't the mortgage, at least when compared to renting. That's only about half, once the numerous additional expenses are considered. My bachelor pad rent included everything but the electrical bill. Mortgages do not pay the gas bill or for a roof or a new HVAC system or water bill or (generally) property taxes or ...
In essence, we're a victim of our own success. Back in the day, life revolved around the city center and much of what is the 'burbs now was farm land. Overtime, as more people moved to the area, the cheap real estate was always al little bit further out from the city so people would saddle up and buy a house (with a 20-30 commute as the penalty) for a reasonable price. Over time, companies started building offices in the 'burbs, more people kept moving to the area, and the creep has pushed "affordable" out almost 20-30miles from the city center (commute time >1hr). Factor in the road networks are terrible, and mass transit stations are rare enough that real estate near them commands a premium and you find people willing to fork over a chunk of change in rent to not have a terrible commute either to city center or their 'burb job. Houses for sale, in the neighborhoods closer to the city, with good schools, not terrible commute etc, are generally priced for 2-income families. (>$500k).
Yes, the tradeoff between renting and buying is you assume the risk and costs of maintenance in buying. Most of the rentals i know of (single family homes or townhouse) push the cost of utilities onto the renter so really, all we aren't paying for is standard house maintenance and taxes. I'd rather assume the costs and risks of maintenance and taxes (and budget for them accordingly) and live with a fixed housing cost rather than continue fighting variable costs and potentially cranky landlords. Nothing makes a good housing situation sour faster than a bad land lord.
For example, here in Oregon based on all of the factors I adjusted, the result was "If you can rent a similar home for less than $1,422 per month then renting is better.". I could probably break even by moving to a different location, but then (for me) the freedom factor pushes it back towards home ownership.
So you put your own assumptions in, and that can give you a good idea of where your own situation results.
Its never clear to me how you invest the mortgage payment and also pay rent to live somewhere.
As a direct response to this, the calculator will actually show what the expected costs are assuming you invest any difference between the rent vs mortgage in a vehicle with the specified returns (and over the time period you specify)
[0] - http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...?
Let's say you're a couple years out of school and you work at Snapchat. Somehow you have a lot of money saved up and you can buy a little house near your office in Venice. A small house in Venice runs about $2m. So let's say you borrow 1.8m to pay for it, your monthly payment is about $8,500 on a 30 year fixed and thats before maintenance and insurance.
That same house in Venice probably rents for somewhere between $3k and $4k/mo net of everything.
So what those people are saying is to live in a rental and invest _the saved money_ in the market.
Remember, in both cases you are renting: in one, you are renting real estate. In the other, you are renting money. But they have different tax treatments, and renting money allows you to lever yourself into eventually owning an asset who's value you might expect to rise.
My landlord has probably shelled out $10k in repairs ( the house is at that magic 20 year point where everything fails ) in five years.
I've done the "buy cheap and spend the rest at Home Depot" thing. It's not bad, but it's not ideal. Unless I'm categorically certain of living in the house at least five years, I'll continue to rent.
I've done the math - I'd have less equity in a house of the same value than I have in raw cash freed up just from renting. And that's really not counting fees and closing costs.
Vastly. Fancy parts of LA. SF. All of New York. Pretty much anywhere in the train-serviced urban/suburban Northeast.
It might not "make sense" but it is true. I'm also sure it's not the case in most markets in the USA, but in the large metropolitan markets, it is true, and that's the point people are making when they say "you know, it might make more sense to invest your investment money in a different asset class and rent rather than pay the ownership premium here in Santa Monica/Pacific Heights/Williamsburg"
You invest your excess money in the stock market (hopefully returning more than 3.5%) instead of paying off your mortgage early.
Let's say after 30 years you have a big bag of money. Well, now you have to invest it for the passive income to continue paying rent. But, per my recent comment[1], inflation-protected passive income will pay something like 2.1%. Oh, and you're taxed on the interest income. So, more like 1.7-8% (in addition to whatever hit it because you couldn't put it all in tax-deferred retirement accounts). I hope interest rates return to something sane, but we can't assume that.
In contrast, if that extra money paid off a house, it's implicitly "paying your rent" ... except that it's not an actual income flow, so it's not taxed at all! You just pay property tax, whose increases are capped because you're just an elderly person whose estate shot up in value.
Plus, factor in rentals being generally targeted a lower-income people (or high-income yuppie singles) and therefore less desirable neighborhoods and less optimal for your lifestyle and it's looking steadily worse -- definitely need more than 3.5% for the break-even point (which would have to be the real, not nominal return anyway).
That's a tiny bit racist.
More info and examples here: (and elsewhere)
http://www.interest.com/refinance/news/3-free-ways-to-pay-yo...
My lease expires in April, and I haven't been able to get a response back from the owners about renewing it.
I understand, though... My neighborhood basically grew up around me, and my house is by far the cheapest rent in the neighborhood. The owners want to kick me out, remodel/demolish/rebuild the place where I live, and rent it for twice as much.
I wish I owned it. So while I used to think the same thing, this current situation is definitely causing me to reconsider it.
This literally means the landlord doesn't need a reason. It just means you need to give them 30days notice.
https://www.ontario.ca/laws/statute/06r17#BK43
Secondarily, the notice period for a monthly tenancy in Ontario is still 60 days:
https://www.ontario.ca/laws/statute/06r17#BK43
This part I'm not entirely sure on. You'll definitely want to check with authority, such as a counselor etc.
If you are renting you are prioritizing the location rather than the house. You can't find a house with your ideal gym, but you can't change your city to New York city.
The way I see it: If you don't plan to live in that place for the next 15-20 years, then you shouldn't buy. You can always invest your money in more liquid assets.
If staying in a city 1 year, you almost certainly should rent. If staying in a city for a guaranteed 30 years, you almost certainly should buy.
The exact place where those two switch over? It can vary on a lot of things. Single and gonna get married soon? Buying a studio condo may not be that smart. Married with 3 kids and stable schools and family? May tip towards the buy sooner range..
For example where I live (not major city), I cannot rent a house like the one I buy. The best house I can rent would cost 50% more than my mortgage payment, and only be about 75% as nice.
Where I am (suburb of Vancouver) a mortgage payment for an apartment of similar size/quality/location to what I have now is about 50% more per month.
That's sort of normal, I think. You get a better standard of living for that extra money.
My point was, originally, that if you're in an apartment you'll most likely be able to save for a downpayment on the sort of house on which you'll be able to afford the monthly payment. If you can't, either you're not the kind of person who saves money or there's something wrong with your math.
There's many fine reasons, including customizing and fixing a place to your liking, which you can't do with rentals. Personally, what I'd really love to do is build my own house.
See eg http://economix.blogs.nytimes.com/2013/09/03/taxing-homeowne...
Of course it would be purely for the benefit of your day to day life as you wouldn't get anything back out of it (if and when you decide to move).
To each his own.
At the bigger multi units, if your room is up for replacing carpet or repainting, they simply don't care what you do, they're replacing it all on schedule. When I left my bachelor pad it was up for its decade remodel, they didn't care as long as I didn't bother the neighbors or create a superfund site.
This article estimates that eliminating the mortgage interest deduction would reduce home prices by ~12%. But if you're in the highest tax bracket, the tax benefit from deducting mortgage interest is around a 28% reduction in your effective payment. So at least at first, you'd lose more to the elimination of the deduction than you would gain in reduced payments.
You're assuming that the average impact on home prices is the same as the impact on prices of homes bought by people irrespective of income. People of different incomes tend to buy different kinds of homes (or the same kinds of homes in different locations), so one would expect that removing (or adding) a subsidy that is income sensitive would have differential impacts on the homes typically bought by different income levels, not consistent impacts across all homes.
If it weren't there when you were first looking, houses would be somewhat cheaper, perhaps enough to still seem like a good deal.
Agree on the point about embrittlement and being stuck -- I'm reading Taleb's Antifragile now, and that's exactly the kind of thing that makes your ability to plan for the future more fragile, especially because it comes with debt. However, it has the offsetting benefit of "locking in" (a bulk of) your costs of living, which has historically been a good deal.
You mention kids a lot, several studies show that kids grow up happier in a house owned by their parents. Somehow it makes them feel safer or something. They have consistency in terms of going to school, etc.
Once the kids are gone, you are allowed to sell your house to downsize.
If i would by a property then to rent it out to tourists so it pays for itself plus extra.