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Comment by jjslocum3 | Hacker News Reader

Mortgage loan officers (and also car salesmen) do all in their power to redirect people away from the fact that they're going to fork over e.g. $600k in total interest and principle for a $300k sticker-price house over 30 years. They do this by focusing on the monthly payment rather than the actual total spend. Convincing buyers that monthly out-of-pocket spend is somehow a proxy for the actual purchase price is a powerful tool that, while not technically deceptive (you do, after all, have to sign a Truth-in-Lending statement when you finance a house), absolutely causes people to spend more than they otherwise would.

But since the total lifetime spend on a house is absolutely lower if the interest rate over the life of the loan is lower, then it's true that lower interest rates make homes cheaper over their lifetimes. I don't understand why the writer of this article would chose to focus on the deceptive monthly payment argument rather than the concrete interest-rate argument.

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I don't think that's entirely fair. When I bought my house 6 years ago I looked at the monthly payment and compared it to rent in the area. For my mortgage (and a small down payment) at the time I could rent something like a fairly run down three bedroom apartment or I could own a run down three bedroom house. If you can live somewhere for free you can think about it in those terms (and I think about smaller purchases like cars in those terms) but the monthly payment is a big factor when looking at alternatives. That house has gone up 50% according to Zillow but I wasn't planning on that, I just figured it was worth the down payment and upkeep to have the peace of mind that you wont get evicted because someone else bought the place and maybe get a little something when I move.

My monthly mortgage payment on a nearly 4,000 sq foot home on nearly an acre is about the same as local monthly rental of a 2 bedroom apartment. I can't decide if I got a deal or if local rental prices are crazy high.

The house across the street from me rents for 2x my mortgage.

A lot of people can't afford the down payment to reduce the monthly payments. Plus the endless rumors of hedge funds buying up all the houses w cash to force renting, reduce supply.

One mistake a lot of people make is comparing their monthly mortgage payment to rent. You're not comparing apples to apples. You should be comparing only the interest portion of the payment to rent. The principal portion is money you're paying back into your own pocket in the form of home equity. Your actual "money that goes away like rent" expense is the interest. When you use this as your comparison, a lot more rent-vs-buy decisions swing over to "buy". Of course you also need to factor in amortized taxes, maintenance, and so on, but mortgage principal is not an expense.

EDIT: Plus, if you want to get even more exact, you should be comparing the interest portion minus the tax deduction to rent, because (at least in the US) the government lets you deduct mortgage interest from your income.

You can discount the principal payments somewhat, too, because you'll lose 10% of total value selling.

Why do you lose 10% selling? 6% for real estate cartel commission I guess. If you are in a hot market you can use redfin or similar low rate companies, don't pay the buyers agent. I'm trying to talk myself into it. No one is doing $60k of work selling your million dollar place.

6% to the cartel and another 3-4% in other transaction fees (title fees and insurance, excise tax, etc).

Rent vs Buy has fairly standard calculators, especially when you're wealthy enough to factor in opportunity cost.

If you're able to take a 30 year loan w/ a 2.7% interest rate and invest the rest of the equity, your house is cheaper than someone who buys it outright in cash.

The only time I would disagree with you, however, is for poor people. "Mortgage principle is not an expense" is correct over a long-horizon, but families living month-to-month that somehow managed to purchase a house are severely unlikely to be able to really capitalize on any value generated from that. I think your comment primarily applies to upper middle-class and wealthy people.

The key for the people who are poor is they need to stay in the house much longer than normal, so that they begin to get the advantages of inflation and growing principle payments.

But the working poor are also the most likely to have to change jobs, which either forces them into a long commute or having to sell the house before they're really built any equity.

It’s also important to include a sinking fund for expected maintenance costs when you own.

And property taxes, insurance, utilities (which you may have in an apartment but will probably be lower than a house) etc. I live in an older house on a reasonable bit of land so my expenses are probably on the higher side. But I figure $1,000/month is a reasonable round figure for budgeting. Condos will be lower in general--though there's a condo fee in that case.

> … minus the tax deduction to rent.

Make sure to not use the deduction verbatim, but calculate the amount that the deduction reduces your actual tax bill.

The "principle" amount on a 30 year is negligible for the first 7-10 years or so, which coincidentally is about how long the average homeowner owns a house.

People also wildly underestimate just how much taxes and maintenance can be, because they're not monthly - if you have to escrow taxes it's more noticeable, and if you correctly account for maintenance it's surprisingly high, even on relatively new homes.

The mortgage deduction only applies if you are not taking the standard deduction, and even then only the differential really applies (as otherwise you'd take the standard deduction) - something like 87% of filers will take the standard deduction.

Remember that if you have a copy of TurboTax or something similar laying around, you can do "what if" scenarios by inventing various 1099-INTs and playing around with them.

>People also wildly underestimate just how much taxes and maintenance can be, because they're not monthly - if you have to escrow taxes it's more noticeable, and if you correctly account for maintenance it's surprisingly high, even on relatively new homes.

Even if a house is fully paid off, there are a ton of expenses that relate to ongoing maintenance of a house and property that really can add up--plus taxes and insurance as you say. The details vary by age, location, type of property etc. But $1K/month is not unreasonably high especially given that a lot of homeowners will have some sort of expensive job (some of which are admittedly upgrades) every handful of years or so which will easily chew through a year of that budget.

Yeah, even a furnace replacement (was about $8k let's say, including AC) that should be done every 20-30 years is $25-35 a month - those things start to add up if you account for all of them. Roofs are 40 year so you might escape that one, but all the appliances are probably 10-15 year lifespan, and most people wouldn't even think of a new fridge as "maintenance".

One thing to note is you can put things off. My furnace is from the early 80's, I'll replace it when it dies but it works fine. I'm kinda looking forward to it so I don't have to use window units for AC anymore.

If the idea is you want a immaculate house with everything perfectly maintained then you can have high costs, but for example my microwave door handle busted off, I rigged up a fix, it looks terrible but not bad enough that I want to spend the money to replace it until it is completely dead.

The recommend replacement interval is useally a little pessimistic especially if you buy quality meterials and pay to do the job right.

You can incur "maintenance debt" like anywhere else and some cans kicked down the road end up not needing to be done or being done in a different/better way. But as someone who lives in an old house, you do need to keep up to some degree especially with things that are only going to get worse if left alone.

I agree the parent lifetimes are probably a bit low. But the basic point that annual costs for a house/property are significant even if you can trim a bit at the margins.

I agree you have to think about it, but things like appliances generally don't cost more to replace if you wait. If you have leaky roof or a wet basement take care of it as it will be cheaper to do now but those types of things don't make up the bulk of the maintenance costs, it's mostly little stuff that you can let slide if you need to. Other things like pest control you can do yourself with a little reading and call someone if it gets out of hand.

My point is mainly maintenance costs are a lot more flexible than rent. You don't fix a washing machine, you won't have a washing machine. Don't pay the rent and your out on the street.

Your old furnace may well be costing you more in fuel than the cost of replacement. A 1980s furnace is likely well under 60% efficient, plus it drafts inside air up the flue. A new furnace will be 90%+ efficient and the firebox will use outside air.

My house is under 1200 sqft and at night in winter we turn the heat down real low and just use space heaters in the bedrooms to take the chill off. We also got new, high end windows in the bedrooms so the space heaters run for about 15 minutes total. Also I like to sleep cold. Payback time is something like 10 - 15 years if it was twice as efficient given the math I did. Instead of a heater I got the basement redone as that was becoming a issue.

Part of me is also sort of thinking that each year I wait the heater I will get in the future will be a little more efficient. I've been thinking about replacing it since I moved in but just recently I'm hearing people in my area talking about heat pumps so I might see if I can give it another year or two and see if that becomes more mainstream and go that way.

Treating a mortgage payment as "money I'm lighting on fire" is the safe way to do it if the mortgage is on an asset that you can't liquidate in order to get access to the equity (because you're living in it).

Yeah you can. Boomers who hate their children do it all the time, it's called a reverse mortgage. You stay in the house until you die, then the bank takes it.

>but mortgage principal is not an expense.

this isn't entirely true either. You need to live somewhere. Yes you own the equity, but it's always going to be locked away as "home equity". It has an advantage of giving you higher debt flexibility by taking loans out against it - but to say it is the same as banking cash as compared to renting is wrong.

Unless you downsize your living or sell the house without buying another one (which means you will be renting) that money is effectively gone as far as liquid cash is concerned

Interest rate below inflation? I don’t care about that 300k, I would have lost it to inflation anyways.

Mortgages let you pay 2052 dollars against 2022 prices and that’s under appreciated by the financially illiterate.

Exactly. My mortgage is at 2.25%, I'd be a fool to pay that off early in the current climate. I am stuck with PMI and I might consider refinancing or something like that in the future but if I can't get the lower rate then it might be worth it to keep paying.

One of the hardest things for me w.r.t. finances is removing the emotional aspect. I don't get worked up about a fee added onto my mortgage because when looking at it over a longer period of time it's insignificant compared to what I can do instead with my money. Like right now I could pay off my remaining student loans without issue but why would I while they sit at 0%? If they restart payments I'll wipe it out and there is a part of me that just wants them gone but it would be an emotional decision not a financial one. Paying off my car early was right on the line and I probably made more of an emotional decision when it came to that but no one is perfect.

You can also eliminate your PMI if you can appraise your home at a price that escapes the difference, so keep an eye on that.

I thought at some point I read that FHA loans don't have that? I'll look more into again in a few years when my house will appraise high enough.

Certain loans (like fha loans) have PMI for life

Is an appraisal enough or is refinancing required?

Check your loan documents, mine have often had a "if valuations go up you can pay for an appraisal when you cross 20% or it's assumed if valuations have gone up enough AND enough time has passed".

Usually it auto-expires when you pass the 20% equity mark based on original sale price.

It's easier with a local lender as opposed to someone who sold off the mortgage, of course.

I'm guessing your mortgage doesn't remove PMI after a certain number of years or 80% LTV?

The greatest vehicle ever for the common man to leverage debt to his advantage.

> Mortgages let you pay 2052 dollars against 2022 prices and that’s under appreciated by the financially illiterate.

Can you please clarify, or point towards additional reading material?

You’re forgetting about inflation here. Sure you’re paying 300k of interest for a 400k house at 5%, but your mortgage payement keeps decreasing in real terms.

Do you benefit from inflation if your income or other investments don’t go up in value? Someone owning a house and making $300k/year loses purchasing power at the same rate as their mortgage “value” drops due to inflation.

You'd have to be in a pretty crappy situation to not have your income go up over a 25-year mortgage.

Same goes somewhat for home prices going up, but if you don't live in a booming tech city it might not hold true. I'm in one, my house is 4x in under 20 years. My payment was so huge when I got it, now it isn't so crazy.

The country would be in shambles if, over a 30 year horizon, your investments did not outpace that interest rate. There's a reason why the <3% interest rate era we just left was considered free money - especially entering into an 8% inflation USA.

I blame consumers for falling into the trap. I’m not saying the sellers don’t have a lot of responsibility here as well, but consumers need to be smarter.

It’s a pretty obvious play. I go into a dealership, and the first question the salesman asked me is “what do you want your monthly payment to look like.“ And I always respond with something (a little snarky) like “ I don’t care what my monthly payment looks like, I care about getting a good deal.” While a little snarky, I’m also trying to signal to cut the crap and let’s do business.

More consumers need to think that way. In the mortgage context, I think it makes a little more sense to focus on the monthly payment. However, when brokers are using 2 or 5 year ARMs to sell the “monthly payment,” that’s pretty unconscionable.

It would probably be more helpful to state that as "the total sale/out-the-door price" rather than "a good deal". But otherwise, yes, definitely avoid thinking in terms of monthly payments (alone).

You are forgetting three things that changes a lot for home buyers:

* The government lets you deduct your mortgage interest from taxes * The house will appreciate in value over the term of a 30 year loan (almost certainly) * You are paying for your interest and payment in tomorrow's money

Also, what am I going to do instead, rent? My rent can go up $50 bucks a year where my mortgage payment is locked in. For most people, home ownership is the safest and best way to build a retirement nest egg and a tangible asset to borrow against in times of trouble.

I'd change the perspective. Both you and the GP are right, but all these benefits are used against the consumer, to distract them from other things that are happening. It's a subtle race to the bottom which, when looking at younger generations / lower classes and their incapability to buy, suddenly isn't so subtle anymore.

The entire thing also creates a cycle of "house prices must go up!" which further exacerbates the problem, at the cost of those who haven't been able to buy houses. Or worse, it creates a large amount of debt which is begging for a 2007-2008 repeat.

Now that people have less children, or no children, and the population tends to age-out and shrink in many countries, I wonder if we'll reach a point where real state prices start to consistently fall every year, reversing the current trend, as people die of old age in large numbers leaving lots of empty properties behind.

I hope so, but I also heard enough reasons to not expect this. Many countries are still projecting population increases well until 2030 (sometimes even 2050?). The Netherlands predicts population will continue to rise well until 2070, despite fertility rate fluctuating between 1.5 and 1.7 for five decades now. It's pretty similar to Japan, and Japan has only just started decreasing in population.

There's also the cautionary tale of "there is enough housing, just not enough affordable housing", as well as VCs convincing governments to tear down homes in favor of other things, further reducing the number of homes.

Then again, there's the darker perspective that lack of medical staff / medicine will significantly lower the lifespan of several generations.

> The government lets you deduct your mortgage interest from taxes

This is effectively not true anymore.

> Also, what am I going to do instead, rent? My rent can go up $50 bucks a year where my mortgage payment is locked in. For most people, home ownership is the safest and best way to build a retirement nest egg and a tangible asset to borrow against in times of trouble.

I'm going to push back a touch on this, it's not really true. Mortgage rates don't usually change in the US(because we take 30yr fixed mortgages generally). But housing costs do go up for owners: property taxes, and property maintenance.

Generally renting vs owning is mostly a wash, sometimes one is cheaper than the other, just depending on the local housing market.

Historically property has a about a 1%/yr real rate of return, so housing basically keeps up with inflation, but not much more. I know recent history makes people think this is not true, but it really is. It seems unwise to think this recent history will continue forever. Equities historically get a 4-6%/yr real return, drastically outperforming the historic returns of real estate.

But yes, lots of people tend to not save for retirement, making their houses their de-facto retirement savings. The problem is, they have to live somewhere, making their house value somewhat hard to spend in retirement.

>> The government lets you deduct your mortgage interest from taxes > > This is effectively not true anymore.

Care to explain? Is this because the standard deduction is so high, it's generally not worth itemizing for most people since the Trump tax system adjustment? Genuinely curious; I'm a current renter, hopefully purchasing in the next couple of years. But this is an important part of the buying calculus.

I assume that's the point they're making. With relatively recent tax law changes, it no longer makes sense for a lot of people to itemize--and if you don't itemize, you don't get a break on your mortgage.

They're correct; at least for the short term. A quick search tells me itemized deduction returns are only ~10% of tax returns right now, down from ~26% before the TCJA. So if you're MFJ you'd need ~$25,000 of home interest and other deductions before you'd even break even itemizing. Not counting the hassle of itemizing vs just claiming the standard deduction.

But the higher standard deduction is set to expire in just 3 years (2025)[0], which will cut it in half. That may or may not get extended. So you may want to calculate if you'd be in the ~26% of filers who'd benefit from itemizing if it did expire.

[0] https://taxfoundation.org/look-ahead-expiring-tax-provisions...

Very interesting point about that higher standard deduction expiring in 3 years, conveniently after the next election. It'll be interesting to see how that pans out on a federal level -- lowering the standard deduction is equivalent to doubling the effective tax rate for many lower-income Americans, after all.

They are probably referring to the $10k salt limit this is the total deductible state and local tax and interest deduction. In any big city your property taxes are probably 5k+, add state taxes, you don't have any room under the 10k limit to deduct mortgage interest. That deliberate Republican property tax screw you change made a big difference (the old deduction was also a huge tax deduction for huger middle class to wealthy people).

The other commenters covered the reasons just fine.

> But this is an important part of the buying calculus.

I would argue it probably shouldn't be.

Anyways, like I mentioned, sometimes renting is cheaper, sometimes buying is, I'd recommend buying whenever owning is cheaper. It likely will change while you hold the property, but no sense in over-spending on a property if you don't have to.

Buying property tends to take a good while, don't get so fixated on a particular house so much that you bid ridiculous amounts for it. It might take a few years once you start shopping.

Try to put 20% down if you can, and try to limit your purchases to a single house for your lifetime. Transaction costs will likely eat you alive if you transact all the time. Illiquid transactions are always such a pain.

Good luck on your house hunt!

$50 sounds like an OK amount for rent to increase per month at lease renewal. In the last few years, many of my friends have had rent rise by $200-800/mo in a single renewal. Hell, the apartment I just moved from is renting for $600 more than I paid for it per month! That's more expensive than the house I'm renting right now.

> But since the total lifetime spend on a house is absolutely lower if the interest rate over the life of the loan is lower, then it's true that lower interest rates make homes cheaper over their lifetimes.

House prices are determined to a large extent by interest rates [1]. People have a certain amount they are willing to spend on a mortgage payment each month. If rates are lower, that amount buys a bigger mortgage, so house prices are higher.

[1] https://www.bankofengland.co.uk/-/media/boe/files/working-pa...

Yes, lower interest rates (and lower property tax rates) often just get capitalized into the price of the asset in supply constrained areas.

I was pleasantly surprised that Rocket Mortgage (Formerly Quicken Loan) actually has a calculator on the dashboard when I view my loan information that shows me how much interest I'll pay over the lifetime of the loan. I can even change my monthly payments and see how it will effect the lifetime interest of my loan and how much faster I will pay it off.

Under federal law, when you get your credit card bill, the bank is required to include a breakdown of, for example, how long you have to pay if you only make the minimum payment, and how much your total payments will be if you only make the minimum payment.

We need something similar and conspicuous for mortgages. Let people really see/feel the interest.

Another way I’ve seen it phrased is in terms of buying power, and I think that can be effective. I’m ball parking some numbers here, but I think I saw something along the lines of, for the same monthly payment you can buy a $275,000 house with 5% interest or a $350,000 house at 3% interest. I think that drives the point a bit

While I would not object to what you propose, I doubt it would change behavior significantly. People who are inclined to think about the interest and overall costs are already easily able to access that information. People who aren't inclined will see 3 additional pages among the 120 pages they see during closing or 30 they see during mortgage application/qualification process.

People who can't (or don't want to) math aren't likely to suddenly do so because of an additional disclosure.

> We need something similar and conspicuous for mortgages. Let people really see/feel the interest.

The disclosures you get from the lender are already required to contain a a "FINANCE CHARGE" which is the total interest you will pay on the loan, "The dollar amount the credit will cost you". They also have "TOTAL PAYMENTS", the "The amount you will have paid after you have made all payments as scheduled."

The forms are formatted clearly. If you want to know what the number is, it is right there with an explanation.

> I don't understand why the writer of this article would chose to focus on the deceptive monthly payment argument rather than the concrete interest-rate argument.

Why? because they have a motive. The motive is to put out a propaganda piece to try to convince the FED not to raise rates.

Look at this AI triggering headline at CNBC this morning! They are using the FEDs "favorite" inflation measure, which is 4 points lower then the typical number quoted!

https://www.cnbc.com/2022/05/27/the-feds-preferred-gauge-sho...

Wondering why stocks are up today?

> $600k in total interest and principle for a $300k sticker-price house over 30 years

These numbers are a bit high, but definitely in the ballpark [1]. BUT, I think that framing it as total interest + principal is also misleading. Let's say you locked in an interest rate of 2.75% in 2020-21. Your total interest payments on a 300k house (with 20% down) would be $112k, so total P&I would be $412k. Someone might look at this simplistically and think, wow, I'm overpaying by 37% if I take out a mortgage. But at a 2.75% rate, anyone who is financially savvy is going to recognize that as a steal. It's almost like free money, because it's being paid off over 30 years. Your $1500 monthly payment might seem like a lot now, but even with relatively low inflation, your payment in years 15-30 are going to seem like a bargain when they come around. But it's hard for many people to think in those terms.

[1] Mortgage rates right now are around 4.75% on a 30 year. Assuming 20% down on a 300k house (60k), you would take out a loan for $240k, and over 30 years you would pay $210k in interest, or a total of 510k in principal + interest. Your monthly P&I would be about $1,530.

> $600k in total interest and principle for a $300k sticker-price house over 30 years

Present value of $600k paid over 30 years is less than $600k. Depending on the discount rate it might be even less than $300k now.

Inflation is a monthly/annual measure (at least insofar as most economists are interested in it). Looking at monthly spend is the fair comparison.

You're bringing up an important point about buyers often left unaware of their total outlay, but on the flip side, their home is usually an appreciable asset, they are free to re-fi, and they also get to deduct mortgage interest.

The monthly payment is often used because people are comparing the cost to rent, or the monthly cost of their current mortgage.

Or their monthly salary/expenses...

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