In Monday’s post I covered the parameters for getting a mortgage. Most people don’t want to save up for a house, because it takes a long, long time. This post is math-heavy, so just be prepared for that.
Let’s say that three years later you decide you need to sell. Because things in the housing market have been totally jacked up for the last couple of years, let’s just assume you can sell the house for the same $187,500 you paid for it. You’ll need to pay the realtor 6% and you’ll probably have to pay 3% towards the buyers’ closing costs. That leaves you with about $170,625 you get from the sale.
With the 15 year, you have $124,621.27 left on your mortgage so you walk away with a check for $46,003.73. Including your down payment, you’ve paid $75,120 in to the house. You have a loss of $29,116.27. That’s about $810 a month.
With a 30 year, you have $141,153.02 left. You get a check for $29,471.98. You’ve paid $62,520. Your loss is $33,048.02. That’s about $920 a month.
At the five year mark, the numbers are a $43,418.54 loss for the 30 year and a $36,438.31 loss for the 15 year. That’s $725 and $610 monthly.
How much is your rent that you think you’re throwing away?
Put another way, to break even on your $187,500 house five years later, you’d have to sell it for (adjusting realtor fees and closing costs for the higher prices) $236,000 if you had a 30 year, or $229,000 if you had a 15 year. If you paid cash, you’d only need to sell it for $206,000 to break even. These figures don’t account for other costs such as property taxes or new roofs. The first $250,000 of capital gain is tax free assuming you’ve lived in the house three of the last five years, so that doesn’t apply here.
The point of all of this is this: Your house probably isn’t an investment in the short term, or at least not as good of an investment as you think. In order for you to break even, your house would have to annually grow in value at 5.5% for the 30 year, 4.4% for the 15 year, or 2.0% if you paid cash. I want you to get a house. I really, really do. I just don’t want you to get a house prematurely because you think it’s cheaper than renting.
But if you’re buying it as a place to live, how does that change things?
If your buying as a place to live *permanently* then the loss in the short term does not apply. If your buying as a place to live for only a few years its better to rent. buy for the long run, rent for the short.
The biggest takeaway here should be that the longer you pay interest, the worse off you’ll be. Your personal residence is an expense no matter how you look at it. In fact, it’s probably your largest expense after taxes. Your priority should be reducing that expense.
Of course, there is a point of diminishing returns on that. You could live your whole life sharing mom’s basement with your wife and four kids. That would be economical, but not entirely practical.