Counterpoint to buying a house

I suggest everyone go to this website http://www.salemfive.com/cobrand/CALCULATORS/index.html, they have a great set of calculators for different financing things (we are using it in my finance class up at WWU). I by no means am an expert, however, there were a few little facts I have learned recently in my accounting degree that have indicated buying a house is not as valuable as investing free money.

Here are two fairly common (and I am sure wiggles can verify the numbers aren’t that out of line) house loans.

APR: 6.900 %
Payment Term: 360 Months (30 years)
Total amount financed: $250,000.00
Monthly Payments: $1,646.50
Total payments: $592,740.60
Finance charge* $342,740.60
Amortization method: Normal

This is for a fairly standard 250,000 house. So in the end you are paying over 150% worth of the house’s value in interest alone. This is only for a 30 year loan.

Now, you want to make it a little cheaper, go for the 40 year loan:

APR: 6.900 %
Payment Term: 480 Months (40 years)
Total amount financed: $250,000.00
Monthly Payments: $1,535.45
Total payments: $737,022.67
Finance charge* $487,022.67
Amortization method: Normal

So in the end for a 250,000 house (which seems low to average for Whatcom County) you are paying almost 3/4 of a million dollars, you are saving 130 a month, but paying 165,000 dollars in interest extra to save you that 130 a month. YOU ARE PAYING ALMOST 3 TIMES THE VALUE OF THE HOUSE.

Now, if you were to invest this money, say 1,000 a month, and then spend the other 600 for rent (which apartments run in the market) you can earn this by investing that supposed house payment into real things like stocks/bonds/etc. Here is what you can earn.

APR: 6.90%
this is pretty average return, stocks can go as high as 10% which increases the amount you earn alot
Monthly Payment $1,000
Payment Term 360 Months (30 years)
Amount of Return of Investment: $1,196,170.35
Amount this will have Grown to in 30 years with that return:

Now lets do this for 40 years.

APR: 6.90%
this is pretty average return, stocks can go as high as 10% which increases the amount you earn alot
Monthly Payment $1,000
Payment Term 480 Months (40 years)
Amount of Return of Investment: $2,552,250.79
Amount this will have Grown to in 40 years with that return:

So what we are saying is either A: you can pay 592,740 for 30 years to own a house (or 737,022 for 40 year mortgage). and have a house not worth to even close that.

Or you can invest that money in stocks/bonds/mutual funds/ cd’s get the 6.9% fairly easy and make after thirty years 1,196,170.35 in the bank (at $1,000 a month) or after fourty years make 2,552,250.79 at 1,000 a month investment.

Sorry, houses are only good for people that can buy, and then turn around and sell them for a profit in a relatively short time.

None of this takes into account the bubble bursting, which there are signs of in New York and Boston. One of the ways the realty people are getting around the bubble bursting now is by offering 50 year loans back east.

In addition, that monthly house payment of 1600 DOES NOT INCLUDE INSURANCE OR TAXES which are pretty hefty in themselves, there is an additional 500 a month at least that could be added to your investing (which more then 150% bonus to investment  with the way returns work) or can get you an $1100 apartment which is pretty nice.

Seriously, whats a better investment, pay for a house, that you have to worry about paying off for 30 or 40 years (or if your really stupid 50) and have to repair out of your own pocket, or rent an apartment, and invest that money to get 1.1 or 2.5 million in the bank.

Home Owning Observations

My sister got a loan, made me think about home owning, read at your own risk, its long and not really that interesting.

My sister recently was approved for a home loan, she was excited, as many people believe she thinks it’s the way to save money and to get ahead in life. As my family was talking about this I began to think about the real value of owning a home. My conclusion is that it’s a myth. It doesn’t increase your value, and if nothing else it actually limits you due to your inability to move or sell quickly.

I am told constantly how people waste money renting, however after doing more research I discovered on average, if you wish to actually invest money, the smarter idea would be to rent. Here are my reasonings.

First and foremost, this does not include closing costs, realtor fees, repairs, or any extra fee. This is purely a monthly payment comparison between the house and the rental, AND this does not include money on the actual loan, THIS IS PURELY PAYMENT IN TAXES, INSURANCE, and INTEREST on the payment (basically the money that doesn’t go towards the value of the house, rather the money that is lost to excessive fees and does not actually pay off the primary loan).

First I took the average amount of $258,000 (average cost of a home in Bellingham according to http://www.bellingham.org). The average property tax is 1.4% (range is 1.2-1.6%), so you multiply 1.4% x 258,000 = $3,612 a year. She is paying 7% interest rate, that means 7.0% x 258,000 = $18,060 in interest alone on the house loan (none of it goes to the actual amount). Finally average home insurance (10 quotes I looked at for that value) was $820 a year. That means the totally yearly payment of her $258,000 home is $3,612 + $18,060 + $1220 = $22,892 dollars a year. If you divide that into a monthly payment that comes out to be approximately $1907.00 per month. NONE OF THAT GOES TOWARDS THE LOAN, that’s just the “cost” of having the house.

Now if you compare that to the average rental of a 3 bedroom home of $1050 (costs run $900 to $1200). If you take the rental cost of 1050 and subtract the Loan cost of $1907 = means renting you are saving $857 a month alone just in loan fees (plus the several hundred you would pay on your actual debt). Instead of wasting close to a $1000 a month extra plus the actual debt payment, you could turn around and invest that in some serious 401k, or invest it in other opportunities that are more portable.

So, my conclusion is you are throwing away an average of $857 a month in excessive fees to be able to say “I own this”. Of course this does not include the other advantages of renting, you do not have to repair or replace appliances (that is the responsibility of the landlord), rental insurance is only $15 a month, and utilities are generally cheaper in apartments (which btw are an additional $400 a month cheaper then the rental house).

If you truly want to invest, the best way to go about it would to be either rent an apartment and invest your extra money. Or do what the wife and I did, by a $20,000 mobile home (1/14 th the cost of House or go for a cheaper one) then pay $350 a month in lot fees that include w/s/g and cable (which is a savings of about $1600 a month over a house payment).

Just something I have been thinking about, useless rambling 😉

PS. My Insurance for the home is off, I mistakenly did a quote for $150k, not $258k, that means its actually a bit more expensive then $820 a year

PPS. This also doesnt even indicate that the average wage in Bellingham is about $28k a year, thats almost 60% of your pay, and it doesn’t even go to the actual debt.

PPPS This only includes starting buying a house from scratch (my sisters situation) not someone who has the ability to put down a downpayment 🙂