5 ms·

Plus renting is basically flushing your money away each money opposed to building equity in something over time.

by envex 13y ago

minimax 13y ago
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.
addflip 13y ago
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.
huherto 13y ago
Same thing happens when you pay interest. Either you rent the money or you rent the house.
- mikeash 13y ago
  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.
dan1234 13y ago
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)
- snowwrestler 13y ago
  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.
  - VLM 13y ago
    "Long-run inflation is 3%" LOL the political reported rate is what the .gov is willing to provide in COLA increases. It has nothing to do with actual costs. You're budgeting based on made up numbers provided for someone elses "pay" rate increases. Look at say... gas prices. Double in a decade. Thats about 7% per year. Or the price of food, or medical insurance, or tuition, or price of cars, etc. Think of what real people actually spend money on. You can get better numbers from shadowstats. Somewhere toward the low end of 6% to 10% is about right. We'll call it 7% long term average. The problem with 7% annual inflation rates is very few people can maintain those pay increases, every year, for an entire 30 year mortgage... So eventually you end up house poor. Lets say J6P gets a 3% pay raise but the cost of everything else increased by 7%, for a generation or so. That means the money left over after food, car, etc aka the rent either directly for land or indirectly for money to buy land, will drop by about 4% per year. For awhile you can mask that by lowering interest rates, but once you reach "basically zero" like now, problems develop. Finally the mortgage interest deduction doesn't work like that. If you pay more interest to the bank than the standard deduction fraction then you don't have to pay income tax on the fraction above that. Basically you need low income, high interest payments, and then all you save is taxes on the portion above the standard level. You're still out the same money, just not out the income tax on a small sliver of the total interest over a certain limit. I've paid enough of my mortgage off that I no longer get a mortgage interest deduction. Oh, I could file it anyway, but I'd have to pay more in taxes than just taking the std deduction. Eventually you reach AMT range and then things get weird.
debacle 13y ago
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. Also, s/each money/each month/g
this_user 13y ago
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.
marksands07 13y ago
+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.).
- philwelch 13y ago
  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.

Plus renting is basically flushing your money away each money opposed to building equity in something over time.

by envex 13y ago

Plus renting is basically flushing your money away each money opposed to building equity in something over time.

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.

addflip 13y ago

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.

huherto 13y ago

Same thing happens when you pay interest. Either you rent the money or you rent the house.

mikeash 13y ago
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.

dan1234 13y ago

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)

snowwrestler 13y ago
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.
- VLM 13y ago
  "Long-run inflation is 3%" LOL the political reported rate is what the .gov is willing to provide in COLA increases. It has nothing to do with actual costs. You're budgeting based on made up numbers provided for someone elses "pay" rate increases. Look at say... gas prices. Double in a decade. Thats about 7% per year. Or the price of food, or medical insurance, or tuition, or price of cars, etc. Think of what real people actually spend money on. You can get better numbers from shadowstats. Somewhere toward the low end of 6% to 10% is about right. We'll call it 7% long term average. The problem with 7% annual inflation rates is very few people can maintain those pay increases, every year, for an entire 30 year mortgage... So eventually you end up house poor. Lets say J6P gets a 3% pay raise but the cost of everything else increased by 7%, for a generation or so. That means the money left over after food, car, etc aka the rent either directly for land or indirectly for money to buy land, will drop by about 4% per year. For awhile you can mask that by lowering interest rates, but once you reach "basically zero" like now, problems develop. Finally the mortgage interest deduction doesn't work like that. If you pay more interest to the bank than the standard deduction fraction then you don't have to pay income tax on the fraction above that. Basically you need low income, high interest payments, and then all you save is taxes on the portion above the standard level. You're still out the same money, just not out the income tax on a small sliver of the total interest over a certain limit. I've paid enough of my mortgage off that I no longer get a mortgage interest deduction. Oh, I could file it anyway, but I'd have to pay more in taxes than just taking the std deduction. Eventually you reach AMT range and then things get weird.

debacle 13y ago

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. Also, s/each money/each month/g

this_user 13y ago

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.

marksands07 13y ago

+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.).

philwelch 13y ago
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.