"Owning a home is
better because I rather invest in something then waste money on rent" says
everyone.
30 year vs 15 year loan argument
Scenario #1:
$200,000 House
3.5% Interest Rate
30 year mortgage
Zero Down
Loan amount $200,000
No Extra Payments
------------------------
Total of $323,000
Scenario #2:
$200,000 House
3.0% Interest Rate
15 year mortgage
Zero Down
Loan amount $200,000
No Extra Payments
------------------------
Total $248,000
Paying a 15 year note will not only save you $75,000 but you will have 15 extra years of freed up cash to invest in retirement, purchase a second rental property, pay for your kids college, etc.
20% down vs 0% down
When you fail to reach
20% down on your house, you will most likely have to pay PMI to get a loan. PMI
is Private Mortgage Insurance. Essentially, you are paying money each month
that protects the lender in case you can't make your payments. You can avoid
PMI by putting 20% down on your house.
Scenario #3:
$200,000 House
3.5% Interest Rate
30 year mortgage
$40,000 down (20%)
Loan amount $160,000
No Extra Payments
------------------------
Total $258,000
Scenario #4:
$200,000 House
3.0% Interest Rate
15 year mortgage
$40,000 down (20%)
Loan amount $160,000
No Extra Payments
------------------------
Total $198,000
Again you will save anywhere between $10,000 - $25,000 on interest alone PLUS saving on not having to pay PMI.
Let’s say PMI will cost you $100/month (which is on the low end of mortgage insurance).
$100/month x 12 months =
$1200/year
$1200/year x 6 years =
$7,200
Assuming you made your
payments you would have around 20% of equity around 6 years after starting. At
that time you can request to cancel your PMI with a REFI (which will cost you).
Apartment Living vs Owning a Home
Average rent in Utah is
$670/month. Let’s round that up to $700 to make the math easier.
$700/month x 12 months =
$8400/year
The average income in
Utah is $60,000/year which is $5,000 per month.
The average cost of
living is about $750/month in Utah per person. The average family size is just
a little over 3. Which bring your total expenses to $2250/month + $700 for rent
to a whopping total of $2950/month of total expenses.
$5,000 of income/month -
$2,950 in expenses (lets round that to $3,000) will give you $2,000 to save
each month. That is 24,000 a year.
Put this all together
By moving into a house
in Scenario 1 with no money down, on a 30 year note, with PMI you will have a
mortgage payment of about $1000/month which in 2 years is $24,000. Lets not
pretend that their not hidden expenses when moving and operating a house too
(HOA, lawn service, plumbing, heating, cooling, trash, etc all go up) but I
won't factor this in. First two years in an apartment you will spend
$16,800 on your rent. That is $8000 you will save in 2 years alone just by
living in an apartment!
By saving 24,000 a year in 2 years you can be at $48,000. You will not only have enough money to put 20% down but you will have the luxury of having $8,000 for an emergency fund to handle these hidden expenses and if you are able to switch to a 15 year and pay the house off quicker you will have more money to invest into something else down the road.
You spend less and save more by living in an apartment. While the argument that a house is a better investment is correct; it is not a better investment long team if you too don't have any money down and putting it on a 30 year note. Saving for 20% down and taking 2-5 years living in apartment to do it is the smartest way to move into real estate. While you are at it; cut up the credit cards and pay off the car.
Still not sold? Look at the numbers. The difference between Scenario 1($323,000) vs Scenario 4 (238,000) that is an $85,000 difference!! Not to mention you are out of a mortgage 15 years earlier.
The argument that I rather invest in a house then pay rent is absolutely foolish. It is a sucker’s game. Put 20% down on your house and have a 15 year fixed rate. It is the only way to go.
