Owning a home is not right for everyone. There are certain benefits to not owning the home you live in. If something goes wrong with the property, you simply ring up the landlord and they get to fix it. You pretty much know what your cost are going to be month to month (unless your landlord decides to sell the property, increase rent, convert the condo, etc.). On comments from last Friday’s post on interest rates, there is a discussion debating if one could consider having a mortgage as a forced savings plan. I know I’m going to seem biased since I am a Mortgage Planner…and I fully expect all of the number-crunching-junkies out there to have a heyday with what I’m about to post…but here goes!
[photopress:northgaterental.jpg,thumb,right]I found two similar homes, both in the north Seattle area. The rental property is available for $1850 per month. The home for sale, with close square footage, rooms, area, etc., is available (actually, an offer is pending) for $499,995.
With the comparison, I’m going to assume someone has 20% down to either invest in the stock market or to buy a home. The current rate for a 30 year fixed is 5.75% (APR 5.904%). Principle Principal and interest is $2,334 plus taxes and insurance equals a total payment of $2623. First year monthly tax benefits are $606 (mortgage interest benefit will decrease, property tax benefit will most likely increase).
The prospects are in the 28% tax bracket; they have a gross income of roughly $8000 per month and can have $700 in monthly debts with credit scores at 680 or better. The investor will receive 11% from the stock market and the homeowner will benefit from an appreciation of 7% on their real estate.
| Rent | at 5 years | Homeownership | at 5 years | |
| Total Payment | $117,863 | Total PITI | $157,396 | |
| Principal Paid | 0 | Principal Paid | $28,951 | |
| Tax Benefit | 0 | Tax Benefit | $35,293 | |
| Net Cost | $117,863 | Net Cost | $93,152 | |
| Real Estate Value | 0 | Real Estate Value | $701,269 | |
| Loan Balance | 0 | Loan Balance | $371,045 | |
| Total Home Equity | 0 | Total Home Equity | $330,224 | |
| Rent | at 10 years | Homeownership | at 10 years | |
| Total Payment | $254,498 | Total PITI | $314,792 | |
| Principal Paid | 0 | Principal Paid | $67,519 | |
| Tax Benefit | 0 | Tax Benefit | $67,893 | |
| Net Cost: | $254,498 | Net Cost: | $179,381 | |
| Real Estate Value | 0 | Real Estate Value | $938,566 | |
| Loan Balance | 0 | Loan Balance | $332,477 | |
| Total Home Equity | 0 | Total Home Equity | $651,089 | |
| Investment | Investment | |||
| Opening Balance | $109,000 | Opening Balance | 0 | |
| 5 Yr Return @ 11% | $188,452 | 5 Yr Return @11% | 0 | |
| 10 Yr Return @11% | $325,817 | 10 Yr Return@11% | 0 | |
| 5 Year Net Worth | $188,452 | 5 Year Net Worth | $330,224 | |
| 10 Year Net Worth | $325,817 | 10 Year Net Worth | $651,089 | |
The first five years with the mortgage provide an average monthly principle reduction of $482.47 per month. Taking out any appreciation factors, the principle principal paid each month is a forced savings plan. With that said, home equity does not earn interest. And I would probably encourage most clients to consider not using the entire 20% for the down payment to stay more liquid (depending on their entire financial picture).
For many Americans who do not have a savings plan (and the statistics show that many do not save), owning a home is as good as it gets for building savings…and it ain’t so bad.
Let the games begin!