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PSA, you will actually pay $1M for your $500k house at today's rates (lemmy.world)
submitted 1 year ago by to c/personalfinance@lemmy.ml
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This might be duh for some people, but if you're like me and considering a mortgage; at today's rates in the US at around 5-6%, over 30yr mortgage you will pay about same in interest as you will for your house price.

Your $500k house will cost you around $1M total over thirty years.

I was surprised.

https://m.mortgagecalculator.org/?q=A1Nzy-8KX

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[–] 3 points 1 year ago (5 children)

I don't understand how the investments from renting are so high at the end. Can you show your maths?

After a few years rent will be more than the mortgage payments, so there is nothing extra to invest. The person with the mortgage can now offset to save interest or invest the difference from renting.

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  • [–] 0 points 1 year ago* (last edited 1 year ago) (2 children)

    Here's the spreadsheet I used (web version w/o formulas; LibreOffice native format w/ formulas. This exercise was motivated by this video by Ben Felix.

    It looks like I was calculating rent increase incorrectly (only increased one year), so I fixed that and the total was below the house value. However, I also wasn't accounting for maintenance, so I added that in at 1% of house value per year (this article claims 1-4% per year, and the numbers are about what they were in my original post.

    Here my calculation for investments while renting (I'm using monthly compounding):

    FV(10%/12,12,(mortgage - rent)+(house maintenance/12),investment value)

    Investment value starts at the down payment, and otherwise we're investing the difference between the mortgage and rent as well as how much the home owner would be paying for maintenance. There are still some things not being accounted for, like renter's insurance, home insurance, taxes, etc, but I think those would favor renting as well, so I left it to a configurable percentage of the house value. You can play w/ the spreadsheet by using a fixed value (i.e. if you're into DIY), adjusting the percent, changing borrowing rates, etc.

    I compared my calculations w/ this investment calculator to make sure I did things correctly.

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  • [–] 1 point 1 year ago (1 child)

    Seems like you have an outcome in mind and decide to adjust the figures to meet it, rather than reflect the reality.

    I don't disagree that it can be better for some to rent depending on the market and personal reasons. However, you also leave out all the associated costs with moving when renting. It is quite common to have to move, and purchase appropriate furniture, ever 2 years or so. You also have the home value appreciation much lower than historical or current and the investment returns higher than norms.

    It may not be a conscious decision, but affects the figures greatly when compounding.

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  • [–] 2 points 1 year ago

    you have an outcome in mind and decide to adjust the figures to meet it, rather than reflect the reality.

    More that I'm reproducing convincing evidence in a form that I understand and that I think I can communicate effectively in a comment.

    My point is that you don't need to own a house to retire or be successful financially. Your choice of rent vs buy is far less important than other decisions you could make. "Throwing money away" on rent or mortgage interest is missing the mark, and both are symptoms of not understanding finances.

    quite common to have to move, and purchase appropriate furniture, ever 2 years or so

    I also didn't list home insurance or taxes, which in my area comes to ~$4k/year (and we're on the lower end). That's enough to cover the moving expenses if you pay someone to move you every 2-3 years. However, I've also known people who stayed in the same apartment for over a decade.

    I tried to account for the biggest factors and keep things simple to prove the point that it's closer than most probably assume.

    You also have the home value appreciation much lower than historical or current and the investment returns higher than norms

    I thought they were pretty reasonable. This article cites 3-5% for home appreciation, and this article cites over 10% for the State&Pepper 500 since 1957 and just shy of 10% going back to 1928. My numbers don't account for inflation, which is why I added inflation to rent.

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