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To me the only thing that makes sense when considering buying a house is to buy in cash or make plans to pay down your mortgage as fast as possible. It was eye

To me the only thing that makes sense when considering buying a house is to buy in cash or make plans to pay down your mortgage as fast as possible. It was eye opening when I did some numbers a while back (can't vouch for whether this is still accurate today, but my hunch is it's not far off). If a person pays minimum monthly payment on a 30-yr mortgage (assuming certain interest rates) you ultimately end up paying approximately the cost of the house in interest over the life of the loan. This may be obvious to some who are more familiar with finance, but I think it's eye opening to the majority of people when they hear this.

potatolicious 11y ago
This is technically correct but fails to account for the time value of money. If you took out a $200k loan at 4% you'd end up paying $343k for the entire 30-year mortgage. This seems outrageous, except that $1 in 2045 (when you pay off the loan) is worth substantially less than $1 in 2015. For comparison's sake, consider a 30-year mortgage that is paid of this year, started in 1985 - $1 in 1985 dollars is $2.21 in 2015. Your mortgage payment (assuming you lock it in) do not increase over the life of the mortgage, which means your monthly payments are - in inflation adjusted dollars - dropping over time. In fact, based on an inflation rate of 2%, your mortgage payment of $953/month in 2015 falls to an inflation-adjusted $523 by the time of your last payment, and the total cost of your $200k mortgage is actually closer to $258k (2015 dollars). https://ostermiller.org/calc/mortgage.html https://ostermiller.org/calc/mortgage.html
- datashovel 11y ago
  I guess it probably also depends on financial well-being of the individual / family, and whether or not they're allergic to paying money for money and paperwork :)
- datashovel 11y ago
  also I wonder what that $58k would look like if, over the life of the loan they put the equivalent of a mortgage payment into the stock market every month (assuming they're approximately matching returns of S&P500 index every year). EDIT: That is, as a substitute, instead of paying mortgage payment every month you're putting that same amount of money into your investment portfolio.
CookieMon 11y ago
You also haven't factored in home-owner government welfare: Here everybody aims to keep the house in as much debt as possible as long as possible because the interest can be written off as an income tax deduction, while the "repayments" build up to fund a second property purchase. Granted this will depend on where you are in the world. Here, the house has to be a rental property to be able to deduct the interest. It's a stupid game I don't want to play, but not playing makes me the automatic loser of it.

potatolicious 11y ago

This is technically correct but fails to account for the time value of money. If you took out a $200k loan at 4% you'd end up paying $343k for the entire 30-year mortgage. This seems outrageous, except that $1 in 2045 (when you pay off the loan) is worth substantially less than $1 in 2015. For comparison's sake, consider a 30-year mortgage that is paid of this year, started in 1985 - $1 in 1985 dollars is $2.21 in 2015. Your mortgage payment (assuming you lock it in) do not increase over the life of the mortgage, which means your monthly payments are - in inflation adjusted dollars - dropping over time. In fact, based on an inflation rate of 2%, your mortgage payment of $953/month in 2015 falls to an inflation-adjusted $523 by the time of your last payment, and the total cost of your $200k mortgage is actually closer to $258k (2015 dollars). https://ostermiller.org/calc/mortgage.html https://ostermiller.org/calc/mortgage.html

datashovel 11y ago
I guess it probably also depends on financial well-being of the individual / family, and whether or not they're allergic to paying money for money and paperwork :)
datashovel 11y ago
also I wonder what that $58k would look like if, over the life of the loan they put the equivalent of a mortgage payment into the stock market every month (assuming they're approximately matching returns of S&P500 index every year). EDIT: That is, as a substitute, instead of paying mortgage payment every month you're putting that same amount of money into your investment portfolio.

CookieMon 11y ago

You also haven't factored in home-owner government welfare: Here everybody aims to keep the house in as much debt as possible as long as possible because the interest can be written off as an income tax deduction, while the "repayments" build up to fund a second property purchase. Granted this will depend on where you are in the world. Here, the house has to be a rental property to be able to deduct the interest. It's a stupid game I don't want to play, but not playing makes me the automatic loser of it.