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These buy vs rent calculators assume that any savings made from paying rent instead of mortgage is paid directly into an investment account. I.e. you sock away
by jhy 16y ago
These buy vs rent calculators assume that any savings made from paying rent instead of mortgage is paid directly into an investment account. I.e. you sock away the full theoretical mortgage amount less rent paid into a managed fund or some such.
The reality that I've seen is that people never actually do that, or at least not to the full degree, and treat the difference as extra disposable interest. And so the money gets frittered away and the calculations are wrong.
You can't do that with a mortgage: you have to pay it, and so therefore people have an enforced savings/investment discipline. And also the incentive to sock as much money into their house as quickly as possible, to pay down the debt.
So the money side is generally better, and you generally get a better house, when buying. But it's a bit of a commitment which some people will avoid on principle.
- jasonkester 16y agoWell said, but that doesn't make the calculator wrong. It'd be cool if there were some form of financial instrument for the weak-willed individuals you describe (which as you say probably represent 90% of the population), that acted exactly like a mortgage but simply left your money in a pile you could access later. Sorta like an IRA that you could force yourself to commit to, with nasty letters arriving in red envelopes if you skipped a payment.
- dreeves 16y agoThere's something like that (though on a different timescale) called Christmas Club accounts. You can deposit money but you can't take it out until December. I understand it was quite popular in the 70s. The idea is to force yourself to save enough for holiday shopping. I'm totally fascinated by commitment devices like that. I've been compiling a list of them here: http://padm.us/akrasia http://padm.us/akrasia The "getting a mortgage to force yourself to save" was actually the first example I thought of, from when this topic came up a year ago.