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One things I don't see mentioned is the use of a mortgage as kind of a forced savings plan. For a bunch of reasons, it is really hard for people to plan/save f
by xrange 12y ago
One things I don't see mentioned is the use of a mortgage as kind of a forced savings plan. For a bunch of reasons, it is really hard for people to plan/save for the future. That's why there is thousands of years of parables and social convention exhorting people to save and not be in debt (i.e. if it was easy to do, everyone would do it). Buying a larger-than-strictly-necessary house with a mortgage is a way to start applying current money to a need in the future. By making a mortgage payment, they aren't otherwise spending that money on more frivolous items. In 30 years time they'll at least have something tangible, instead of fleeting memories of vacations. Whether that trade of as an individual is worth it is debatable, but on a societal level, it probably is.
I think there is a similar, more short-term story with IRS refunds. People could have their paycheck deductions arranged so that their "refund" was nothing. But if it comes out "unvoluntarily", then they are excited to get it back in a lump sum, even if this is the mathematically sub-optimal solution.
- grecy 12y agoBy the time you pay off the mortgage you will have paid 3-4 times the value of the property because of the interest. So on a $400k house you will have put $1.2mil - $1.6mil into the savings account, but you'll only have a ~$500k property to show for it (IF the house appreciates, which it hopefully does, fingers crossed). That's a seriously inefficient way to save.
- conjecTech 12y agoYou get to use the property for that entire time rather than having to wait until you can pay for it in cash, however. Your alternative to paying a mortgage isn't living in a home for free. It's paying rent or being homeless. If your rent is $2,500 a month, you need to subtract about $900k from that amount you're talking about putting in your savings account because it'll be going to your landlord instead.
- grecy 12y agoI have no idea where you live that rent is $2,500 a month, but if it really is, I'm guessing houses aren't $400k.
- conjecTech 12y agoIm talking what you would otherwise pay in rent for a house of the same type and quality. As both a homeowner and landlord of properties in that price range, I can tell you that those numbers arent far off. If you're trying to compare taking a mortgage on a 400k home to renting a property that would sell for considerably less, you aren't talking about the effects of taking on debt, you're talking about the effects of downgrading your lifestyle.
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- deleted 12y ago[deleted]
- Domenic_S 12y agoFUD. The number is less than 2x, not 3-4x. Loan amount: $500,000 Interest rate: 4.5% Total paid: $912,033.56 http://www.bankrate.com/calculators/managing-debt/annual-percentage-rate-calculator.aspx http://www.bankrate.com/calculators/managing-debt/annual-per... You're forgetting two other things: 1.) A portion of interest paid is tax-deductible (rent is not). 2.) $1 today is not worth $1 30 years from now - your payment stays constant for 30 years, but your dollars gain more buying power.
- jacquesm 12y agoYou're missing the point that you are also paying the principal. He didn't say 'extra' just paying 3 to 4 times. And that 4.5% can be improved upon but only if you go variable rate, if you lock it down for longer it can get quite a bit higher (or if you are considered a higher risk client, such as someone who is self employed).
- xrange 12y ago>You're missing the point that you are also paying the principal. Just so everyone is on the same page. The original 30 year, $500k loan that Domenic_S is proposing, at 4.5% interest has a monthly payment of $2533.43. After 360 of those payments (30 years * 12 months per year), all the principal and interest will have been paid off. 360 * $2533.43 = $912034 $912034 / $500000 = 1.82