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You cannot always sell the house. The market may have fallen, or rates may have risen in a way that makes your home less affordable. Also, prematurely paying
by jholman 11y ago
You cannot always sell the house. The market may have fallen, or rates may have risen in a way that makes your home less affordable. Also, prematurely paying off your mortgage might have punishing penalties, and also there are frictional costs to selling.
You cannot always necessarily rent to others. You may have strata / HOA rules that prevent renting.
Buying with cash has an opportunity cost on your money. A mortgage is renting money. Whether you rent a home or you rent money, either way you're paying rent. You also have other "lost money" costs as an owner: maintenance costs (and labour), property taxes, possibly condo fees, etc. So when you consider the "losing money" aspect of owning, you're losing the interest payments, and you're losing some other fees... but the part of your mortgage payment that is excess of interest is not lost money (it's savings).
On other other hand, there are advantages to owning. In particular, if you want to make a highly leveraged wager (5x being common), you can do that in real estate. If you win at the wager, you can win a lot of money. (Of course a casino lets you win a lot of money too, with extreme leverage, but the housing market has no "house" extracting a vig, pun not intended). Also, many countries have tax incentives for ownership. For example, US effective interest rates are somewhat lower than the contractual rate, because the government gives you some of it back at tax time (I think.... I'm not an ardent student of the US housing rules).
In short, a statement like "you've always got options as an owner" or "renting is losing while buying is an investment" is so oversimplified as to be incredibly damaging.
The math is tractable for a modestly smart person, but it does take some dedication.
- toomuchtodo 11y agoI was one of those people who couldn't just "sell the house". My builder went bankrupt, the remaining land was sold by Bank Of America for pennies on the dollar, and I was ~$100K underwater. Doing the math (based on historical yearly real estate appreciation), it was cheaper to have 3-5 years of bad credit than 10-15 years of payments just to bring the house to neutral equity. My HOA wouldn't allow me to rent our townhouse out because several people bought them as investments, so we had reached "rental capacity" before the subdivision was even complete. I walked away, lost my $30K downpayment, 2 years of equity at $2K month in mortgage payments, and have ~3 years of bad credit. With only that negative mark on my credit, I still have a 680 credit score. I'm never willing to bet again that I'll be in the same location for 15-30 years. I'd rather rent and take what you'd consider "equity" and invest it in something I can get out of in less than 60 seconds (ETFs). EDIT: Mortgage underwriting guidelines now limit a new mortgage until after 3 years of a foreclosure, not the traditional 7. Why wouldn't someone walk away if it would take more than 3 years to reach neutral equity?