This question of whether to borrow money to get a home or rent and invest the difference is actually much more difficult than it seems.
Either answer can seem self-evident, depending on your goals and current financial situation. However, we were moved to think about this when we read the full back cover ad on the latest edition of Costco Connection.
Labelled “Home Financing 101,” the bank ad had a set of figures listing Mortgage: $285,000 (presumably the price less a 20% down payment) Term: 30 years; Rate: 5% vs. 4%. Like anyone is paying 5% on a mortgage these days. Well, never mind, let’s continue.
Monthly payments were either $1,530 or $1,360, depending on the interest rate. The ad continued: Monthly savings $169; Yearly savings $2028; Life of loan savings $60,840. Wow! Looks pretty good, eh?
But the ad went on to say, “Do Your Math.” So we did. Turns out the home buyer will end up paying a total of $489,600 for the house, if he sticks with it for 30 years. Will home prices appreciate at 4% a year? Who knows? But the current history isn’t good. Most home prices only increase at the rate of inflation, which averages about 3%.
Right now, buying a home doesn’t look like a good idea. For extensive discussion about why this is so, check out Dr. Housing Bubble, listed on our Blog Roll. Suffice to say that home prices are still dropping in most of the U.S., despite what you read in the chirpy real estate stories.
OTOH, if you are young, married, have a child or two, and want to live in a stable neighborhood of mostly, or all, homeowners, go out and buy the house anyway.
Unless you are in California. Then, don’t even think about it. Get out of Cali as soon as you can. This state, in spite of some signs of voter intelligence and courage, is still a slowly-unfolding disaster. You may be able to afford a house now, but the taxes the state will impose on you in coming years will crush you… unless you are a Hollywood star, or a university professor, or a member of some other favored class.
Oh, in the example above? Don’t say the mortgage holder “bought” the house for $285,000 or any other price. Just say he promised to pay $285,000 plus interest. He doesn’t OWN the house until he gets a clear title on it.