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March 10, 1999

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Subject: Re: Pay down mortgage or invest?
Author: ChundoHadASnack

Now go and buy that much house, put 20% down and watch that investment grow 20% (or more) per year.


Two things: First, there was some discussion some time back where "we" were debating how much house to buy based on your income. Most realtors will tell you 3X your income, and the general consensus on here was about 2X your income (or 2X the income of the higher-paid spouse in a multi-income family). Then someone (sorry to the person whose name I forgot) posted that they had followed that rule of thumb and were still struggling. The rule of thumb I always heard was to keep your mortgage payment below 25% of your monthly income.

Second, about buying vs. renting. I realize from my last post that it reads like I am an anti-house-buying person. I'm not. I REALLY WANT A HOUSE--NOW. I am trying to be patient. I live in an apartment now, and it does not feel like a home to me. I grew up in a house with a really big yard out in the country, so this living in an apartment in a city thing just isn't my cup of tea. I guess I could rent a house, but, really, if I'm going to rent I might as well go for the cheapest thing I can so I can get more money for what I really want. I could afford to live in a lot nicer apartment than I do, but I'd rather have a room of my own and my own mailbox and windows on more than one side.

I'm definitely pro-buying. But I don't agree that renting always means throwing away money. The rule of thumb that I have always been told is, "if you are going to be there less than 4-5 years, it's better to rent than buy."

About a year ago, I was looking at one of those ads for a builder who has cookie-cutter house plans that they can build fairly cheaply because they don't do a lot of customization. It looked great on the surface--with some "sweat equity" in the calculations, the mortgage payments would be about the same as my rent. So I sat down with a calculator and a pencil and figured out that if I were going to be in the house less than 7 years, I would lose money buying vs. staying in my apartment. And then I looked at my situation. It is much more likely that I will move in the next seven years than stay where I am. So I made the decision to be patient a little longer. Someone else's figures will most likely be different from mine, depending on what their rent is, what area they are in, how much house they are buying, etc.

Here is what I took into consideration (this may not be a complete list because it is off the cuff):

1. Mortgage
3. Estimated Appreciation/Inflation
4. Mortgage Insurance
5. Estimated tax break from paying interest (which, by the way, is not always a given; my sister has a house and they have only been able to deduct their house interest ONCE in the six or so years they have been living there because they got a great deal on the house)
6. Property taxes
7. Homeowner's Insurance
8. Down Payment, Closing costs, etc.
9. Estimated selling costs

1. Rent
2. Estimated rent increases
3. Renter's Insurance
4. Rate of return (~5%) on the difference between the house costs and the rent costs and on the down payment money if put into my bank account instead of into a house.
5. Taxes on #4

Things I didn't take into consideration because they were either too nit-picky, I didn't know how to estimate them, or they were intangibles:

1. Yard maintenance (lawn mower, gas and maintenance on said lawn mower, garden hose, weed killer, big floppy hat, etc.)
2. The joy of not having to hear water running through the pipes when the neighbors take a shower or not having to worry that your feeble attempts at doing "Tae-bo" is not bugging the guy downstairs.
3. Tools and toys I would need for a house that I don't need in my apartment. I have a screwdriver and a hammer and get by pretty well.
4. Difference in utilities. Since a house would be bigger than my apartment, the utility bills would be higher.
5. Home improvements. I heard someone at a mortgage company say once that the "average appreciation" rates you see for homes assume that the homeowner put 10% of the value of the home into home maintenance and improvements every year. I thought that was a little high, but I wasn't really sure how to estimate it, so I left it out.
6. The money I would pay for more furniture and gagets to fill my home. People tend to fill up what they've got. If I got a house, I would get more stuff to go in it.
7. How much of my "free time" would be spent on house/yard maintenance that I don't have to worry about now.

Using the most conservative estimates I could, the difference was still about three thousand dollars. 20% ROI? Not quite. You should buy a house because you want to live in a house, not because you assume it will make money for you. Just my opinion.

Everyone have a great day!

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