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Sep 13

The Absolute Insanity of Not Buying a Home When You’re Young

Below is part of the article published by Tyler Tervooren from his website www.riskology.com. What do you think about his opinions? Or, are they merely opinions if based on numbers…?

homemoneyIf you’re young—under 40 or so—

…and have been heeding all the personal finance advice spewing forth from some of the most popular columnists and bloggers over the last few years about how owning a home doesn’t make financial sense anymore, I’m afraid you’ve been duped.

Absolutely, positively, undeniably duped.

Buying a house—especially when you’re younger—is still an incredibly smart decision financial or otherwise. I’m about to explain why, but let me start by saying I do not own a home, so there is no hidden bias in the argument I’m about to make.

Read on to learn why all the smart financial bloggers who tell you it’s better to rent than buy are completely wrong. Hint: It’s in the numbers.

What’s the lifetime cost of renting vs. owning?

Let’s say you’re 25 years old, and you’re trying to decide whether to buy a house or to keep renting. You run into all kinds of articles written by high-earning personal finance experts in their 20s and 30s talking about how owning a home is a waste of money now, and you can enjoy an amazing life and far financial rewards if you give up the idea of ever owning.

Is it true?

Yes, when you purchase a house, you have to do some legwork to make sure you’re buying something that’s valued fairly. But the rest is nonsense.

And here’s a conservative example using very unfavorable criteria for purchasing a home and favorable criteria for renting. What we want to know is, “What’s the lifetime cost?”

Let’s say you buy a $250,000 home with a paltry 10% down. You’re taking on a $225,000 loan, and you’ll be paying PMI (private mortgage insurance) of about 0.5% until you have 20% equity in your place.

Now, that’s just the beginning of what you’ll need to account for when you buy a house. Your interest rate matters, so let’s say you get a bad deal (by today’s standards) and have to pay 6%.

You’ll also need to pay property taxes of 2% of the value of your house every year for as long as you own the place. And don’t forget the maintenance you’ll certainly need to save for over the course of ownership. We’ll assume 1% of the home value—which is high—because youdon’t want to make any repairs yourself yourself or compare bids to get the best deal.

Put this all together and here’s what you’ll pay to own if you live to be 80:

  • Down Payment: $25,000
  • Loan Re-payment over 30-years at 6% (including PMI and property tax): $636,000
  • Property taxes after loan repayment: $125,000
  • Maintenance: $137,000
  • Total cost of ownership: $923,000

Yep, almost a $1M. It looks like a lot, but remember: this conservatively covers your living space for your entire life.

How much would renting that same place cost?

We’ll assume the landlord owns it on similar terms but, since she’s a super-nice lady just trying to provide decent housing, she makes no profit on the rental. It’s cash flow neutral for her….(and what are the chances of that happening today? -Sarah)

So, she rents it out for the price of her mortgage: $1,766/month.

Over the course of your life, you’ll pay $1.2 million, or about $200k more than you would if you’d owned the place.

That’s right, $200,000 more. What could you do with an extra $200,000? Well, not much for yourself since it took your entire life to save that much, but you could start a pretty awesome college fund for your 15 grandkids.

Perhaps that’s why so many personal finance gurus focus on short-term gains

…because people want extra money they can use now for themselves, not later for others.

And the argument for owning only gets stronger when you consider these three things left out of our example above:

  • We left out the value of the house at the end of life. Maybe in your last few years you decide to move in with your kids. If the house didn’t appreciate at all in 55 years, you’d still be able to sell it for the original purchase price of $250k, and that puts you $400k ahead of renting.
  • This model completely ignores inflation. When you buy a house on a long-term, fixed mortgage, you’re essentially shorting the value of the dollar (or whatever currency you use)—a pretty safe bet for any country printing money faster than it can get rid of it. Every year you own your home, it gets cheaper to live there. The opposite is true when you rent. This tilts the scale towards ownership astronomically more.
  • Buying younger? Living longer? No problem, even more money in your pocket since every year of ownership adds to your advantage.

Read the entire article at  The Absolute Insanity of Not Buying a Home When You’re Young. 

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