Interest on Mortgage?

[LivingAlmostLarge]

Have you ever considered what you are paying in interest on your as rent? I was discussing with a friend that we've been living here 7 years now (geez) and our mortgage was cheaper than renting. Granted we've refinanced a couple of times, but in the end we really ended up with a good deal.

Have you calculated what you pay? I realized that we pay $500/month property taxes + $1079/month interest = $1600/month to "rent" our place. Turns into $1200/month if you consider the 25% mortgage deduction. We "save" our principal payment of $700/month if you consider it'll be cashed out when we sell, so enforced savings plan. Plus $200/month HOA and maintenance estimates of $500/month = $2300/month actual outlay, but $1900/month with the tax break.

We were renting a studio prior to buying for $1500/month. Granted we are a bit more extreme since we needed places that took dogs, but getting rid of a pet is not an option to find cheaper rent because we made that commitment years ago. Although without a pet we might have found $1300-$1400/month and a smaller deposit.

We actually bought a 3/2.5 townhouse for a reasonable price. With a child we would have been forced into a 2 bd apartment at a minimum (fire codes for many places ask for no more than 2 people per room, you can lie, but I hate doing that) would have run $2k to $2500/month. So we'd be on the hook for the same now.

I wonder if we would have saved the difference $800/month interest + $700/month principal? Or just blown it?

Have you ever consider this?

[BMEPhDinCO]

This was one consideration for us when we were looking to buy. We were paying around $950 to rent, and it was set to go up again, both for the base and the pet fee.

We moved to a new area, where we would have paid around $700-800 instead to rent. We bought and pay $750 a month, around $570 goes to interest and principle and the rest to taxes and insurance.

So yeah, I do consider that we don't "own" our home - but we "rent" it for less than it would've been to rent a smaller, not as nice place.

Of course, there are additional costs to owning that should be factored in (in our case, we've spent almost $20k more in the almost 3 years what we've lived here...).

The NYT has an often cited calculator for rent versus buy - and this idea is something to consider before you buy for sure!

[bennkar]

Too many people don't look at it the way you do, and they should. And the reverse is true too... if you sell your home and start paying rent, you haven't removed a large debt (mortgage), you've just converted it to a smaller ongoing debt (rent). For me, I only considered the interest + taxes + insurance as rent, as the principle paydown was just money going back (more or less) into my pocket.

Of course the best solution is to pay off your mortgage and then you only owe yearly taxes + insurance. (Mortgage free since 08/2011 - )

[MonkeyMama]

Of course the best solution is to pay off your mortgage and then you only owe yearly taxes + insurance. (Mortgage free since 08/2011 - )

So true.

[MonkeyMama]

Actually, the primary reason we bought a home about the second we graduated college was because the costs of home ownership (*all costs considered*) minus *substantial tax breaks* was significantly cheaper than renting. & that was when interest rates were over 8%. {I think the mindset was more like "holy heck - we can't afford to rent here!!" - so we had to keep an open mind and figure it out}.

We have since moved to a much cheaper city where the rent/own gap isn't quite so wide, but it is still much wider than average. With these interest rates, we are still in a similar boat.

This is true even when you consider repair/maintenance, and "what if we just invested the 20% down payment?" Owning still wins by a landslide.

If we take out the principal payments, then we are just paying pennies to own, at this point.

[disneysteve]

Of course the best solution is to pay off your mortgage and then you only owe yearly taxes + insurance.

Of course, you still need to look at the numbers. My mother sold her paid-for home 6 years ago and moved into a senior apartment building. Her rent and electric is quite a bit less than her taxes, utilities and insurance on the house. She has saved a ton of money by switching from being an owner to a renter.

[LivingAlmostLarge]

Taxes are proportionate to space and probably a single old lady has a big home with more taxes, more repairs, and more utilities than necessary. Many older people it costs more to own then rent when you have to pay someone to shovel snow, garden, repairs, etc.

[disneysteve]

Taxes are proportionate to space and probably a single old lady has a big home with more taxes, more repairs, and more utilities than necessary. Many older people it costs more to own then rent when you have to pay someone to shovel snow, garden, repairs, etc.

Exactly. By downsizing, she was able to cut costs even though she went from owning to renting. So it isn't just own vs. rent but comparing the actual costs. There are times when renting is cheaper.

[MonkeyMama]

This illustrates how much a region will vary, too.

My spouse's grandma sold her house and rents - BAD deal. I think her experience is the #1 reason we are committed to home ownership in the long run. But I Realize the region is very unique. (Rents are sky high, but if you bought your house decades ago and it's paid off, you won't be paying much for taxes or insurance. It's like pennies).

All you can do is run the numbers where you live. My impression over the years was that renting is probably not a bad deal most places.

[thekid]

I'm actually not sure how to price this.

I agree that it should be rent vs interest + taxes + maintenance (including amortization of long term expenses). However, I'm not sure what goes into interest.

I've personally paid off my house, but I could go out tomorrow and borrow 80% of the property value and invest it. Say rent is more expensive than with paid off house and cheaper than fully mortgaged house...what does this mean?...same house...same money.

I think I would have to calculate an expected ROI on investments I would buy with the equity and compare that to real interest costs. If ROI is higher than interest, I have to add that difference to costs of owning. If it's the reverse, I have to add it to costs of renting.

In Canada, mortgage interest are not income tax deductable. So when I paid off my 4% loan, I effectively locked in an about 7.5% return (ie. I have a marginal tax rate of 45%, so would need to earn returns of about 7.5% on investments to match my 4% mortgage rate, which is paid in after tax money).

So, let's say I pick 6% as an expected ROI on investments. I have to add about 1.5% of house value to my rent costs. My house would probably cost about 2k-2.5k a month to rent. Let's cut in middle and say 2250$ or 27k a year. Add the 1.5% and it's around 32k. Interest costs (on 80% of value loan) would about 1700$ month (20.5k a year) + taxes 4.5k a year + maintenance about 3.5k a year for a total of 28 500$. To be fair, i'd also need to add expected future appreciation of the house.

Conclusion: It's basically a tie, with future house appreciation being the tie breaker. If it appreciates over 3 500$ a year (bit less than 1% a year, non compounded), I'm better off owning. Since I'd expect long term appreciation to be in the 3-4% a year range, I'm probably better off owning.

Still, it's a lot closer than I would have expected.

[LivingAlmostLarge]

Same reason why canadian do 5 year arms for mortgage and people here would consider them nuts. My in-laws paid their house in 10 years and like my MIL said she had 1 year arms in that period where they negotiated with the bank annually. And she thought we were CRAZY for getting a 30 year fixed. She argued against it and even told some of our friends why did they do that?

It's country dependent. You can't make the same financial assumptions unfortunately. Like a friend from Australia said the mortgage there are like HELOC. They leave all their excess cash in there and pull if they need it. That way they pay the minimum or more and pay off homes faster. So why would people get fixed rates when they do HELOCs with the mortgage?

Although in the us it's possible to have a small enough mortgage that you don't get the deduction. So it probably is worth paying off depending on the rate. But right now rates are very low.

[dawnwes]

Well, you have to take into account what your standard deduction would be if you didn't have a house to write off. I believe the standard deduction for us would be about $11,000. So, we have to pay a min. of $11,000 in interest to break even. So, I don't consider 25% of our interest to count against our cost of "renting" our home. We also end up not paying 25% in taxes after all of our deductions, child tax credits, etc...

I may not be figuring the above exactly.

We could rent a home somewhat similar to ours here for more than our mortgage is currently, so we feel we are already ahead, but we don't expect we would necessarily get out of our house what we put in due to the market either.

We currently pay about $300 in taxes and insurance per month and $650 in interest per month. Principle is about $1,200.

Dawn

[MonkeyMama]

Well, you have to take into account what your standard deduction would be if you didn't have a house to write off.

True.

For us, we itemize, house or not - so it's 100% deductible. Part of the reason is state taxes are so high (you itemize state taxes), so we also save closer to 35% than 25%. This was true when we first bought and lived in insane expensive city. These days we don't pay much state taxes and nowhere near 35% in taxes, but we don't need our house to itemize either. So, this may be more magnified in some of the more expensive coastal cities with high taxes and expensive rents.

[LivingAlmostLarge]

Agree about state income taxes and itemizing. Our state taxes are close to $11k alone without the mortgage deduction. Add in that plus property taxes. Ugh.

[dawnwes]

Ah, I didn't think of the state taxes. I know our state tax is 7 point something and was 9.3 in our previous state.

Dawn