|
|
How to make $1.8 million BY BUYING A HOUSESep 25 '00 Write an essay on this topic.Most people in this country buy far more house than they can really afford, at least those who buy a house at all. Another epinion in this category states "The basic rule is that you should buy as much house as you can afford. Stretch a little." (mrisch, 03/18/00) Following this rule amounts to planning to be broke for the rest of your life. I would like to offer a much more fiscally sound plan. First things first - should I buy or rent? In my opinion, there are very few situations that warrant renting over buying. The reason for this is that owning a home decreases your cost of living over time. When you rent, you can rest assured that your monthly rent will increase every year or two. However, if you buy, your mortgage is the same year after year, while (hopefully) your income continues to increase. This is not absolutely true if you get an adjustable rate mortgage, but even then the increase is limited to a cap specified in your contract. In addition, if you buy you constantly build equity. Renting simply pays your landlord's mortgage and you walk away with nothing. There are exceptions where renting makes more sense, such as living somewhere for a short time or not being able to qualify for a mortgage. Both of these situations, however, are temporary. My personal home buying experience. I bought my first house in Norfolk, Virginia in 1993 for $96,000. We paid nothing down and financed at 6.5% for 30 years. Big mistake! First problem was that, at the time, I really couldn't afford the payment of $607 (principal and interest), about $750 including taxes and insurance. The second mistake was financing with a 30 year mortgage. Equity grows so slowly in the early years that only a nice appreciation allowed us to get out of the house with any money. The second house was in Diamondhead, Mississippi. This house was about the same size as the first house, but it was 20 years newer and the lot was three times larger. Having learned our lesson from the first house we looked long and hard and found this one for $30K less than the first house. We financed at 7.5% for 15 years and the mortgage payment was lower for this 15 year loan than for the other 30 year loan. A better plan for next time. I have approximated $1400 per month as the maximum mortgage payment I am willing to make after returning to the East Coast in two years (a few pay raises since the first house.) If we take the maximum mortgage as suggested by many people, we can finance $191K, assuming an interest rate of 8 percent. Another option, and the one I plan to take, is to finance $90K for seven years. Adding a nice down payment will get us a house in the $100 to $110K range and there are many acceptable houses available at that price. Why would anyone do this? At the end of 30 years of the "most house you can afford" plan, you have paid $504K and had no free money for years. The seven year plan results in a total payment of $117,832 and 23 mortgage free years. If this $1400 per month is invested in even a bad mutual fund at 12% it will have grown to a little over $1.8 million! Arguments against this plan. "I need a bigger/nicer/better house." I have said this myself, but I always find that upon serious contemplation, I actually "want" more rather than "need" more. I think this is true for most people. "I can take the 30 year mortgage and just pay it off early." That is certainly a good plan if you can really do it. Most people don't have the financial discipline necessary to make it work. "I get a big tax break by paying more interest." This is the biggest myth ever devised by the banking industry! ptiemann posted an excellent opinion on 04/05/00 which explains very clearly why the tax break is a myth. In short, if you are in the 28% tax bracket, you save $87K in taxes over the life of the loan, but you pay $313K in interest. Nobody wins here but the bank! Conclusion. It looks pretty obvious to me. You can either take the nicer house and be broke or you can take a little less house, pay less than one fourth the price of the other house over the long run, and have close to two million dollars left over for your trouble. What if I can't afford $1400 per month? It doesn't matter; this plan will work for any price range. For example, if you can afford the $80K house for 30 years, look for the $50 or $60K house and a shorter mortgage. You'll be glad you did.  |
| Read all comments (16)|Write your own comment |
|
Ads by Google
|
