Interesting Q&A question over at CBSMarketwatch:
Q. Why is there such hoopla about homeownership and building equity? The way I look at it is that homeownership actually reduces equity. For example, a $200,000 loan at 6 percent will result in a $1,200 a month payment. Over the first five years, that works out to $58,000 in interest. Add utilities ... and property taxes ... and you [could be] in the hole for $93,000 to build equity of $14,000. Now if you rent a place for $1,000 a month, you have paid $60,000 to someone else to put a roof over your head. But you saved $33,000. Of course, this is without tax implications [or] the cost of maintenance, which I also did not consider. Given the current state of housing do you think it is still advisable to jump into housing market to build equity?
Answer: Even if the figures you cite were accurate, you still forget the most important part of the equation -- appreciation.
While not guaranteed, it is likely that the value of your property will increase over the time you own it. By how much is anyone's guess, but the longer you hold the place, the better the chance that you not only will get more than what you paid when you sell, you'll get a lot more.
Another point that you overlook -- you're not alone on this one, though -- is that your gain is not based on the original price of your house but the amount you invest in it. In other words, if you put up $40,000 to buy a $240,000 house (resulting in your $200,000 mortgage) and sell it for $480,000, you did not double your investment, you increased it by many times more because you only put $40,000 into the deal, not the full price.
Also left out of your reasoning is that property taxes are deductible on federal income tax returns as well as the interest of the mortgage. For a taxpayer in the 28 percent bracket, that shaves more than $16,000 off your total cost number.
Ownership, though, is not just about the money. The money is nice, to be sure. But with a home of your own, the place is yours do to with exactly what you want. Paint the walls green? No landlord to tell you no. Loud music at 3 a.m.? Well, you still can't disturb the peace, but within reason? Sure. Then, there are the studies that show owners tend to take more interest in their environs and are better citizens because of it. And children of owners tend to do better, too.
Not everyone is cut out to be an owner, of course, nor does everyone aspire to be one. But all things being equal, it's probably the best choice for most folks, financially as well as psychologically.
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Like I said many posts ago, apartments are shit.
Q. Why is there such hoopla about homeownership and building equity? The way I look at it is that homeownership actually reduces equity. For example, a $200,000 loan at 6 percent will result in a $1,200 a month payment. Over the first five years, that works out to $58,000 in interest. Add utilities ... and property taxes ... and you [could be] in the hole for $93,000 to build equity of $14,000. Now if you rent a place for $1,000 a month, you have paid $60,000 to someone else to put a roof over your head. But you saved $33,000. Of course, this is without tax implications [or] the cost of maintenance, which I also did not consider. Given the current state of housing do you think it is still advisable to jump into housing market to build equity?
Answer: Even if the figures you cite were accurate, you still forget the most important part of the equation -- appreciation.
While not guaranteed, it is likely that the value of your property will increase over the time you own it. By how much is anyone's guess, but the longer you hold the place, the better the chance that you not only will get more than what you paid when you sell, you'll get a lot more.
Another point that you overlook -- you're not alone on this one, though -- is that your gain is not based on the original price of your house but the amount you invest in it. In other words, if you put up $40,000 to buy a $240,000 house (resulting in your $200,000 mortgage) and sell it for $480,000, you did not double your investment, you increased it by many times more because you only put $40,000 into the deal, not the full price.
Also left out of your reasoning is that property taxes are deductible on federal income tax returns as well as the interest of the mortgage. For a taxpayer in the 28 percent bracket, that shaves more than $16,000 off your total cost number.
Ownership, though, is not just about the money. The money is nice, to be sure. But with a home of your own, the place is yours do to with exactly what you want. Paint the walls green? No landlord to tell you no. Loud music at 3 a.m.? Well, you still can't disturb the peace, but within reason? Sure. Then, there are the studies that show owners tend to take more interest in their environs and are better citizens because of it. And children of owners tend to do better, too.
Not everyone is cut out to be an owner, of course, nor does everyone aspire to be one. But all things being equal, it's probably the best choice for most folks, financially as well as psychologically.
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Like I said many posts ago, apartments are shit.
