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My girlfriend and I are spit-balling the idea of buying a house. We've heard pros and cons for mortgages; you're putting your money into an investment vs you're paying far more than you anticipate due to the interest involved. But we're very number oriented! I think there's merit to both sides, but I'd like to find the right balance.

Below I've looked at three different situations. Where we buy 300k house with a mortgage...

  1. at 3.6%, 20% down, over 25 years.
  2. at 3.6%, 80% down, over 10 years, saving $4000/mo.
  3. at 3.6%, 80% down, over 10 years, saving $2000/mo
Home price:       300k    300k    300k
Down payment:      20%     80%     80%

Loan Amount:      240k     60k     60k
Loan term:         25y     10y     10y
Interest rate:    3.6%    3.6%    3.6%
Interest Total:   123k   11.5k   11.5k

Years Renting:       0      5y     10y
Rent Cost:           0    1.5k    1.5k
Rent*:               0     90k    180k

Property Tax/y:   2.7k    2.7k    2.7k
P tax duration:    25y     20y     15y
P tax total:     67.5k     54k   40.5k

Total payment:    491k    456k    532k
Time b4 owning:    25y     15y     20y

As you can see, if we can save 4000/mo (~40% income) over 5 years while renting at $1500/mo, we'd save about 35k and pay off our house 10 years earlier. But if we reduce saving by 2000/mo we now end up paying more than the first instance, just in a shorter time. However, we don't have to deal with house maintenance and other associated costs for a longer duration, and we don't take into account any interest accrued in that time, either.

I'm trying to keep some sort of basics down, as the further you dive in the more complicated the math turns out. Things I will be ignoring: Utilities, house/renters insurance, and maintenance, as I think these things should be budgeted for along with personal maintenance (dental, medical, food, etc).

I was also not going to account for inflation or investments as I don't understand the math and premiums involved sufficiently. I've since modified the above table to take into account property tax in my area, and made up for the differences in time-frames with the cost between finishing the mortgage and the longest term column. I don't know anything around tax benefits or being able to make 'lump sum' deposits on a long-term mortgage, etc., so I don't know how to calculated that into this maths.

I'm primarily interested in maximizing net savings while minimizing the time before being mortgage free.

My question is:

To minimize mortgage time, and maximize net savings, at what point would a mortgage be more beneficial than renting?

Interest calculations were done through this web calculator.

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    I don't know if your three columns are really comparable. They're not even for the same total duration, and you're not including expenses you might expect when you own a home (even fixed, predictable expenses like property tax, much less unpredictable things like maintenance). – dwizum Sep 16 at 19:58
  • @dwizum That's a good point, but realistically would you have a mortgage starting at 60k that lasted for 25 years? It was more for trying to ballpark what we'd be attempting to do in real life, rather than a single-variable change. What would you suggest I change? – KGlasier Sep 16 at 20:01
  • Have you considered the pros and cons of buying a house with a non-spouse? I don't know about Canada, but in the US non-spouses have very few protections if there are "unwritten agreements" about who owns what fraction, who pays what, etc. No one wants to think about this when the relationship is going well, but then it blows up in your face during a breakup (even an amicable split). A long history of settled divorce law says what to do in that case, but not for "shacking up". – RonJohn Sep 16 at 20:04
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    Also, you're ignoring taxes, insurance and maintenance (everything from mowing the lawn to painting the house, repairing the roof and emergency January heater replacement), all of which increase the cost of owning a home. – RonJohn Sep 16 at 20:06
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I would suggest reading these articles:

A) Why your home is a terrible investment

B) Rent v. Owning Your Home, opportunity cost and running some numbers

To summarize though your models should also include:

1) The ongoing costs associated with home ownership/property taxes/upkeep.

2) Heat/utilities if they differ between your rental and the house you are looking at.

3) The predicted value of your house 10 years in the future, and how much you anticipate it to go up in value over that time period.

4) (THIS IS THE BIG ONE THAT PEOPLE USUALLY FORGET ABOUT) The interest that all the money you're saving for the house would earn over that time period assuming you are investing it.

5) The intangible warm fuzzy feeling you get from owning your own place.

6) The intangible warm fuzzy feeling you get from having no mortgage and a fat stack of cash in the bank.

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    Good points, but it doesn't answer the (admittedly unanswerable) question. – chepner Sep 16 at 20:32
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    I would throw in the often overlooked closing costs - both at the outset, and then when you sell [which magnifies the costs if you move earlier than 5-10 years from now, meaning you should only buy if you're willing to commit to staying there long term], as well as the chance that rental costs go up in the future. – Grade 'Eh' Bacon Sep 17 at 13:22
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The bottom line is you don't know and cannot predict the future.

On a micro level your chosen neighborhood could under go gentrification and it would be really wise to purchase a home right now. Eight years ago in Nashville, and 15 years ago in Austin were great times to buy. Or it could end up like Detroit.

On a macro level, interest rates could soar and it would be really wise to have purchased a home as rents will also increase. Or perhaps the rates go down and it would be best to wait.

It really is impossible to predict the future. However, while this does not seem to be your problem, a mortgage acts as a forced savings plan. By paying down your loan, you eventually end up with a significant asset in the clear. Noted by the popularity of reverse mortgages for many the home is their only asset. So despite articles saying that a home is a poor investment, its better than nothing.

On a more personal level you are talking about splitting a long term asset with a person that you have not made a life long commitment. Sure, that can be taken tongue in check as few marriages last a lifetime, but you do need to be careful. Legal documents should be drawn up describing what happens if one of you wants out. Or, a simpler way to do this is that one party buys the property, and the other pays rent.

And really that is the risk with owning a home, what happens to you on a personal level. No matter what the economy is doing, if you two experience some sort of down turn in income it could create a painful loss. With renting, you can always move to a cheaper place and because your stock/bond investments are not leveraged they do not need to be sold. With a home, if you can't service the loan because of your down turn in income, then you will experience some pain and loss. It is very expensive to transact real estate, and even if the home increased in value you may see little or no profit from its sale.

So in my opinion only buy a home if:

  1. You have no other debt. No car payments, CCs balances, or student loans.
  2. You can afford to put 10% down.
  3. You can afford the 15 year mortgage.
  4. You have found a neighborhood where you would be okay living long term.
  5. You have a stable career. You may want to move to a different employer, but they are withing commute distance of your proposed purchase.
  6. You are in a stable relationship, and if not married, you can come up with an equitable deal for both parties.

While it is great to be numbers oriented this is a case of predicting the future and past results do not dictate future ones.

  • Why 10% down? I'm familiar with 20% to avoid PMI and 5% to minimize initial cash outlay. – Hart CO Sep 17 at 13:53
  • The 15 year mortgage recommendation is also strange, as it makes no comment on the relative interest rate. – Brady Gilg Sep 17 at 22:35
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I have factored some property appreciation into your figures. After 25 years plan A and B have comparable cost: $229.8k vs $309.5k. If you are happy renting and saving for 5 years you might avoid some house repair costs with plan B. On the other hand it might be more comfortable in a $300k house. 2% property appreciation might be optimistic though.

Plan               A       B       C

Home price:       300k    300k    300k
Down payment:      20%     80%     80%

Loan Amount:      240k     60k     60k
Loan term:         25y     10y     10y
Interest rate:    3.6%    3.6%    3.6%
Interest Total:  124.3k   11.5k   11.5k

Years Renting:       0      5y     10y
Rent Cost:           0    1.5k    1.5k
Rent*:               0     90k    180k

after 25 years from start

Property Tax/y:   2.7k    2.7k    2.7k
P tax duration:    25y     20y     15y
P tax total:     67.5k     54k   40.5k

Prop appreciation
Appreciation rate   2%      2%      2%
Appr. duration     25y     20y     15y
Appr. value       192k    146k    104k

Total payment:   229.8k  309.5k   428k

Time b4 owning:    25y     15y     20y

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