How can home buying be considered a sound investment with all of that interest that needs to be paid?

Question

I am 33 years old, married with 3 kids. I currently live in Central NJ.

About a year ago, I got a job which lets me work from home. Since then I wanted to move out of this house because the property taxes are so high and the mortgage payment is a killer.

I want to move to somewhere else in the county where there is a much lower home ownership costs. Instead of renting, I want to buy another home. Selling my current home is not an option because it is also in my parent's name and they do not want to sell it (they would rather I rent it if I am moving out).

I have about 40k in savings which I can put towards the down payment and closing costs. I want to convince my wife to make this move because it will save us at least 800 month, but she fails to see how buying a second home is financially sound because we have to lose our savings and we have to pay interest on our second home.

Her logic is it will take almost 5 years to get back our down payment and we have to pay interest as well. So how can this move help our family financially in the long run?

Is she right? Are we better of staying in Jersey where our family and friends are? Or am I right and that $800 we can save every month in a cheaper part of the country add up in the long run?

Answer 1

I'm going to start with your title question:

How can home buying be considered a sound investment with all of that interest that needs to be paid?

If taken literally, this is a loaded question because if you pay cash for a home, you don't pay any interest. Furthermore, if your interest rate is 3% for 10 years you won't pay nearly as much interest as you will if your rate is 10% for 30 years, so "all of that interest" is relative to your personal situation. Having said that, of course I understand what you mean. Most people pay interest, and interest is expensive, so how do you calculate if it's worth it? That question has been asked and answered, but for your particular situation, you really have two separate questions:

1. Is it worth it to move far away from where you currently live in order to save money?
2. Should you rent or should you buy?

I believe you should answer these questions independently. If you move far away, it's probably the case that you can save a lot of money by either renting or buying in that location. So you should first consider if it's worth it to move, and then if it is, decide if it's worth it to rent or buy. If you decide not to move far away, then decide if maybe you can save money by renting somewhere near your current home. Since it sounds like if you move you may have to become a landlord, living close by to your tenant may also make it easier to deal with problems when they arise.

Answer 2

Since then I wanted to move out of this house because the property taxes are so high and the mortgage payment is a killer.

As I understand this is a property jointly owned by your parents and you. As they are not living staying in the house, you have taken over the mortgage payments for this house along with any other maintenance. If you move out of this house; the rent is expected to cover the cost of maintenance and mortgage payments.

Are we better of staying in Jersey where our family and friends are?

This is an individual decision. It is not just family and friends, but also schooling of kids, penitentially if you change jobs would it also entail changing residence as the workplace would be more near from current home than the new home.

I want to convince my wife to make this move because it will save us at least 800 month, but she fails to see how buying a second home is financially sound because we have to lose our savings and we have to pay interest on our second home.

There are quite a few posts on first-time-home-buyer

Some question like this one and this one and this one are good reads.

There are historically times when the Mortgage EMI becomes equal or less than Rent paid. In such times it is good to buy home, than pay rent. Otherwise quite a few invest advisor's mention that fools buy house and wise live in it.

There are advantages to buying as well advantages to renting. There is no simple answer and it depends on multitude of factors.

Answer 3

The flaw in your reasoning is that you are assuming that renting a house is easy and automatic. Who is going to manage the property? Your parents? What are you going to do if the tenants burn the place down, start having drug parties there, or secretly have 6 cats who piss everywhere so noone will ever want to rent it again? What are you going to do when the house goes unrented for a year and you have to pay a year's worth of mortgage payments with no rental income? What are you going to do when some deadbeat decides to stop paying the rent, but won't move out, and when you try to evict him, he goes to court to stop you? You going to fly to NJ to make the court appearances?

Unless you sell your existing house, or your parents buy you out, then you need to stay. You should not attempt to own two houses at once with one of the houses located not where you are at. That will not turn out well.

Also, just as an aside, 30-year mortgages are not an "investment"; they are a way to lose money. Usually people get them because they want a big beautiful house that they cannot afford, so they borrow the money. That is not "investing", that is wasting money to live in luxurious circumstances. If you want to become wealthy, buy a property you can afford, not something that you have to string out payments for 30 years.

Answer 4

Your question isn't great, but I will attempt to answer this piece as it seems really the root of your personal finance question:

I want to convince my wife to make this move because it will save us at least 800 month, but she fails to see how buying a second home is financially sound because we have to lose our savings and we have to pay interest on our second home.

And...

Her logic is it will take almost 5 years to get back our down payment and we have to pay interest as well. So how can this move help our family financially in the long run? ...

Is she right?

She is mostly wrong. First, consider that there is no "ROI" really on your down payment. Assuming you are paying what your home would sell for the next day, then your "RIO" is already yours (minus realtor fees). She is talking about cash on hand, not ROI. I will use an example without taking into account risk of home markets going down or other risks to ownership.

Example: Let's say you pay $2800 a month in mortgage interest+principle at 5.5% apr and $200 a month in taxes+insurance on a $360k loan ($400k house). In this example let's say the same house if you were to rent it is $3800 a month. Understand the Opportunity Cost of renting (the marginal amount it costs you to NOT buy). So far, your opportunity cost is $800 a month.

The principle of your house will be increasing with each payment. In our example, it's about $400 for the first payment, and will increase with each payment made while decreasing the interest payment (Suggest you look at an amortization table for your specific mortgage example). So, you're real number is now $1200 a month opportunity cost. Consider also the fact that the $400 a month is sitting in a savings account of sorts. While most savings accounts give you less than 1% in returns and then charge taxes on that gain, your home may (or may not be) much higher than that and won't charge you taxes on the gains when you sell it (If you live in it for a period of time as defined by the IRS.) Let's assume a conservative long term appreciation rate of 3%. That's $12k a year on a $400k house. So, now you're at $2200 a month opportunity cost.

In this example I didn't touch on your tax savings of ownership. I also didn't touch on the maintenance cost of ownership or the maintenance cost of renting (your deposit + other fees) which all should be considered. You may have other costs involved in renting. For instance: The cost of not being able to fully utilize your rental as your own house.

This may be an even simpler and more convincing way to explain it: On the $2800 mortgage example, you will be paying around $19k in interest and $2400 on taxes, insurance = $23k per year (number could be way different in your example). That is basically throw away money you're never getting back. On the rental, 100% of your rent at $3800 a month is throw away money you're never getting back. That's $45,600 a year.

Answer 5

Housing prices are inseparable from the job market of an area. The 40k you want to use as a down payment will buy an entire house outright in many places of the country that have no jobs. If your job is mobile why not follow cheap housing, even if it is just to rent?