27Sep

Budget: Why we no longer see a mortgage as “good debt.”

Photo Credit

On paper, a mortgage seems smart.  I mean, why pay rent when you could be paying for your own house instead?

Consider this:

You purchase a house for $65,000, at 5% interest rate and a 30 year loan.  At this rate, your payment would be approximately $348 +$70 (mandatory PMI unless you have 20% down) + $150 (taxes and insurance for escrow) = $558/month that you are paying.  You pay the minimum for 30 years and you have paid $65,000 for your house, plus $60,617 in interest.

Now, let’s say you double up your principle payments, for a total of $916/month ($348 + $348 + $70 + $150).  Now, you’ll “only” pay $17,000 extra in interest, and you can pay that loan off in around 10 years.  So, in 10 years, you bought a $65,000 house.

Let’s say you decide to rent instead, using that same amount.  Our rent is $425/month.  We’ll take our allotted $916/month, and pay $425 in rent, putting the other $491/month into savings for the 119 months it would take to pay off the mortgage.  We would save $58,429 toward a house.  Just going by these numbers, renting would put us a bit behind—we could get a $58,429 house instead of the $65,000 we got with our mortgage in that same amount of time. (I didn’t take into account the market gaining/falling during this time, or interest earned on money being saved).

However, those numbers don’t take into account these factors:

1. Equity adds up very slowly.  We bought our house in 2007 for $67,500.  We’ve paid a little extra here and there, plus an additional $25/month, paying a total of $35,641 toward our home (payments + PMI + taxes + insurance).  We still owe $58,000+ on our mortgage.  So basically, we’ve paid $35,641+ for about $7,000 in equity.  And, in this down market that’s nothing because even priced at $65,000, our house isn’t attracting any buyers.  So, after paying our realtor and everything else, we’re probably going to end up in the hole, having to PAY, if we can sell it at all (we’ve had it on the market for (3) 6 month terms with very little interest).

During these 5 years if we had been renting instead of paying a mortgage, we would have saved over $10,000. (And that doesn’t take into account the cost of repairs that we wouldn’t have had to pay for, or the additional mortgage payments past the time we left, which already adds another $1,000 onto that, or the amount we stand to lose when we sell).

2. If you own your home, you are responsible for all repairs.  In addition to your monthly mortgage, you are constantly paying for repairs.  (Just before we moved, we had to spend $200 to fix the freezer and AC).  No, renting isn’t all flowers and rainbows, but if you have a good landlord who will fix things in a reasonable fashion, you have peace of mind about this.

3.  No freedom.  We have a one-year lease on our rental property.  We have to stay here for a year, but after that it’s month-to-month. If we need to move, we can move.  It’s that simple.

Many of you know that we recently moved;  we’ve been out of our house for 2 months, but we still have to pay our $569.02 mortgage until it’s paid off or sold.  We are financially tied to that property, and it has been a huge headache.

A lot of the problems we’ve experienced are exacerbated by the fact that we needed to move/sell after only 5 years, and that it’s a down market.  But this has opened our eyes to the idea that for us, there is no good debt.


 
Related Posts Plugin for WordPress, Blogger...

Share this article!

Comments

  1. Hey there..praying your house sells soon. Hubby and I lost our house in a foreclosure a few years ago. It was a horrible mess to go through. We were at the time were you got 6 months and you were out. NOt like now where they are begging people to stay. We have always rented and I think always will. Well until we save enough to buy something we can pay cash for. :) Renting is a pain, but it does have its perks.

  2. Well said. I recently told my husband (He works for the Bureau of Prisons) if he ever decides to transfer we are not buying again. Our AC broke and I nearly had a heart attack. Luckily a friend was able to fix it for $15 and I through in an Olive Garden gift card because I appreciate someone saving our tushies like that. Praying that your house sells to relieve some of your stress.

    • Cassie, that’s awesome about your friend being able to fix your AC like that :) And nice of you to bless them as well. We’ve come to the same conclusion of not buying again until we have 100% saved up (that’s the plan anyway)…never again will we get into this situation of losing so many thousands of dollars like that.

  3. JasonKendra Stamy says:

    If we could've rented for that cheap, I doubt we would have bought a house, but for 3% down, and only $68 more a month. We are fortunate in that we can perform most repairs ourselves. However, I do agree with you, "There is no such thing as good debt". There is better debt, or not-as-bad debt but not good debt. We are budgeted and working hard to pay this house off in 14 years, so it is possible to be debt free. :)

    • I completely see where you’re coming from! When we first bought our house, that was kind of our reasoning, because for not much more money (we were hoodwinked about the exact amount…we were told it would be $500, but taxes, insurance and PMI ended up more than we thought), and since we moved quickly it ended up costing us a ton of money. It sounds like you have things under control better than we did 5 years ago :)

  4. Technically, I would think that both mortgage and rent are debt. If you don’t own a home outright, then you’re either paying the bank or paying the landlord. Either way you own someone. The ideal would be to own a home and stay put, but too often that’s difficult to achieve in this economy. How wonderful would it be to have a homestead and build your home out of your own natural resources like Laura Ingalls Wilder?! Praying that your house would sell soon, Crystal!

    • Thanks, Meghan :) Obviously owning our home is the goal…but since we don’t have tens of thousands of dollars sitting around, we can’t really make that happen. So for us, the question becomes what choice do we make in the meantime…a mortgage or rent. Also, I understand your point about having to pay either the bank or a landlord. I’ve always kind of had that same thought, when people are out of debt but still paying rent, they still have that big monthly bill. However, after our recent experiences, I disagree that rent is the same as debt. Yes, it is a bill, but it’s one that you could potentially get out of (ethically) just like a lot of other bills, whereas a mortgage you cannot…If hard times hit, we could potentially move in with parents or something like that and not pay rent for a while, or try to find a place with less rent. That option is not available for a mortgage, you still have to pay it no matter what. So, I don’t think that rent ties you down in the same way that the debt of a mortgage does.

      • I’ll confess rent has appealed to me because of those very reasons! I could easily be a nomad, moving to experience different places every few years. Obviously even owning a home outright would hinder that kind of moving. But I’ve also learned frugality so much from my husband that I hate the idea of paying hundreds every month and then having nothing to show for it. Still though, in many ways renters are ahead in the housing economy we have now. And, sometimes, there just isn’t any other choice. It’s a difficult world! Thanks for thinking through this online and letting us in on the conversation.

        • Thanks, Meghan! I, too, hate the idea of paying hundreds every month with nothing to show for it…which is probably why I’m so cynical about a mortgage right now. Because since we only owned our home for 5 years, and it’s a down market, we’ve already lost $11,000 (based on what we would have paid for rent, and the additaional $569.02 we have to pay per month until it sells…which will keep growing. It is so frustrating, and is definitely coloring my view on having a mortgage…lol.

  5. Well I agree that ALL debt is bad. But I agree with Meghan either way u r paying unless you own outright. Owning a home is only worth it if you’ll be there long term-at least ten years.
    You cant have a homestead with chickens and bees and a nice garden if you rent. This is what we have and I wouldn’t change a thing. However we do pay extra towards the mortgage every month, as well as paid off our 10 year second mortgage in five years a year and a half ago. What a freeing feeling that was, and now we are saving money for retirement and Have a nice emergency fund. Your in my prayers! Hope u sell the house soon!

    • Thanks for your prayers and encouragement :) We are fortunate to live in a rural area where you actually can have a garden and chickens while renting. And, it is definitely one of those things where each person will have to weight the pros/cons for their particular circumstances :) Thanks for your input! And, I agree with you guys (I used to think the same thing when people who were renting talked about being debt-free…hello you still have a “payment”) But, we learned a tough lesson this summer that kind of changed my mind about which was the lesser of the 2 evils for us. Although we are definitely looking toward the day when we can own our own place and have no mortgage or rent :)

  6. I love this post and the fact that you put numbers to a theory. I think there is a perception that if you don’t “own” a house you are somehow “less than”. Our society has decided that home ownership is the American Dream but it can be a nightmare unless you are financially prepared for all of the responsibilities. When you add up all of the interest, repairs, etc. it is cheaper to rent. Don’t even get me started on the “tax deduction” argument. We’ve owned a home for the last 15 years until this summer when we decided to rent. It is a relief to not worry about repairs, yardwork, utilities, etc. We are saving up to hopefully buy our next home in cash.

    • Thanks for your input. It’s nice to hear other stories about this as well, although some of them have been quite sad. Until our experience this summer I had no idea that there could be any positive thing about renting…I guess we live and learn.

  7. We currently rent… I think we would be more ok with it if it was a house instead of a duplex. Being attached to people that smoke is not fun! Oh well… It’s where God has us for now. Thanks for sharing this post with Thrive @ Home. I made me less anxious to buy a house! :)

    • Yeah, Jennie…that can definitely be a bummer! We’re fortunate in that while our house is TI-NY, it is at least in a quiet neighborhood with a decent sized yard. Not the acre we had before, but still large enough that the boys can play catch and stuff.

  8. Thanks for the number crunching! We’re looking at selling our home so we can change schools and the thought of renting occurred to me but not with a numbers comparison.

  9. I wish our rent would have been that cheap! We rented a house once for $500 and it had holes in the floor and the insulation was newspaper (I wish I was joking). We really want our own home, but we have to admit that renting is alot better, and we wouldn't mind renting for as long as we can. I hope that your house sells quickly and your burdens be lighter. God Bless you!

    • lol…Megan, I completely believe you, because we looked at one of those places when we moved here! It was HORRIBLE, but the only thing available…then God came through at the last minute and provided a very tiny, but neat house for us to rent. We basically just lost a month’s worth of rent, but it was worth it. Wages and cost of living tend to be lower here than in some other places, so that’s kind of cheaper rent, and the average is probably around $500-$550 or so? Thanks so much for your kind words regarding our house selling.

  10. If only rent was that cheap where we are. We pay $900 to rent a home that I can't do anything to. (paint etc) :( It's small and we live modestly, almost popping out of the house. As my husband would say, there are two sides to a coin. For us, it is our dream to buy a home, to be able to fix it up, add on, and make it ours. For us, it would mean paying less money a month and working toward owning something in the long run even if that takes 30 years. Paying $900/mo. in rent will not accomplish this. We are literally paying someone else's home off for them. Also, where we rent we are responsible for whatever breaks. All rental agreements are different. <3

    • Kristy, thanks for sharing your thoughts :) I have been on both sides of the coin, but our current situation of losing so much money has made me change my mind about the idea of having a mortgage. Buying a home is definitely a dream of ours as well, just without the debt :)

  11. I agree that “there is no good debt”. In reality–I’m not sure my husband and I would ever be able to afford to buy a house with all the cash up front, but right now we’re renting and saving with the idea that we want to save up as much of a downpayment as possible before we get to the point of looking at houses. We’re also pretty convinced that we don’t want to think of buying a house till we’re pretty sure that we’re going to stay in one spot for a good long time–when you’re moving around, renting gives you a lot more freedom!

    • Rachel, I’m not sure that in practice, my husband and I will ever have the patience to truly save up enough money to buy our own home. I would definitely recommend saving up at least 20% down, because that is the magic number for most loans where you don’t have to pay PMI. And, definitely agree with the “wait till you’re settled” idea…that would have saved us a ton of headache.

  12. Very interesting. My husband and I have been thinking along these lines lately as well. Especially since we enjoy moving every few years. I'll have to pass this along to him.

  13. Alana Taylor says:

    My husband and I are hoping to sell our house soon and we're strongly considering renting for the fact that 1} we wouldn't be responsible for the repairs and 2} we won't be tied down to any one place. The only problem is, it's more expensive to rent in our area… We'll easily be paying $200+ more per month…

    • Alana, that stinks! That’s originally why we chose to buy but it just didn’t work out for us. If we could save $200/month by having a mortgage, then we would probably do that. I pray that God will provide, and make His will abundantly clear.

  14. Good for you!!! Indeed, this is a slow game, but we surely win at the end!

  15. Wow Crystal ! Thank you for sharing so much wisdom. Before my husband and I got married we both agreed that we did not want to be tied down by a mortgage and I believe it is a great decision we made because we have friends who have beautiful homes and yet wish they could go back to renting instead of living in a home where you are almost “imprisoned”. One day we will own our home but I know we will do it debt-free.

    Thank you once again for such wisdom !

    • Barbara, thank you for the kind words! It is my prayer that our story, and sharing this info can at least help someone consider everything before jumping in. Even if the decision is still to carry a mortgage, I pray that God will use our story to at least help people go into it with eyes wide open, which we did not.

  16. Rent isn't that cheap any. We bought our house in 1996 and have a $1400 mortgage including taxes. Houses are renting around here for $1600-$2300 for the same amount. We plan to stay so it makes sense that we bought when we did but if you are moving around alot.

    • That is one good thing about a mortgage–it doesn’t rise with the cost of inflation over 17 years. That’s a great point :) Also, I realize that if you’re going to be in your home for that length of time, a mortgage can be a good thing. But, if you aren’t, you can end up losing thousands of dollars like we did. Thanks for adding a new dimension to the discussion. I didn’t consider the inflation thing….and over 17 years (or 30 years) rent will increase way over the cost of a mortgage.

  17. Interesting thoughts, Crystal. Debt is definitely not a good thing, so anytime we have to borrow money we have to be wise and discerning. And seek the Lord!

    Love that Romans 15:13 is your theme verse. It’s mine too!
    Linking up from WIP Wed,
    Susan in VA

    • Susan, so glad you left a comment and I found your blog! I really loved what you had to say today and I left you a comment over there :) God bless!

  18. When we moved to TX for 3 years, we chose to rent for some of the reasons you mentioned. We knew we were only there for 3 years–not enough time to build any equity. And the housing market was already dropping in bigger cities, so we didn’t want to get stuck with a house. When we moved home, we chose to buy. We are in a college town that has huge housing turnover every year and is relatively unaffected by the housing market issues plaguing the rest of the country. Also, in this town, we wouldn’t be able to find an appropriate house to rent. All rentals are targeted towards college kids. Great insight! I love how you punched the numbers. Thanks for linking up!

    • It sounds like you were prepared and examined all the options and assessed the situation before making a decision. I think that’s the most important thing :)

  19. We’ve been learning that we should owe no man anything, no not one things except a debt of love. We were fortunate that we sold our house and we’ve been renting for a couple of years. I would consider it a blessing to buy another house at some point, but we plan to pay cash for it (and all things from this point on). One should not presume upon the future. What if God calls you to another city but you’ve tied yourself down to a debt elsewhere, that wouldn’t be good.

    • This is so true! That is what we are aiming for as well, even though it’s a long road.

      • tmichelle1 says:

        I’m relying on the promise that with God all things are possible. It seems impossible for us to do this quickly too, but I’m praying God will prove me wrong. Hopefully He will for you too! :)

  20. Where are you living that rent is that cheap? I am in pleasant Grove UT, and the cheapest place around that would suit my family is 800/mo.

  21. I think it’s important to remember that the things you have mentioned here make most sense in the short term. In the long term (i.e. if you never do anything but rent), owing another person for your housing isn’t going to be optimal and in my opinion really no different from a 30 year mortgage (except maybe worse!). The cost of rent adds up over time, just as the cost of interest on a house. In fact, you are basically paying “all interest” since you are paying someone for your housing every month but the downside is you aren’t getting anything tangible (i.e. equity) to show for it. And you may find that you lose security in the long term because it is very easy for rent to increase, terms of contracts to change from year to year, rental homes to change hands, and you could find yourself out of a place to live and up a creek very fast. Working towards something I own, putting my money where I want it to be, and not relying on someone else’s whims for something as important as my home is not something I would want to do for the rest of my life. It’s a fine line, and sometimes it absolutely makes sense to rent. However, the argument of rent vs. own is much more complicated than a monthly bottom line. Buying does require a game plan to pay off early (especially in the first 15 years of that 30 year mortgage- because as you’ve seen, the massive chunk of that interest payment is in the first 15 years) and an understanding of how compound interest works, which I think unfortunately a lot of folks these days don’t understand well at all. We are a month away from owning our home at age 29, not because we make a lot of money- because trust me, we do not and yet we are doing better than most people our age who make double or triple what we do. Instead it’s because we understood what we were getting into with a mortgage and how to tackle it effectively and pay the house off fast. In this case, it was absolutely worth the uncomfortableness of our early pay off plan, because we will be debt free AND free of home payments for as long as we choose to stay in this house- potentially forever- and can use our hard earned income to build wealth.

    • That’s awesome! For us that isn’t an option. We are barely making enough to stay off gov’t assistance, and made some bad decisions previously as far as student loans for my masters degree, etc. There are a lot of variables here, and if you’ll reread my post, I said (1) this was OUR personal story, that we lost at this point $12,000 and counting by purchasing our home instead of renting, and (2) I said that if you feel surely that you’re going to be in that same home, same place for longer, then it may be in your best interest to purchase. For us though, I never said it came down to just a monthly thing. It stretched out over 5 years where we paid $12,000 more than if we’d rented, and we’re still losing money daily as we haven’t been able to sell our house, and if we do, more than likely we’re going to lose even more money. I just wanted to give the other side for people like me who have always thought it’s better to purchase. 5 years ago, I had your exact same thoughts on the subject, but now after our experience, I see it as a much more gray issue, much more complicated than one side of the argument makes it out to be. It takes years to build equity, even paying a little extra here and there, and even then if the market falls a bit, you have no equity after all, which is the case we’re in. Also, people find themselves up a creek and without a home all the time through mortgages.

  22. Why don't you rent out your old house if you can't sell it? Have someone else pay your mortgage and keep your property as an investment.

    • Unfortunately, because of the type of loan we have, we are unable to rent our home. It’s a “lower insterest” (our interest rate is 5.25 when the going rate at the time was about 6.0).

  23. We’ve always wanted to purchase a home, but our situation has caused us to rent. Previously, I was always very jealous of those who owned their own home, and to some extent I still am, but in this economy I’m better off renting for all the reasons you listed. I would still like to own a home someday, but would prefer to pay cash. It’s a long shot that will ever happen, but we’ll see what God has in store for us. I’m just glad I don’t have a huge mortgage loan and starring at an appraisal that is thousands of dollars less than what I still owe. I know so many people in that situation and are 100% unable to move. It’s so sad.

Leave a Reply

%d bloggers like this: