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

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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.

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