I have recently read an author, Dave Ramsey, who argues that you should not get a mortgage.
He says that you’re better off renting until you can pay cash for a house, but if you feel that you MUST get a mortgage, you should get together a 20% downpayment and do a 15 year mortgage.
Has anyone here ever actually done the numbers on mortgage versus no mortgage?
I’m thinking that getting a mortgage, even a 0% down mortgage, is a better deal than renting, ASSUMING you rent a home/apartment with comparable amenities to what you’d buy in a house.
Am I right or wrong there?
I wouldn’t get a 0% mortgage under any circumstances. The interest and PMI would probably not make it worthwhile compared to renting under most circumstances. On the other hand, if you can afford a 20% downpayment or more, building equity is a much better deal than renting, especially because the interest that you do pay is tax-deductable, and you’re actually getting something in return for your monthly payment.
On what planet does the author live where you can save up enough to buy a house while paying rent at the same time? * Very * modest homes on the East Coast start at $200K and go up sharply from there.
There are a ton of variables, but at least where I live, houses rent for as much or more than the monthly mortgage on an equivalent house (including insurance and equity). Even not very impressive apartments go for $800 - $1000/month. Certainly after the income tax on the deduction, owning a house is cheaper. (Although this doesn’t include maintenance – realistically, rent has to pay for that maintenance as well.)
There might be some elusive argument that in the long run you’ll be better if you don’t get a mortgage, but * practically * speaking, it’s impossible for most people unless they live in some wretched one-room flea bag apartment and save every dime for ten or fifteen years.
I know a person who did as D.R. suggested (though he never heard of him). The problem is that housing prices went up faster then he can save, so even though he has a substainstal down payment, he will have to actually borrow more due to the increase of housing prices.
As for his plan (if you must…) it is sound and can be broken down to don’t overextend yourself, buy modestly and keep the amount of interest you pay as low as practical. Or to put in another way, if you can afford 10% down at a 30 yr rate, you are setting your sights too high, by buying a less expensive house you should be able to put 20% down on a 15 yr mortgage using the same initial money.
Is there some kind of assumption in that book about the relative costs of renting vs. purchasing.
When I bought my house, I think we put 5% down on it and the mortgage payments were about $50 more per month than the rent.
That might be true in very specific cases, but most of the time when you’re renting you’re paying the landlord’s mortgage as well as his profit. Might as well put it towards your own equity. The only case I can think of where renting is financially more sensible is if you move frequently, closing costs and agent’s comissions can really eat into equity if you flip real estate.
The part about 20% down is valid (to avoid PMI). There are 80/15/5 and 80/10/10 programs that can reduce the down payment as well, though you have to be careful (they’re adjustable).
But under no circumstance take an interest-only mortage in this market.
I think that the “rent until you can afford to own” system would only work if your rent didn’t carry an implied principle.
In other words - If the lease you are paying reflected only the interest on the property you were occupying then its a good deal. But the lease is usually priced at a level which reflects the principle and interest on the property you occupy.
So when you lease, you pay the interest of a mortgage for the property you occupy plus you are probably paying some of the equity too -for someone else.
So why pay principle and interest on somebody else’s property when you can aquire property yourself via a mortgage?
Apparently, he’s near Brentwood, TN.
“The Dave Ramsey Show is broadcast live every day from his studios in Brentwood, TN (1-4 CST, 2-5 EST). The radio program is also heard on Sirius Satellite Radio and XM Radio, and streamed live free of charge on his Website. One-hour podcasts of the show are also available.” Cite: http://en.wikipedia.org/wiki/Dave_Ramsey
I feel for you with your housing costs, though.
When I looked for houses, I had the opportunity to pick up viable houses for anywhere from $60K to $120K.
I put a little more than 20% down on my house. Someone once told me that I could significantly reduce the term of the loan if I made a single extra payment to the principle every year. How much shorter would the mortgage be if I did that?
Also: Should I pay as much as I can afford toward the principle; and if so, ho will this affect my taxes?
I don’t like the idea. I think a better idea is to buy a starter house, reap the tax benefits from your mortgage and use the appreciation when you sell to put down on your dream house. I think the appreciation of the starter house is going to give you more money than what you could possibly save while renting. Not to mention that getting a mortgage on a starter house is going to put you over the threshold of itemization and let you deduct any state and local taxes that you pay.
I freely admit that housing prices on the East Coast are extreme. But housing prices tend to track wages in a given area. So if houses are going for $60K to $120K, I’m guessing that it’s going to take someone living in the hinterlands just about as long to save up as someone on the coast.
Johnny:
Hypothetical $100K loan
30 yr term, aka 360 months
APR 6%
Principal & Interest Mortgage Payment: $600/mo
Now, I plug in an additional $600 every year in the form of an additional $50 every month, making the payment $650/mo.
The new term is 24.5 years or 294 months. Your extra $50/mo could save you 5.5 years in terms of paying off your mortgage.
What’s the equation for that?
That’s a pretty lofty goal to save for a house until you can pay cash.
Take an example of two guys who want to buy the same house for $150,000.
“Joe” makes enough money that he can afford to save $1000 a month. He also found a cheap place to rent and only pays $500. He ends up living in his little apartment for 12 1/2 years and finally saves up the $150K. However, he finds that over the past 12.5 years that house now sells for $200K. He now has to save for another 4 years. So, in the long run he has lost $99,000 in rent money, has to pay $50k more for his house, AND has to live in his apartment for 16.5 years. In the long run he pays $299K for getting to live in his initial $150K house.
“John” makes the same amount. He puts $0 down on the house and gets a 15 year mortgage at a fixed 7%. His payments (excluding taxes and insurance) are $1,348 per month. He gets to immediately move into his house. At the end of 15 years with interest he has paid $242K for his house, saved an additional $27,360 in cash (he paid $1348 while Joe was paying and saving $1500 and pocketed his $152/month) and his house went up in value $50K.
(note: not taken into account- Joe could have made some interest investing his savings and John would be forking over cash for PMI, property taxes, and home owners insurance.)
Johnny:
Hypothetical $100K loan
30 yr term, aka 360 months
APR 6%
Principal & Interest Mortgage Payment: $600/mo
Now, I plug in an additional $600 every year in the form of an additional $50 every month, making the payment $650/mo.
The new term is 24.5 years or 294 months. Your extra $50/mo could save you 5.5 years in terms of paying off your mortgage.
Be careful about putting all you can afford toward the house. You should try and have enough money to live on for about 6 months or so. If you are like most people that 20% down for the first house tends to deplete your savings. In general you are unlikely to be able to get money much cheaper than now so the house is probably the last thing to pay off.
Don’t bother with an equation. You can find mortgage calculators on the web very easily that let you fill in the numbers. Whether or not it’s worth doing depends on a lot of factors – how long you’re planning on staying in the house and what that extra payment could be earning elsewhere. Right now, interest rates are in the sub, sub-basement and mortgage rates are around 6%, so you can probably get a better rate of return by paying the mortgage down.
One note – some mortgage companies will offer to let you make the extra payment automatically and will charge you for it. (My old mortgage company wanted to charge me $120.00 to sign up for this service and then an extra service change for every payment.) This is absurd, because almost every company allows you to just add extra money to a payment for free and specify how it is to be used.
I think that if you’re in that situation (where $100,000 or less gets a viable home, with an implied market for resale), then it’s not a bad idea.
I have no cite for this (my guesswork), but I think that the gap in housing prices per location is probably not as large as the earnings gap. What I mean to say is that living in a depressed housing market might lend itself to Dave’s theories, as long as your relative earnings don’t eclipse the house pricing differential.
In Chicago (and suburbs), I think you’d be subject to the “saving until the price exceeded realistic levels” rule. Homes in my area of the NW 'burbs go for about $300k for a 3b2ba split-level. Good luck saving $300k with anything approaching a median income!
Dave Ramsey seems a little unrealistic, or hopelesly regional.
-Cem
This would be a completely laughable assertion in the Washington, D.C., area.
Johnny:
Hypothetical $100K loan
30 yr term, aka 360 months
APR 6%
Principal & Interest Mortgage Payment: $600/mo
Now, I plug in an additional $600 every year in the form of an additional $50 every month, making the payment $650/mo.
The new term is 24.5 years or 294 months. Your extra $50/mo could save you 5.5 years in terms of paying off your mortgage.