Tuesday, April 27, 2010

Being Logical and Never Buy a House


My wife sent me a link to calculate the cost of renting vs buying a home the other day, which was basically a pitch from a home builder about why owning a home is so great. If you believe the calculations, buying the home with the prices we would consider is save us $1,075,638 after 30 years.

On the surface, it sounds like we’ve got to jump on this home buying bandwagon that everyone else is on. After all, who would turn down 1 million dollars of savings? Looking at it further though, and there are many flaws with this calculation.

First, although it has a box to put in a percentage for home value appreciation, it assumes that the property tax amount is the same for the entire 30 years. Unfortunately, this is just wrong. We will probably never get a new assessment of property tax every year, but we can bet that the property tax will increase with the home value over the long run.

Second, it assumes no cost associated with obtaining a loan. This is again incorrect. When a loan is made, there are upfront closing fees that just need to be paid. Some people end up taking a bigger loan to cover the closing costs but this is still money paid up front that could be earning interest in our saving accounts.

Third, buying a home usually accompanies a huge down payment. This is money that would otherwise be earning interest. This might sound like a small detail, but the down payment could more than double at 3% a year after 30 years.

Fourth and last (there are more, but let’s stop here since I think we see the point), it doesn’t say anything about the higher monthly payment that we have to come up with if we decide to buy. This situation stays the same for years before rent appreciates enough to surpass it. The extra cost of owning a home for the first many years could’ve been invested or saved, which would further cut into the perceived savings that the website is leading us to believe.

If we look at the calculation of owning vs renting more carefully, owning a house might actually be more expensive after 30 year if we include the extra cost of maintenance!! Hopefully, no one falls for the calculation in the link above thinking that they are saving a million bucks by buying a home now.


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Was established since 20th Rejab 1430.
Just to educate myself.
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