100% Down For A House

I never thought that such a thing would be possible.

I have though started to do the numbers and I’m not sure that they really are making sense to me. Especially with mortgage interest rates and savings account interest rates also low.

I started with a hypothetical house. A $300,000 house.

Situation #1: 30-year 5% fixed rate mortgage with $60k down (20%)

For a 30-year fixed rate mortgage for $240,000 my monthly payment would be $1,288/month.

If I save the difference between a mortgage payment every month and my current rent payment ($695) I would be able to save $593/month for the down payment. With a hypothetical interest rate of 3% it would take me 7.5 years to save $60,ooo dollars.

If I was able to save the entire mortgage IN ADDITION to my rent payment I would be saving $1,288/month for the down payment. This would take me 3.5 years to save $60,000.

After getting the mortgage, if I did not prepay early, I would end up spending $240,000 on the principle of the loan and $221,889 on interest over the course of 30 years.

Total, to go this route, it would cost:

  • Rent: $29,190
  • Savings for down payment: $54,096 (interest gets us to $60,000)
  • Mortgage payments: $240,000
  • Interest payments: $221,889
  • Grand total: $545,175 – and the house does not become ours for 33.5 years from when we start saving

 

Situation #2: 15-year 5% fixed rate mortgage with $60k down (20%)

Again it will take us 3.5 years to save up our down-payment. However now our monthly payments will be higher. Instead of $1,288/month they will be $1,897.

However, we’ll be paying off our debt faster, and thus the amount of interest we’ll pay is less. Now we’ll only pay $100,205 to interest.

Total, to go this route, it would cost:

  • Rent: $29,190
  • Savings for down payment: $54,096 (interest gets us to $60,000)
  • Mortgage payments: $240,000
  • Interest payments: $$100,205
  • Grand total: $423,491 – and the house does not become ours for 18.5 years from when we start saving

Situation #3: 100% down for a $300,000 house

Well, now we’ll want to save $300,000. If I assume we can save the $1,288 each month from before it will take 15 years to save $300,000.

However, we’ll have to be renting during this entire time. The average yearly rental increase is 1.7% … so you’ll be paying approximately $142,382 in rent during that 15 year period (unless you can lock in a 15 year lease, which I probably would not recommend).

Total, to go this route, it would cost:

  • Rent: $142,382
  • Savings for down payment: $231,840 (3% interest compounded over 15 years gets us up to $300k)
  • Grand total: $374,222 – and the house is yours within 15 years of saving – and the moment you walk in the door!

So what does this all mean?

Owning your own house outright may actually be CHEAPER and FASTER if you pay for it in cash outright. So if someone tells you they’re just “throwing” their money away by renting, then they are doing it wrong!

A caveat:

This makes the assumption that $300k will get you the same house now as it will 15 years from now. That is not likely. However, if you can save up money for the next recession you’re likely to get QUITE a deal. Sometimes prices of houses increase, sometimes they decrease. If we were to ASSUME that to get the same house in 15 years this new house would have increased in price by 1.5% annually – then it would now cost us $375,644 to buy the same house. We’d need to save then another two years to get the difference in cost. This would cost us another $17k in rent. Raising the total price of the house to: $262,752 saved + $159,382 in rent OR $422,314.

This is pretty damn close to the amount that we would pay if you saved INTENSELY for 3.5 years and then got a 15 year mortgage. You would own the home outright in the same period of time, and you may benefit from getting a nicer house for a cheaper cost in the past than it would be in the future if housing prices raise faster than 1.5% per year.

Now, this seems pretty counter-intuitive to me. I WANT to believe that owning my house by paying 100% down would be the best way to go. But unless I could save more than $1,500/month and get to my savings goal significantly faster it doesn’t seem possible. Have I missed something that I should factor in? I’d appreciate your input on my new thought experiment!

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19 Responses to 10019 Down For A House

  1. SP says:

    I read this just the other day, comparing a 15 to 30 year. Assumptions are made, of course, but you may want to consider your return of investment on savings (assuming you didn’t put all your savings into your house.

    http://allfinancialmatters.com/2009/11/16/addressing-a-dave-ramsey-fans-comment/

    • SS4BC says:

      I don’t think I would feel comfortable putting ALL of my savings into a house. I would most likely still want to have an emergency fund and a car fund (in addition to IRA contributions).

  2. Also, don’t forget the costs you have in owning a house that you will not have for however many years you are renting. So far, in two years, we have (1) painted the interior (planned) (2) bought new appliances (planned) (3) had to get a pest control service (should have been planned, but wasn’t), (4) had to repair the water heater several times (unplanned – the heater was ❤ years old), (5) had to repaint the exterior of the house (unplanned, but necessary because the exterior paint started to peel), and (6) look into termite treatments (unplanned, but hopefully not necessary). That's an easy 20K you won't have to spend, as long as you are a renter; your landlord is responsible for all these problems. Also, don't forget that your property taxes are included in your rent, and you only have to insure your possessions, not the domicile itself when you are a renter. So that trends even more to renting over buying, especially if you can rent for 1/2 for what it would cost for the mortgage alone.

    • SS4BC says:

      Oh absolutely. And re-carpeting as well. The complex should also take care of that. I think the key is finding a GOOD renting situation that you can see yourself in for the long run. My apartment now I could definitely see myself staying in for 4-5 years, but I don’t know if I could stay there for longer than that.

  3. Jessie says:

    This is a fascinating experiment – I don’t have much to add to it, but i’m enjoying reading!

  4. I’ve also heard that buying a house with cash can lead to heavy discounts from the original purchase price. So maybe that $300,000 house is really a $350,000+ house. Just a tidbit that I’m throwing out there.

    • SS4BC says:

      Yes, I did consider this! Also, when you buy in cash you’ll be getting a NEWER house (presumably) then you would if you bought it 15 years ago with a mortgage. Which goes back to The Lost Goat’s comment about fixing and painting everything.

  5. Carrie says:

    Very interesting SS4BC! I’ve thought along these lines for awhile – I get so angry when people tell me that I’m throwing away my money by renting, but I just want to say – oh yeah, how bout that $200K+ that you’re spending in interest, huh?

    Of course, there is that whole thing about earning equity in your home….but you’d be hardpressed to find someone where I live who’s house increased in value $200+ in 30 years.

    The way to go for sure is the 15 year loan. My bf and I have talked about how this is one thing we will budget for when we buy a house. *sigh* I would love to save enough money to buy a house in 100% cash…but of course I can’t force myself to live in an apartment for 10+ more years. 😦

    Great post!

    • SS4BC says:

      Oh yeah, the 10 years of renting is the kicker for sure.

      I’m not sure if I could do it in the size/affordability of an apartment that I have now. Of course having a double income where you’re BOTH contributing this amount could lower the amount of time you have to live in an apartment from 15 years down to around 7 or 8. And that I feel is a reasonable time frame.

  6. TMcImmy says:

    While I’m always in favor of math, I think I see a minor flaw in your thinking.

    I’m fairly sure your current apartment is not as nice as what a 300K house would be. Minimally, to be truly fair you should be comparing the cost of mortgage payments on said house to the cost of renting said house. At my current life stage, renting a 2br/1ba house with my girlfriend is totally fine. However, there’s no way we’ll be renting the same size house for the next 15 years!

    Cost of ownership is difficult to calculate, of course. Most people who buy a home want to buy furniture to put in said home. If you upsize from a 1br to a 2-3 br, that’s a lot of furniture you probably don’t have. Most people aren’t thrilled to be “Apartment by IKEA” in their mid-to-late 30s. Yeah, you can find some steals on craigslist. Property taxes are another big negative to property ownership.

    Of course, a bigger down payment is almost always a good thing in home ownership. It typically gets you a better interest rate, and those savings improve your credit score. It reduces your monthly payment or can slice years off the life of the mortgage.

    Children and college funds can also complicate things. Because of tax incentives for college funds (at least in the US), it is often beneficial to save the maximum amount of money in their fund rather than paying down the 5% mortgage faster. If you assume a 8-9% annual stock market return (a big assumption, I know, but a small child has a fairly long time frame for investing), you’re arguably making +3-4% on that money.

    But yes… bigger down payment good!

    • SS4BC says:

      Well, I think the general idea of living in a smaller place until you get a house is sacrificing for the short term to get something better in the long term. So I don’t think it is wise in the situation of trying to save for 100% down to live in a big place with a large payment. A smaller rent payment per month increases your savings and thus decreases the time until you can be in your new place.

      My piano teacher when I was a kid (her husband worked as a loan executor at the local bank) lived in a trailer park with her husband and two kids until they could put 100% down on their house. They stayed in a pathetically small, cheap place for many years when they first got married so that they could afford to buy their beautiful 3 bedroom house in a very nice part of town with 100% down. Granted, in my hometown a beautiful 3 bedroom house in a very nice part of town was only $120k at most – but they were only saving off of one regular salary.

      So I guess what I’m saying is that yeah, you may have to “suffer” with Ikea furniture and a small apartment through a time when “normal” people are getting mortgages – but if we all did what was “normal” then we would just take out an interest only loan and rack up tons of debt. I got into this debt because I wanted to live the life I wanted no matter the cost, and I think the same is true here – living the life you want means getting the nice house – even if financially it isn’t the right move to do.

  7. Can you believe I’ve never really even thought of this? The idea of a mortgage is so ingrained. I doubt I’d even be this patient – I feel kind of feel awkward now that a lot of my friends and coworkers are buying their own places, even though I don’t really want the stress of owning right now.

    • SS4BC says:

      Oh I hear you about the stress. I couldn’t imagine worrying about painting or fixtures or the water heater or the roof. For me, apartment living has more benefits than drawbacks (at least at this point in my life).

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