I agree it is forced savings, but I would think a home is an important part of a retirement portfolio. The ability to live rent free, or to sell and move to a smaller home once the kids move out, or even a reverse mortgage are all great options and much safer than the stock market.

But the OP is right only if you use 0 down 25 year monthly amortization. Complete waste of cash. People should aim for better, say 25% down, 15 year bi-weekly.

Rent where I live is equal to the cost of a first mortgage on the property. If the property owner put 40% down on the property, then they are making money on the rental. That is good debt. in this scenario, someone who has to take out a first and a second on a property is going to pay significantly more per month to own than a 40% down buyer. Renting is probably a better idea.

There are all sorts of variables that could totally invalidate that last paragraph. Interest only loans, down payment on a home vs that same money in a portfolio, bad property market, bad rental market…I think the best take away points of blog and comments are these:

Your home is not an investment, it is forced savings.
Live within your means. Understand that “means” does not equal “the largest burden your paycheck can bear”

What I would love to see is an article about how to estimate optimal rent/car/savings/investment ratios.

Mortgage debt is good debt and I will explain why. While you are quite right to suggest that a home is not an investment and that the total costs of home ownership are much more than just the mortgage, a home for most people is a great forced savings plan. Even if home prices just manage to keep up with inflation as you suggest you are still better off than renting.

To use your example, assume that the inflation rate averages 3% over the 25 years. That means all else being equal your $325,000 home would be worth just over $680,000. The total cost of the house plus the interest payments, by your calculator, is just over $658,000. Therefore you have basically capitalized your interest payments as you will get them all back when you sell. At this point you are roughly $22,000 ahead.

Lets assume that property taxes and maintenance will cost about $200,000 over the 25 years ($5,000 intital guess adjusted every year for the same 3% inflation rate and then rounded up to the nearest $100k). I neglect house insurance as it is insignificant to total cost. The net cost of the house over the 25 years is therefore approximately $178,000 which averages just under $600 per month. That handily beats the assumption of the $1,000 per month rent.

I’m also scared of debt (it gives me the serious heebie jeebies!) but I have to admit, there are a couple areas of debt that don’t haunt me quite as much. I actually refer to them as “good debt”. :O

The 1st is two rental properties that we own that are, and always have been cash flow positive over the course of the years. The other is our margin account where the dividends received are greater than the interest paid. This debt doesn’t seem to bother me.

The home mortgage though, that bothers me. We have a pretty tiny mortgage (to go with a pretty tiny house ) that will be paid off within 10 years of purchase and your mortgage calculator tells me buying will surpass renting after 5 years. Since we’re at 4.5 now, I don’t feel too bad about this one.

We own and live in a 3,300 sqr ft fully developed 3 year old house that is worth $550,000.00 at current values.

It is fully loaded with Air Cond, Brazilian Cherry hardwood floors, Stainless Steel applicances, 5 bedrooms, and 4 bathrooms etc.

It’s a great house in a great location within 15 minutes drive of downtown.

We pay $1,350 per month on an interest-only mortgage that never needs to be paid off. (Think of what time and inflation will do to the principal over the next 40 years. Similar to buying a house in the 70′s for only $50,000.00. Time murders principals.)

We also benefit from the 3-4% annualized growth of the value of our house over the next 40 years.

Our property tax is $200.00 per month.

Insurance is about $60.00 per month.

Maintenance is about $100.00 per month.

Now I know that interest rates may go up but even if they do, I think we are still better off than a renter.

What renter could match this scenario?

Who is better off here?

A renter or us?

university education, home-buying, and starting one’s own business are all situations where taking on debt can immediately and significantly improve one’s “balance sheet”. of course, some careful shopping is in order before making such decisions.