Hi everyone,
I am trying to understand what I think would seem like a basic question, but I honestly don't know the answer.
I am trying to calculate my savings rate. When doing so, should I include the portion of my mortgage that goes into the principle of my mortgage? It makes a pretty large difference in my savings rate, particularly if I pay extra on the principle, which I plan to do.
Separate but related question -- I've read on MMM site that one should typically think of housing not as an investment, but as an expense, including if you own. (See here:
http://www.mrmoneymustache.com/2011/05/11/the-elephant-in-the-room-housing/)
The argument as presented on the blog sounds reasonable. But then again, it sounds like it's premised on the notion that you'd buy the property outright in cash, no? If you're going in with say 15 percent down on a 370K mortgage (pretty much my situation, but all things considered it was cheaper than renting an equivalent property in the same area of town when factoring in tax savings, so made sense for me)... isn't that an investment? In that case, you're leveraged. If the total value of the house goes up at 2 percent per year, you've in theory made roughly $55K on an investment of $55K over 7 years. That's the equivalent of more than a 10 percent annual rate of compounding interest.
I realize there would be expenses in the event one sells, but I'm just trying to understand the concept, so let's set that aside for a second. And at any rate, I would expect where I live -- a bustling urban center that's been growing strong in recent years, to probably over perform the historical average.
Am I missing something about real estate? It's not a huge deal either way -- I did it because I like the place we found and it's in an area we love and I'm feeling pretty certain we're getting a better deal than renting. I just want to understand whether I should be thinking of the house as an investment to put more money into or whether to simply pay the minimum and set aside my savings in index funds. And to reiterate, I'm not really sure whether to count the money I put toward the house as savings or not.
And just in case folks are wondering, I plan to get to 20 percent equity within about eight months, so that issue is factored into my thinking.
Any thoughts greatly appreciated!