Long term costs of a mortgage

[anotherAlias]

Things are a little slow today at work so I've been daydreaming about buying a home again (used to own, but currently rent closer to work).  Being the spreadsheet geek that I am, I ran the numbers on three scenarios and am really surprised by the results.  Do these numbers look right to you guys or am I missing something in my analysis.  The scenarios are 1-buy with traditional 80% mortgage, 2-save up and buy with cash, 3-rent forever.  Here are the assumptions I'm using:

*5% return on invested savings
*60 yr total time frame
*Owning would allow for saving 631/mo with mortgage and 1105/mo when it's paid off
*Renting would allow for saving 1012/mo
*Renting and owning expenses would increase at the same rate, so I ignored that
*23K current savings (initial balance or downpayment depending on the scenario)

Buy with mortgage

	Mortgage
Beginning Balance	0
Years	30
Monthly Deposits	631
Ending Balance	525,155.20

Rent until can pay with cash (assumes house costs 35K more than buying today)

	Rent	Own-no mortgage
Beginning Balance	23,000	45,026.89(157,145.67-150,000)
Years	10	20
Monthly Deposits	1012	1105
Ending Balance	95,026.89	576,494.25

Rent forever

	Mortgage
Beginning Balance	23,000
Years	30
Monthly Deposits	1012
Ending Balance	945,003.86

**ETA Duh, after I posted I saw my error.  I wouldn't be saving for 60yrs.  When I cut that back to 30 yrs the numbers change a bit, but still interesting.
***Edited again because beginning balances weren't being included in the bottom 2 calcs

[rubybeth]

I really like Michael Bluejay's Rent vs. Buy calculator for this kind of thing: http://michaelbluejay.com/house/rentvsbuy.html

There are lots of things you can play around with. You can change the options to have it show you results for 40 years. In our scenario, this is what it tells me if I change the parameters to "over 40 years":

"Buying becomes profitable in year 9. But oddly enough, renting becomes a better deal in later years. (Scroll down to see the huge table.) Not only is renting a better deal than buying in this case, but by renting you'd basically live for free, since the return on your investment is more than you'd spend in rent. (This assumes that you invest the difference between renting and buying.) If you rent and religiously invest the difference between what you would have paid for a house and what you're paying in rent, you can earn a return of $863,805 (after taxes). This helps make renting a better deal."

[brandino29]

Are you assuming your rent will stay the same for 30+ years?  You're unlikely to find a place that you can rent for the same amount for the next 30 years, but if you get a 30 year fixed mortgage, you know that 30 years from today that your $1,000/month mortgage will remain $1,000/month (or whatever that amount is).

Assuming 3% inflation, your mortgage 30 years from now would be the equivalent of about $400 in today's dollars, while $1,000/month rent will be about $2,500/month. 

[SnackDog]

Have you forgotten -
Property taxes
Mortgage and property tax deductions
Maintenance
Insurance
?

[anotherAlias]

Branding, I was assuming that property taxes and insurance would increase by about the same rate as rent increases.

Snack dog, all of those expenses were accounted for in my monthly expense numbers except the tax deductions..which wouldn't be that big of a difference

[rubybeth]

The thing I like about the Michael Bluejay calculator is that it lets you add in expenses in the line "Maintenance (annual)." I think this is probably the main hidden cost of renting vs. buying, but so many people just look at the monthly payment for a house vs. rental and forget that renting, while the price goes up annually, involves zero maintenance costs. Burst pipes, dead major appliances, new roof, etc. - there's no such thing as a maintenance-free property.

[Dicey]

Branding, I was assuming that property taxes and insurance would increase by about the same rate as rent increases.

Snack dog, all of those expenses were accounted for in my monthly expense numbers except the tax deductions..which wouldn't be that big of a difference

Sorry, you may be wrong on both counts.
1. Assuming a fixed rate mortgage, your taxes and insurance are highly unlikely to increase as much as your rent will.
2. The tax deductions do make a difference, especially when you're just starting out.

Other considerations which rarely get discussed:
You will be repaying your mortgage back with inflation-adjusted dollars. Your income is likely to increase over time, while your mortgage payment will not. It will take fewer of your hard earned dollars to pay the mortgage in the future than it will to pay the rent. For fun, google what $1000 would buy ten or even twenty years ago. Inflation is a powerful force. Home ownership with a fixed mortgage is one way to combat it.

Next, owning your home requires you to focus on your expenditures so that you actually have the money you need for maintenance, taxes, etc. In my opinion, this can help keep you from blowing money on frivolous things and channels your dollars into an appreciating asset. Yes, there may be downturns in the market as we've recently experienced, but with time, real estate tends to appreciate at least on pace with inflation and possibly more so.

[anotherAlias]

Diane c, maybe rents increase more dramatically in other areas but having rented and owned over the past 20 years in my area, I know that my rent has never gone up by more than 60/yr which is roughly the same as the tax and insurance increases that I had when I owned.

I'll have to run the numbers factoring in tax deductions.

[Johnny Aloha]

Sanity check your spreadsheets with the NYT buy vs rent calculator: http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0

You can adjust the assumptions in the 'advanced' tab.  This is the best one I've seen.  Good luck!

[mrigney]

@justchristine my taxes and insurance have never gone up $60/month in a single year since owning (5 years). Is that common other places?

[anotherAlias]

Not 60/mo, 60/year. 

[Dicey]

I don't know where you live/rent, justchristine, but I just read an article on MoneyWatch today stating that rents were up 11.4% overall last year. They further opined that due to the difficulties in obtaining mortgages, more people would be renting longer, putting continued upward pressure on rents. As an owner, I may have to worry about taxes, insurance and maintenance, but I don't have to worry about increasing rents or an owner who decides to sell my home.

Here's a very rough example of the effects of a 10% rent increase vs. tax, insurance and maintenance increases. The numbers I used are simplified for clarity.

Rent:
Annual rent: 12,000. 10% increase: $1200
Total annual increase: $1200

Own w/ fixed rate mortgage:
Principle payment stays the same.
Annual Insurance: $800. 10% increase: $80
Annual Taxes: $2000. 10% increase: $200
Maintenance costs: $1000. 10% increase: $100
Total annual increase $380

Over a period of years, those differences can really add up. Plus, I can paint my house any damn color I want.

[sdp]

Just to throw it out there.......
Even with a tax deduction from my interest payments on my mortgage, My wife and I don't spend enough to match the standard deduction on our taxes, so it doesn't help us out at all.
Cheers,
Scott

[sdp]

Do your numbers include the net worth including the house? or just the cash balance of your liquid assets?  If not the net worth of the house, what would your cash balance at the end of 30 years be when you buy the house now and then sell it and start renting from there? 

[Dicey]

Just to throw it out there.......
Even with a tax deduction from my interest payments on my mortgage, My wife and I don't spend enough to match the standard deduction on our taxes, so it doesn't help us out at all.
Cheers,
Scott

Good point, Scott. I live in a very high COLA. The last time I had a payment of $1000 for a house (per the example above) was in the late eighties. Boy, I didn't know how "easy" I had it back then.