Author Topic: Buying a home instead of renting (Interest only mortgage)  (Read 5351 times)

immocardo

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Buying a home instead of renting (Interest only mortgage)
« on: February 27, 2015, 01:31:11 PM »
One of the books on finance that I just finished reading raised a very interesting point in my mind.  I have always been put off by renting, by essentially throwing money away with 0 return so my question is this.

I would like any responses to remain at a high level please.  I realize this is an incredibly complex issue and depends on quite a few market factors so I'll try to lay out my assumptions.

Assume I pay 1,000/month + Utilities renting.  Instead of continuing this money black hole I get a mortgage that will be interest only.  0 Down payment.  (The interest rate does not matter)

The money that was used before will cover The mortgage+interest+small home repairs.  Basically assume a wash in terms of expenses, if you are having trouble this, just remember that the value of the home is flexible.

By owning a home I will now qualify for the mortgage interest tax deduction.  This effectively decreases my monthly "rent" payment by 25%.  The assumption here is that I itemize and I'm already beyond the standard deduction so I will gain 25% of every dollar in mortgage.

Also, I now have the option of renting out extra rooms in my house for additional cost (something that typically can not be done in an apartment)

I can remain in this home for as long as I would otherwise be renting and any appreciation can be taken as "profit" when I eventually sell.

Besides a decreasing value of the property, or a major repair that is needed, is there anything major I'm missing here?

Please don't point out things like "you are going to have to pay for lawn care".  I realize those are associated with owning a home vs living in an apartment, but I'm more interested in big picture here.

TL;DR:  Buying a home and making interest only payments instead of throwing away rent money every month.  What major problems can you see with this?

Thanks! (This is not something I'm necessarily considering doing, but would like some feedback)

AccidentalMiser

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #1 on: February 27, 2015, 01:45:31 PM »
I don't hate the idea of buying IF you are going to be in the same place for several years and IF you are willing and able to rent out some rooms for income and IF your area is healthy and growing. 

I do hate the idea of an interest-only loan given the current mortgage rates which are so low I'd almost consider buying another house.  The amount you'll save each month isn't that significant and when your ARM period expires, you'll be faced with refinancing at an almost certainly higher rate.


AlexK

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #2 on: February 27, 2015, 01:53:09 PM »
I agree with you but some things to think about:

Sometimes interest costs more than rent due to high purchase price.

Sometimes properties go down in value. A lot of people I know got burned on that over the last decade.

Also are you really above the standard deduction without mortgage interest? I have never been able to do that.

Don't forget property taxes, insurance. Those aren't trivial expenses.

If there is a flood or earthquake you're screwed (normal insurance doesn't cover it).

Here is a good rent/buy calculator:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=1&abt=0002&abg=1

immocardo

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #3 on: February 27, 2015, 01:54:20 PM »
What would you define as "several years" 3-5 range, or 10+ range?

My struggle with getting a typical mortgage (and down payment) is that the money I put in the house as a down payment will sit there and do nothing for me.  Equity tied up in the house doesn't have a % return when compared to 0 down payment, and any months that are spent saving for a down payment are months that rent money is effectively being thrown away.

On top of that, paying down the balance of my mortgage will only increase my tax liability

immocardo

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #4 on: February 27, 2015, 01:59:37 PM »
I agree with you but some things to think about:

Sometimes interest costs more than rent due to high purchase price.

Sometimes properties go down in value. A lot of people I know got burned on that over the last decade.

Also are you really above the standard deduction without mortgage interest? I have never been able to do that.

Don't forget property taxes, insurance. Those aren't trivial expenses.

If there is a flood or earthquake you're screwed (normal insurance doesn't cover it).

Here is a good rent/buy calculator:
http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=1&abt=0002&abg=1

-The home going down in value is definitely the number 1 concern in this scenario.

-Property taxes and insurance are also a consideration that would have to be factored into the monthly payment/rent

-Luckily Wisconsin is one of the most disaster friendly areas

On the standard deduction point in my current scenario I would be below it before mortgage interest, but for the sake of simplicity I was considering that situation.  Since the money is being thrown away on rent it matters more that there is a benefit rather than a specific dollar amount

FrugalEE

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #5 on: February 27, 2015, 02:29:47 PM »
Quote
I have always been put off by renting, by essentially throwing money away with 0 return...

This idea is no more true than saying "I have always been put off by buying food, by essentially throwing money away with 0 return..."

You need a place to live and there will be an associated cost for that property whether you are renting or buying.  When renting the cost is simply your rent plus utilities.  When you own a house the cost is more complex and includes:

  • Mortgage Interest
  • Utilities
  • Taxes
  • Maintenance
  • Insurance
  • Closing Costs on the front and Backend
  • Opportunity cost of money tied up in house

There are also non monetary costs to owning a house such as a loss of flexibility and time spent maintaining a house.  In some cases renting is better and in some cases owning is better.  There is no universal truth here.

netskyblue

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #6 on: February 27, 2015, 04:52:05 PM »
This assumes you can afford to make payments on the home you want, with 100% financing.  I know in my case, I can't.  That's the sucky evil trap of renting.  I will need to put over 30% down in order to have a mortgage/taxes/insurance payment that's just a bit lower than my rent (lower because I'm accounting for increased utilities & most likely gas costs).  On a modest 2br 1-2 bath ~1000 - 1300 sq ft.  And not in the trashy, crime-y part of town.

And saving that up while still paying rent takes foreevvvvverr!

SaintM

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #7 on: February 27, 2015, 05:16:11 PM »
The problem I see with this scenario is that you transfer risk from the landlord to you.

Benefits:
-  Tax deduction if you itemize (must compare the interest - deduction in excess of the standard deduction versus the rent you were paying)
-  The appreciation, if any, is yours
-  You can turn all or part of it into a rental

Disadvantages
-  There are tremendous transaction costs for real estate.  When I bought my last rental, I watched the reaction of the sellers as they realized they were going to split $500 each, due to divorce, in proceeds on a house they owned for 4 years...they were pissed.
-  As mentioned earlier, sometimes houses go down in value
-  You are now responsible for all repairs
-  You build no equity except through appreciation
-  You can't easily get out of the situation if your circumstances change

Another Reader

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #8 on: February 27, 2015, 05:18:51 PM »
Between this thread and the margin loan financing thread, I'm convinced the mania is back and another bubble is forming.  Must be time to sell everything!

If all your assumptions are correct, you would be renting the house from the bank and getting tax deductions to do so.  If the market goes up, and your timing is good, you might win the game and sell to a greater fool.  At some point the market will go down and you won't want to rent any longer.  Alas, the rental contract is really a mortgage albatross because you have run out of greater fools.  A short sale or foreclosure will follow, and the financial damage will far exceed the value of the profits you made.

MGeegs

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #9 on: February 28, 2015, 04:21:50 AM »
Why do I feel like I've read this already? Did you post on reddit?

Damn I should spend less time reading about this stuff
« Last Edit: February 28, 2015, 04:25:09 AM by MGeegs »

lostamonkey

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #10 on: February 28, 2015, 04:41:22 AM »
Quote
I have always been put off by renting, by essentially throwing money away with 0 return...

This idea is no more true than saying "I have always been put off by buying food, by essentially throwing money away with 0 return..."

You need a place to live and there will be an associated cost for that property whether you are renting or buying.  When renting the cost is simply your rent plus utilities.  When you own a house the cost is more complex and includes:

  • Mortgage Interest
  • Utilities
  • Taxes
  • Maintenance
  • Insurance
  • Closing Costs on the front and Backend
  • Opportunity cost of money tied up in house

There are also non monetary costs to owning a house such as a loss of flexibility and time spent maintaining a house.  In some cases renting is better and in some cases owning is better.  There is no universal truth here.

I agree, but I would also include CMHC (PMI in the States) fees in my calculation.

mrmiyagi

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #11 on: February 28, 2015, 10:39:52 AM »
I'm no expert, but I do own a house. I think the biggest thing you're forgetting are the transaction costs of buying/selling real estate. You should plan on paying 7-8% of the home's value in closing costs when you sell. (Maybe only 4-5% if you sell by owner, but that's a different discussion)

So, when you buy a $200K home with no money down, you are instantly -$15K in equity. And since you aren't paying your loan down, the only way you're getting out of that hole is via appreciation.

I also think you're probably underestimating the cost of maintaining a home, but this may vary depending on the age of the house, your handyman skills, etc.

It's possible this could work out, if you get major appreciation or if you can get roommates who essentially pay that interest for you. But, I think it's a pretty risky move for not very much benefit.

bacchi

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #12 on: February 28, 2015, 10:56:45 AM »
Between this thread and the margin loan financing thread, I'm convinced the mania is back and another bubble is forming.  Must be time to sell everything!

Pent up demand. All of the millennials are getting the house-buying bug.

Eric

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #13 on: February 28, 2015, 11:50:34 AM »
Between this thread and the margin loan financing thread, I'm convinced the mania is back and another bubble is forming.  Must be time to sell everything!

If all your assumptions are correct, you would be renting the house from the bank and getting tax deductions to do so.  If the market goes up, and your timing is good, you might win the game and sell to a greater fool.  At some point the market will go down and you won't want to rent any longer.  Alas, the rental contract is really a mortgage albatross because you have run out of greater fools.  A short sale or foreclosure will follow, and the financial damage will far exceed the value of the profits you made.

Exactly this.  You could be signing a financial suicide pact here to save a few dollars on rent.  It'd be better to just find a smaller or cheaper place and accomplish the same thing with zero risk.

Regarding renting in general, I'd propose changing your attitude.  You're not "throwing money away" on rent at all.  You're exchanging money for a place to live.  The realtor lobby spends lots of money to make you believe that the American Dream is owning a home and renting is worthless.  It couldn't be further from the truth.  For many people, buying is a poor option, because your house is a terrible investment.

tallen

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Re: Buying a home instead of renting (Interest only mortgage)
« Reply #14 on: February 28, 2015, 12:16:00 PM »
I recently purchased a home and am saving to buy a rental. I'm no expert but my advice is this: Learn to run the numbers and make sure your home would be profitable if bought as a rental-even if you plan on living there and have no intention of ever renting it out. That way you have flexibility, you never know what will happen and if your home is profitable as a rental you always have that option open.