Author Topic: Mortgage payments count toward savings rate?  (Read 7471 times)

Shooter_D

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Mortgage payments count toward savings rate?
« on: July 20, 2014, 10:03:00 AM »
Hi All,

I'd appreciate some input! I'm currently renting and saving approximately 50% of my take home pay. I'm thinking of buying a house or duplex/triplex soon, but expect this will put a bit of a damper on savings for a bit. But, if I'm paying down my mortgage do I count this toward my savings rate (because it will increase my home equity), thus increasing my savings rate compared to what it is now?

Also, can anyone comment on how buying a house that is presumably more expensive than paying rent (allowing for a high savings rate going straight to investment accounts) changes or increases net worth? Houses in my city are valued so that my mortgage payments will be a few hundred dollars more than my rent now.

Thanks,

D

samburger

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Re: Mortgage payments count toward savings rate?
« Reply #1 on: July 20, 2014, 10:11:53 AM »
The first questions has been discussed a bunch on these forums. Here's a few threads to get you started:

http://forum.mrmoneymustache.com/ask-a-mustachian/savings-rate-calculation/
http://forum.mrmoneymustache.com/ask-a-mustachian/calculating-savings-rate/
http://forum.mrmoneymustache.com/welcome-to-the-forum/how-do-you-calculate-your-savings-rate/

On the second question, the consensus here seems to be that a house is not an investment so don't think of it that way. It's a lifestyle choice. In other words, assume it will negatively affect your net worth (or at least not increase it) compared to renting.

Shooter_D

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Re: Mortgage payments count toward savings rate?
« Reply #2 on: July 20, 2014, 10:47:06 AM »
It's interesting how the prevailing thought of most people I know is that houses are a forced savings plan and a valid source of retirement income. This doesn't hold true until you sell.

Thanks for the threads. I tried to search, but it didn't work. I'll check those out.

Cheddar Stacker

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Re: Mortgage payments count toward savings rate?
« Reply #3 on: July 20, 2014, 12:11:52 PM »
Principal portion of mortgage is absolutely savings.

I agree a house is really not an investment that will help your net worth (most of the time).

You should look at 2 things related to your finances when buying vs renting:

1) total rent vs total mortgage plus anticipated repairs. Typically the house will be much higher, although part of it is principal. However, the entire payment is negative cash flow that takes from your potential investing funds.

2) total rent vs. Non-principal portion of mortgage. This is an expense vs. Expense analysis which is important. If rent is cheaper, consider renting long-term or finding a cheaper house.

Also important are utilities, hoa fees, any other costs that might be higher with a house.

marty998

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Re: Mortgage payments count toward savings rate?
« Reply #4 on: July 20, 2014, 03:49:09 PM »
It's interesting how the prevailing thought of most people I know is that houses are a forced savings plan and a valid source of retirement income. This doesn't hold true until you sell.

Thanks for the threads. I tried to search, but it didn't work. I'll check those out.


IMO it does hold true, because it saves you from having to pay rent whilst you hold it.

Daleth

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Re: Mortgage payments count toward savings rate?
« Reply #5 on: July 20, 2014, 04:19:53 PM »
It's interesting how the prevailing thought of most people I know is that houses are a forced savings plan and a valid source of retirement income. This doesn't hold true until you sell.

I think it does hold true if you either (1) sell or (2) keep it after paying it off. If you keep it and no longer have a house payment, then it functions just like an investment in that it ensures a chunk of your living expenses are covered (i.e. free, in this example, because you no longer have a mortgage).

jabber

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Re: Mortgage payments count toward savings rate?
« Reply #6 on: July 20, 2014, 04:33:52 PM »
Your house, inevitably,  will be part consumption and part investment.  Also search The Finance Buff for "is imputed rent income?"

Your purchase decision will determine what proportion of your payment can be allocated towards savings and what proportion towards consumption.

Stay Mustachian, my friend.

Shooter_D

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Re: Mortgage payments count toward savings rate?
« Reply #7 on: July 20, 2014, 06:49:42 PM »
Thanks for the replies. If the right place comes up at the right price, or a good deal on an income property arises (which of course opens up another can of worms), I will seriously consider buying. Renting for now is doing the trick, but eventually we will want some more space and a bit more distance from the neighbours...My SO is a metal guitarist...

I can see the benefit of owning during retirement, and not having to worry to the same degree about the monthly housing expenses.

Is it possible to accelerate paying down the mortgage and still have some leftovers to sock money into investments? I suppose that's a personal one and will depend on the cost of the mortgage, income, interest rates, etc... It will be a big learning experience when the time comes I imagine!


Seņora Savings

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Re: Mortgage payments count toward savings rate?
« Reply #8 on: July 20, 2014, 07:35:00 PM »
Renting for now is doing the trick, but eventually we will want some more space and a bit more distance from the neighbours...My SO is a metal guitarist...

This isn't about renting vs. buying, it's renting a small place vs. buying a big place.  The two don't have to be connected.  Have you looked into what it would cost to rent a house similar to the type you want to buy?  IMO you'll almost never save money by consuming a nicer thing.

milesdividendmd

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Re: Mortgage payments count toward savings rate?
« Reply #9 on: July 20, 2014, 08:03:18 PM »
Renting for now is doing the trick, but eventually we will want some more space and a bit more distance from the neighbours...My SO is a metal guitarist...

This isn't about renting vs. buying, it's renting a small place vs. buying a big place.  The two don't have to be connected.  Have you looked into what it would cost to rent a house similar to the type you want to buy?  IMO you'll almost never save money by consuming a nicer thing.

I count principle payments as savings because my house will be paid off by FIRE. Owning the house will mean that my single highest expense (mortgage) will disappear. Plus the house should have appreciated by then.

My net worth, after all, increases by the exact amount of my principle payment each time I pay my mortgage.



rmendpara

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Re: Mortgage payments count toward savings rate?
« Reply #10 on: July 20, 2014, 08:13:30 PM »
Hi All,

I'd appreciate some input! I'm currently renting and saving approximately 50% of my take home pay. I'm thinking of buying a house or duplex/triplex soon, but expect this will put a bit of a damper on savings for a bit. But, if I'm paying down my mortgage do I count this toward my savings rate (because it will increase my home equity), thus increasing my savings rate compared to what it is now?

Also, can anyone comment on how buying a house that is presumably more expensive than paying rent (allowing for a high savings rate going straight to investment accounts) changes or increases net worth? Houses in my city are valued so that my mortgage payments will be a few hundred dollars more than my rent now.

Thanks,

D

Sort of. The principal portion of your mortgage can be thought of as an asset transfer (cash to home equity) while the interest is... interest.

The issue is that home equity is sort of a pseudo-asset. It doesn't appreciate to the same degree as assets invested in the markets, though over the long-term, you can probably count on a 2% or so annual return.

A home is, in descending order:

1) A place to live
2) Store of value (read: not an investment)
3) Hedge against rising rent

It's a good way to build wealth, but not in the same way that other investments build wealth.

The way I like to think of it is this. If I find myself at age 50 renting my primary residence for $2k/mo, and if I could buy a home for $400k in cash (or selling some investments) which would bring my monthly expenses to tax/ins/maintenance reserve (exclude utilities as you have those everywhere). In this case, let's assume tax/ins/maint. is $750/mo, so I'm "saving" $1.25k/mo ($15k/yr).

I see that as my return on investment. A reduction in primary home living costs which financial works out to around 3.75% (15k savings / 400k investment).

Whether you pay for that home in cash, or build the equity by paying down your mortgage, the future savings are definitely there, and a *almost* guaranteed 3.75% return is solid in my book... at least at that point in my life.

I greatly look forward to the day when I no longer have to write pay a landlord every month and instead get to add a little more to my real investments.
« Last Edit: July 20, 2014, 08:17:08 PM by rmendpara »

Shooter_D

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Re: Mortgage payments count toward savings rate?
« Reply #11 on: July 20, 2014, 08:34:10 PM »
@Senora: I'm expecting some change in cost from renting to buying, and I realize buying will be more expensive. I have looked into what houses rent for in the area. The main reason I am looking to buy instead of rent forever is to pay towards an asset instead of paying rent to someone else.

@miles: I like the idea of being rent-free in the future when looking to retire. I would also like to count principle payments toward my net worth/savings rate.

@rmendpara: Thanks for breaking it down like that. Thinking in terms of ROI is helpful.

I do expect to have to pay more toward a mortgage and house-related expenses than rent, just wanted to know how others factor in the fact that they are paying into an asset, even if it is less liquid than an investment account or something. Quite a few of you have addressed that, and thank you for that! I am thinking that my initial savings rate may be lower than now, but after continued payments toward the principle, the rate would approach what it was during renting, or become higher. That's not to say I want all of my savings to go toward my house, but I expect what I pay now in rent to be shifted toward paying down a mortgage that is in a similar ballpark.
« Last Edit: July 20, 2014, 08:37:48 PM by Shooter_D »