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.