Author Topic: Home Choice Analysis Help  (Read 1153 times)

RhodyUNC

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Home Choice Analysis Help
« on: August 30, 2015, 06:03:18 PM »
The wife and I have just moved to a new town and are considering various housing options.  We've looked at fixer uppers from the 60s to new builds in new urbanism neighborhoods.  We've seen a $500k house that's amazing (energy efficient, views, abuts a park) and a $300k split level that would be pretty cramped for us and the 4 kids but is cheap, has four bedrooms, and minimizes commuting.   

Since we could pay off the $300k house in 10 years I wondered how much extra would it cost us to own the $500k house over that time.  The attached spreadsheet tries to take into account the extra property taxes and interest.  It also counts the opportunity cost of that money as well as the opportunity cost of the extra $40k on the down payment. 

I come up with an average cost of $10k a year to own the bigger house.  To me this means that I'm paying $10k a year that I'll never see again for the pleasures of the bigger, nicer house. 

Thoughts?  Adjustments I need to make?  Is this the right way to think about this problem? 

Thanks!


MDM

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Re: Home Choice Analysis Help
« Reply #1 on: August 30, 2015, 06:31:42 PM »
Thoughts?  Adjustments I need to make?  Is this the right way to think about this problem? 
Looks pretty good - nice work.

Appears the interest cost differences may be overstated.  Looks about right for the first year, but as the principal gets paid the interest costs decreases.  Eventually the only annual differences for the houses themselves are the property tax (definitely higher for the more expensive house), utility costs (which will be higher?) and maintenance costs (again, which...?).  You could consider annual commuting cost differences if they will be significant (and predictable) enough, and you have already covered the opportunity costs.

RhodyUNC

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Re: Home Choice Analysis Help
« Reply #2 on: August 30, 2015, 06:59:55 PM »
Thanks! 

That's a good point about interest costs.  The interest costs don't decline in the spreadsheet because I'm just calculating the interest on the $200k above and beyond the baseline house.  We couldn't touch that principle in a 10 year time frame (which might mean we shouldn't buy it :-). 

That said, your point brings up a hole in the thinking.  For either the pricey or the cheap house, the interest to principle ratio on the base $300k would change over course of the 10 years.  At the 10 year mark the $300k house would be paid off and we would have paid ~$46k in total interest (using an amortization calculator).  At that same point the $500k mortgage would still have 20 years left on it and we would have paid ~$130k in interest with $130k in interest left over the remaining 20 years.  So I'm thinking the difference is more like $20k a year than the $10k a year in the spreadsheet.  Agreed? 

MDM

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Re: Home Choice Analysis Help
« Reply #3 on: August 30, 2015, 07:15:03 PM »
That's a good point about interest costs.  The interest costs don't decline in the spreadsheet because I'm just calculating the interest on the $200k above and beyond the baseline house.  We couldn't touch that principle in a 10 year time frame (which might mean we shouldn't buy it :-). 
Often a good way to approach these "either this or that" problems:
1) Pick a total annual amount of of money
2) Split it among your options.  E.g., mortgage payments, investments, house operating costs.
3) Track things from year to year
4) Do this for the two different houses, so there will be two sets of columns (assuming each year is a different row): one set for each house.
5) Continue at least until each house is paid off.  If you can pay one house faster, that means more of the total annual amount is available in subsequent years for investment.
6) Compare results.