Sunday, March 20, 2011

The Math Makes Sense

I posted on Thursday our plan to eventually buy a house without a mortgage. That's right. We hope to buy a house without ever getting a loan for it. That statement probably made a few of you think I was completely nuts. And there is an argument to be made that I am, but not about this. The math actually makes sense.

I have heard the argument that you should buy the house since renting an apartment is just throwing money away. Sounds logical. Sounds right. Have you ever done the math on it though?
I have.

Let's say you plan to buy a $150,000.00 house with a 20% down payment and a 30 year mortgage. That means you will finance $120,000.00 of the purchase and let's be generous and say you have 4.5% interest on your loan. That means that over 30 years, you will pay an additional $98,891.46 for the $150,000.00 house.

Now, if you rent an apartment for $1000.00 a month and save $2000.00 a month for your $150,000.00 house, it will take you 6.25 years to save for a house. In that time you will have paid out $75,000.00 dollars with absolutely nothing to show for it. Except...

$98,891.46 minus $75,000 equals $23,891.46. Or to put it another way, you will be making $3822.64 per year over the course of the 6.25 years that you save for your house. The math just makes sense.

But where do I get $2000.00 dollars extra per month. If you have read the post from Thursday you know that you do the house thing after you have paid off all your other debts that have been holding you back. For most folks, not making any payments to car companies, credit cards, or student loan organizations should get close to an extra grand or two each month. If you are patient for 6 years and 3 months, you can have a fully paid off house.

The more expensive the house, the more money you have to find from other sources. Remember though, you are going to pay extra on a 30 year mortgage and you need to do anything you can to avoid that. The money you save is your child's college fund or your retirement fund. Those things are worth being patient for, right? Doesn't it just make sense?

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