519-646-2222THE COST OF BUYING A HOUSE
Buying a house is not a good investment strategy and is a major transaction that should be entered into thoughtfully.
Assumptions:
1) I am buying a house with an agreed price of $300,000
2) I have a mortgage for the full amount
3) I qualified for the financing at 3% fixed rate over 25 years
What is it going to cost me?
First of all I have deal with the purchase price of the house (we are assuming that my down-payment was used up for legal fees and other conveyance costs) so $300,000 is what most people think of but let’s consider the rest of the cost:
Interest costs – over the first five years of your mortgage I will pay $41,608 in interest that is an average of $8,322 per year or $694 per month of after tax income just for interest payments. I will also have to pay $43,577 in principal payments which works out to be $8,715 per year or $726 per month.
If I never add new money to my mortgage and make regular monthly payments for the next twenty five years my $300,000 house will have cost me $425,920 plus maintenance costs, and taxes and utility costs.
What happens when I renew my mortgage?
Based on the assumption that my mortgage renews after five years and assuming that interest rates have gone up to the 100 year average of 6% one of three things is probably going to happen:
1) I renew the existing outstanding principal for the remainder 20 year amortization; or
2) I renew for twenty-five years in order to control my monthly outflow; or
3) I add new money to the mortgage to consolidate some debts.
So in the first scenario I will pay another $181,868 in interest added to the $41,608 already paid, as well as the original $300,000 for the original purchase resulting in me paying a total of $223,476 in interest charges or $523,476 for the house.
In the second instance I pay a total of $235,760 in interest payments which are added to the $41,608 already paid and when coupled with the original purchase price of $300,000 my house will cost me a total of $577,368
Our final scenario assumes that I have refinanced for $300,000 over twenty five years at 6% and if I did so I would pay $275,826 in interest plus the $41,608 already paid for a total of $317,434 in interest charges plus the principal amount of $300,000 and the reconsolidated amount of $43,576 totalling $661,010 (for my $300,000) house.
t what point does the cost of buying roll into a breakeven scenario? It doesn’t, And by the way I don’t own the house (even though I am the registered owner) until I have made the last mortgage payment. When we add inflation into the mix the cost of ownership increases exponentially.
Unless I am going to pay off my 25 mortgage aggressively over say a 15 year term, buying the property is transfering my hard earned money indirectly into the hands of someone else, someone much richer than I am or likely will ever be.
Don’t just look at the nominal price change – consider the impact of inflation – my $300,000 house (today) was not only worth $128,750 in 1982 – it was worth exactly what it is today! The value did not increase.