By the title of this blog many would get the impression that I don’t support mortgages. I do understand that they may be necessary. I have two different view points on this topics
View 1 – Take a Mortgage
This is the more traditional option. You generally pay a down payment of 20% and the rest is paid over 30 years. The only issue with this option is the amount of interest paid.
A $100,000 with a down payment of $20,000 would leave an $80,000 loan. At a 5% rate the amount of interest paid over the life of the loan would be around $74,600 according to mortgage-x.com. So now the house has costed around $174,600, in addition to the fees and charges of getting a loan.
View 2 – Save and pay cash starting small
To really stay out of debt you should start small. Where I live there are some fixer-uppers that are $20,000. Instead of having a down payment you own the house. During this time the payments you would have paid (about $400) could be put in savings. After five years you would have $24,000 in savings. If your house didn’t loose much value you could now upgrade to a $40,000 house, assuming you wanted to. Another five years and the same story, now we are up to over a $65,000 house. You can see where I’m going. About seventeen years after buying the fixer-upper you can now have the $100,000 house without a loan.
Positives and Negatives of each
- Start out in house you want
- Take interest deduction on taxes
- Pay out almost as much in interest as the loan amount
- Paying bank for 30 years
- Could become upside down on mortgage
- You own house outright
- No interest paid, you get interest from the saving account
- You don’t start in your dream house
- The value of the “step houses” could tank
This is over simplified but the big issue with View 1 is the interest paid and the big issue with View 2 is the value of the houses you buy in between the two could tank. One Potential solution is to stay in the starter home, so there isn’t to much to loose.
While other people may chose renting, it is a personal choice. While I cannot blame someone for picking View 1, I am going to try View 2. I would like to know your personal opinion. Which view would you prefer, or would you rent?