Response Crafting

Having a Mortgage is Throwing Money Away

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Let’s take two people, Person A and Person B:
Both are 22 years old and just graduated from college.
Both just got a job earning $45,000 per year.
So both have a “housing budget” of about $1,000 per month.
Their salary and housing budget, for the sake of simplicity, will never increase.
Both ultimately want to own a $200,000 home.
And both will make 5% on any money they invest.

Person A wants to buy the house as soon as possible. To do this, he has to save a down payment of $40,000 (20% of his $200,000 home.) He rents an apartment for $500 a month and invests the other $500. Earning 5% on his investments, it takes just under 6 years to do this. So, at the age of 28, Person A takes out a 30-year 4.5% mortgage for the other $160,000, and now allocates his entire $1,000 housing budget toward his mortgage payment.

Person B, on the other hand, wants to buy the house with cash. To do this, he has to save the whole $200,000, which will mean renting for a lot longer. He too finds an apartment for $500 a month and invests the other $500 until he has built up a balance of $200,000. Earning 5%, it takes just under 20 years to do this. At the age of 42, Person B buys the house with cash.

So… Person A will own his home free and clear, as promised, at the age of 58, when his 30-year mortgage is paid off.
He will pay roughly $150,000 in interest and $75,000 in taxes over the course of 30 years.
Much of this can be written off, which is why many folks don’t consider…

Person B will also own his home free and clear, but he’ll do it at the age of 42.
He’ll pay $0 in interest to the bank during that time. (And doesn’t need to write it off.)
He can also spend the 20 years following that doing it again.

What this really means is: when they’re both 62, while Person A has paid off his mortgage and fully owns his home,
Person B fully owns two.

Still think it’s fair to assert that renting is “throwing money away?”

Bankers and real estate brokers sure would like you to.
(Who, exactly, do you think perpetuated that belief to begin with?)

Now, if this concept sounds good to you, you should understand one very big stipulation: Person B invested the other half of his budget, and he did it each and every month. He didn’t go buy a new TV or tons of shoes. He definitely didn’t start renting an apartment that cost $1,000 per month. He was disciplined. Some of us aren’t that disciplined, and wouldn’t save the other half of our budget. Some would end up spending the other $500, and when they retire, they’d have nothing to show for 40+ years of work.

Here’s the secret: that is who mortgages are for.
So: which type of person are you?

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