Dear Jake,
It's going to be a long time before you move out on your own, but I hope you read this letter before you contemplate buying your first mortgage house.
There's plenty of debate between renting and buying a house and there are pros and cons to both options, but when it comes down to it, I think mortgaging a house is one of the worst mistakes people can make. If you have millions in the bank, sure, buy a house. Buy three. But if you can't afford to buy a house in cash, I think it's wiser to rent until you can -- or at least until you can pay enough upfront that you don't get hammered in interest over the life of the loan.
I'm confounded as to why so many people buy into myths or conventional wisdom instead of taking the time to sit down and do some basic research in order to draw their own opinions, especially on matters of finance. I love when people -- some of whom are in our immediate family -- reflexively say, "You're just throwing away money when you rent!"
Oh, really?
The closing price on the house we live in today was $515,000. I'm not giving away any secrets; it's all part of the public record. It may not necessarily have been a bad deal in and of itself considering our waterfront location and the fact that we have almost an acre of land, but like any mortgage you have to put down about 20% to avoid penalties. I think we put down $125,000 after the sale of our first house, but let's just call it $100,000. So our mortgage is right around $400,000.
Due to the criminal concept that is amortized interest, over the life of a loan you more than double your mortgage number by the time you pay off the loan. But let's just say we pay our mortgage off a few years early and "only" pay another $400K in interest on top of that. That, plus the $80,000 or so we dropped renovating a 50-year-old house right off the bat, and we're already looking at a commitment of -- wait for it -- ONE. MILLION. DOLLARS.
Probably already more than we'd even get back after accounting for inflation if we sold in 30 years. But if we actually want to do fun stuff like, oh, make it look like an actual house instead of a concrete bunker and put on a new roof (which is inevitable anyway) and siding, or replace the sunroom which is a must, or add a front porch to really control water seepage to the basement, or pour a concrete driveway so it's not a mud pit, you're looking easily at another $300K. And let's not forget about the pier and bulkhead, which are already in need of replacement -- that's easily another $50K (we've already priced that out).
Assuming you don't have a wad of cash in the bank, you can tack that right onto the $1 million price tag we've already got. But I'm broke so what does any good American do? Finance it! So after interest you're looking at probably another $600-700K just to get the house to the point where you'd actually like to call it home. So I think that puts us right around $1.7 million over the life of the loans!
What was my suggestion two years ago? To rent. At least for five years to see how the volatile housing market would respond to the recession, but ideally to use the money we ended up putting down on the house to instead invest in something that would actually make us money -- and then to have the ability to save at least 1000 bucks a month toward future construction if necessary. Or investments. Or, well, does it really matter now?
Sure, you would spend about $900K just in rent payments over 30 years (assuming a fairly liberal estimate of $2500/month over 30 years). But is owning a house after 30 years worth DOUBLE that amount?? (because, after all, all you really own PRIOR to that is a mortgage). I say no. Especially because NONE of those mortgage payments takes into account all the additional money you spend at Home Depot every month, or on cutting down trees, or on seeding your lawn, or all the time and stress associated with owning a mortga.. er, house in general.
So, in contrast to those fine folks who argue that you're just throwing away money when you rent, I prefer to consider all the money you can SAVE by renting -- in our case, $800K (!!!) on mortgage loans alone over their duration -- that could be incrementally banked year by year and put to work for us instead of a bank.
The truth is, we are all essentially slaves to the banks. When I was your age most people lived in 1,500-2,000 sq. ft. houses. If you had two toilets you were lucky (your grandma and grandpa's house had one toilet in addition to a litter box and an outdoor shed wall that got plenty of use when Grandpa spent an hour at a time in the bathroom). Interest rates were around 15%, which generally reflected true market rates and thus accounted for much more responsible investment on the part of both banks and homeowners.
These days, however, it's like everyone has a natural right to live in a 4,000 sq. ft. house. Banks work in tandem with the federal government to artificially lower interest rates under the guise of "stimulating the economy," all in exchange for taxpayer-funded bailouts when the bottom falls out after homebuyers realize they've overextended themselves by financing every last dime a bank will give them.
It's all a game. And the winners and losers are almost never in question.
But back to us. There were several reasons Mommy and I decided to sell the house we built in 2002, namely to move closer to our jobs and to get a bigger yard for you (and, subsequently, Rex). We just missed selling the house before the country realized the housing crash was inevitable, but we nevertheless made out very well on the sale. Because we only lived in the house for six years, we were able to cash out prior to losing a ton of money to interest payments. Even though I was very nervous and hesitant to sign on to this loan, your mom convinced me that this would be an investment, and it turned out she was right.
But the economy is an entirly different animal now and, more importantly, economic and financial principles are still the same. Just because you make money on one "investment" doesn't mean your next one is guaranteed.
While perhaps not ideal, another suggestion I had after the sale was to move to a place like Tennessee where property is much more affordable and buy a house almost fully in cash with the money we made off the first one. But like I told Uncle Brian recently while we were sitting in his driveway drinking beer: Two years ago I had a quarter million bucks in the bank; today, I'm essentially a million bucks in debt.
And counting.
Love,
Daddy
Comments