Why are mortgages so expensive?
Investor · Miami, FL · Member since 2016 · 47 posts · 12 votes
Why are mortgages so expensive?
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Member since 2016 · 13k+ posts · 12k+ votes
9yFunny thing is that buying a personal home is a life style decision that through out the life of ownership with payments, utilities, taxes, maintenance etc will cost,in 90% of the country, more than it will ever be worth. It is not a investment it is simply forced savings and in reality is actually a liability.
Reality .... renting is far less expensive than owning and you can afford to save even more money than the forced savings of a mortgage.
There is zero financial logic in owning a personal home yet we all seem to do it. We are strange creatures.
41 Replies
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes9y
Oh -the interest cost over the life of a mortgage. I thought this was about the cost of obtaining a mortgage- the $4500ish in appraisal & origination fees, lenders insurance, etc. Not to mention the thrill of the cavity search applying for it. That's a cost, too. The $4500 cost of obtaining a mortgage needs to be a factor, especially for BRRRR refi all the time folks. "I refinanced and pulled out $15k." (too bad it costed me a third of that to get it!)
A 15 yr would save a lot of interest of course, but 4% money fixed for 30yrs is a rare treat indeed. Most of mine are 5+%. Not long ago, 2005-7, 6.5% was an excellent rate.
The word mortgage is derived from 'muerte', which means til' death. That's why it costs so much in interest. A 30-yr til death will always cost a lot more in interest than a 15-yr til death brought to term. Good discussion!
- 9yRobert EllisBusiness MemberDeveloper · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes
Originally posted by @Thomas S.:
Funny thing is that buying a personal home is a life style decision that through out the life of ownership with payments, utilities, taxes, maintenance etc will cost,in 90% of the country, more than it will ever be worth. It is not a investment it is simply forced savings and in reality is actually a liability.
Reality .... renting is far less expensive than owning and you can afford to save even more money than the forced savings of a mortgage.
There is zero financial logic in owning a personal home yet we all seem to do it. We are strange creatures.
well said, that's why i own a duplex
Section 8 Launch52 Reviews - Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Bryan Hancock:
Mortgages are DIRT CHEAP; not expensive. The opportunity cost for stuffing cash in that property are in excess of 20% annually if you invest your cash in decent projects. Imagine not receiving 20% on your money for 30 years. Go do the math on what that is worth and compare it to the measly amount you pay for use of the money. I think that will change your perspective on how much the money costs.
I agree with you, but would also like to add a comment. When considering returns, we must always adjust for risk. The equity sitting in your property "earns" the interest rate on the mortgage, which is low but 100% guaranteed, as in you are certain to not pay interest on money you don't borrow ... refinancing that equity out and investing it in other projects "earns" the return on that project minus the mortgage rate, but there is more risk you take on. I agree that the trade usually pays off if you know what you are doing and use sensible amounts of leverage.
You too may agree and even think that it is so obvious that it doesn't need to be stated, but common sense is not so common, especially among newbies ... we've seen what taking the "leverage is always good" argument to the extreme can do in markets ... my favorite quote on the subject is from Warren Buffet: "When you combine ignorance and leverage, you get some pretty interesting results."
Leverage is a great tool to increase returns if you respect its power to juice returns (and losses) and know how to use it. It is not the only tool, or even the best one in some circumstances depending on the unlevered risk inherent in the investment, but it is a darn good one. Like a hammer, though, you can use it to nail a board or hit yourself in the thumb, and just because it is your favorite tool does not mean that every problem is a nail.
- Lender · Western Springs, IL · Member since 2015 · 472 posts · 245 votes9yGreg S. I understand what your saying and certain there is some validity to it. But how can you prove there is a direct causation? How can you say/prove that there is in fact no link between owning a home, how that changes your decision making, clearly with some impact on increasing wealth and the opposite for renting? Your saying that if you rent, you automatically have a lifestyle that dictates not creating wealth and not investing. So your choosing to rent and in turn also choosing to not also create wealth for yourself. I don't buy it. I think it's a ridiculously oversimplified and inaccurate thing to say.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes9y
That is what makes BP great. Thanks for providing more color on my response. I'm certainly on board with accounting for risk with any decision making. A discussion of risk could fill volumes and lead to tome-like posts though ;-)
If anyone wants to learn more about the "pay off your mortgage for safety" versus "don't pay off your mortgage and juice the returns" debate you could fill out a whole week of reading on Mr. Money Mustache. There are some decent threads about this on BP too, but none rival the intellectual discussion on MMM. It is quite a bit easier to observe risk in liquid markets with well-defined covariances than it is when using illiquid projects like real estate.
Another point of complication is that virtually everyone on BP fails to account for their time properly in real estate transactions. Thus you'd need to adjust for both risk and for active management (time) to make somewhat of an apple-to-apples comparison.
I'm not sure that any of this heightened analysis is really needed when we're talking 3-4%ish money though. Even the stalwarts in favor of prepaying your mortgage have a really hard time defending their position with money this cheap. As is the case with all things involving risk the answer is certainly "it depends" though. Nice call-out.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Bryan Hancock:
That is what makes BP great. Thanks for providing more color on my response. I'm certainly on board with accounting for risk with any decision making. A discussion of risk could fill volumes and lead to tome-like posts though ;-)
If anyone wants to learn more about the "pay off your mortgage for safety" versus "don't pay off your mortgage and juice the returns" debate you could fill out a whole week of reading on Mr. Money Mustache. There are some decent threads about this on BP too, but none rival the intellectual discussion on MMM. It is quite a bit easier to observe risk in liquid markets with well-defined covariances than it is when using illiquid projects like real estate.
Another point of complication is that virtually everyone on BP fails to account for their time properly in real estate transactions. Thus you'd need to adjust for both risk and for active management (time) to make somewhat of an apple-to-apples comparison.
I'm not sure that any of this heightened analysis is really needed when we're talking 3-4%ish money though. Even the stalwarts in favor of prepaying your mortgage have a really hard time defending their position with money this cheap. As is the case with all things involving risk the answer is certainly "it depends" though. Nice call-out.
Totally agree ... for me with leverage, it is not a question of yes or no, but more of what degree of leverage can the investment safely support and my wife and I (and other business partners if applicable) are personally comfortable with. This forum is not about stocks, but I actually find it very useful to study balance sheets and income statements of publicly traded companies in other industries to get a sense for how they manage leverage and risk ... it is insightful to see utility companies leverage way up since their income streams are so steady while tech companies tend to have little to no leverage since their income streams can change at the drop of a hat (good or bad) with new innovations, and yet they can both still be very profitable. I may be getting too far off topic and I don't want to attempt to write some of the tomes you refer to on the subject here, so will leave it at that ....
- Flipper · Huntington Beach, CA · Member since 2016 · 83 posts · 40 votes9y
Originally posted by @Thomas S.:
Funny thing is that buying a personal home is a life style decision that through out the life of ownership with payments, utilities, taxes, maintenance etc will cost,in 90% of the country, more than it will ever be worth. It is not a investment it is simply forced savings and in reality is actually a liability.
Reality .... renting is far less expensive than owning and you can afford to save even more money than the forced savings of a mortgage.
There is zero financial logic in owning a personal home yet we all seem to do it. We are strange creatures.
I would say that depends on the Region and if you're buying to live in it or buying it as an investment, I make a lot of money on my single family homes. But I only bought them because they penciled, I never bought them with the intention of living in it.
You can make your home purchase a liability or an asset, just depends on what your needs are.
If I'm going to go live somewhere though In my position I would likely rent.
A: because I still enjoy the prospects of moving around a lot.
B: I don't want to tie my money up in a huge down payment just so I can live somewhere, instead I could just rent and use my saved up money to put a down payment on a place that will generate me more money instead.
But there are a lot of variables, I could potentially see myself buying a cheaper distressed property to live in it while I fixed it up, then flip it or rent it out and move on to another property, but that would again only be because the ultimate end goal would be that it would generate me money over the long term, so again it would need to pencil.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Jake Miller:
Originally posted by @Thomas S.:
Funny thing is that buying a personal home is a life style decision that through out the life of ownership with payments, utilities, taxes, maintenance etc will cost,in 90% of the country, more than it will ever be worth. It is not a investment it is simply forced savings and in reality is actually a liability.
Reality .... renting is far less expensive than owning and you can afford to save even more money than the forced savings of a mortgage.
There is zero financial logic in owning a personal home yet we all seem to do it. We are strange creatures.
I would say that depends on the Region and if you're buying to live in it or buying it as an investment, I make a lot of money on my single family homes. But I only bought them because they penciled, I never bought them with the intention of living in it.
You can make your home purchase a liability or an asset, just depends on what your needs are.
If I'm going to go live somewhere though In my position I would likely rent.
A: because I still enjoy the prospects of moving around a lot.
B: I don't want to tie my money up in a huge down payment just so I can live somewhere, instead I could just rent and use my saved up money to put a down payment on a place that will generate me more money instead.
But there are a lot of variables, I could potentially see myself buying a cheaper distressed property to live in it while I fixed it up, then flip it or rent it out and move on to another property, but that would again only be because the ultimate end goal would be that it would generate me money over the long term, so again it would need to pencil.
Greg seems to think that cash flow from property leveraged to the hilt is the only right and valid way to make or measure profit in real estate. No consideration of risk seems to be mentioned, ever, anywhere. Appreciation, either forced and/or from the market, is somehow not valid. From this narrow and distorted (IMO) view of the world, the logic follows.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes9y
There is some garbage in this thread that I wanted to help clean up. Fortunately The Wharton School has a Professor Emeritus to help deal with said garbage. This post by The Mortgage Professor should help out some:
Rent or Buy? A Question That Never Seems to Go Away
Here is a direct link to the calculator he has for deciding whether to buy or rent:
Small Down Payment Now or Larger One Later (Buy Versus Rent)
Cliff's Notes:
-It depends
Any absolute statements in this thread are grossly inaccurate.
Buying a personal residence is an altogether different discussion than purchasing properties others will live in for an investment. There is a giant lifestyle component to the former analysis while the latter is more of a rote analysis that can be bounded in finance-land.
None of this really matters for the OP. Do some Google searches for annuities due. Wiki has a good primer if you're a glutton for punishment:
Look for the amortization calculations section or use an online calculator.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes9yActually your mortgage is really cheap. Real inflation is probably around 4 percent also. So your effective cost of capital is close to zero. When you pay your 1500 dollars 20 years from now you it will be worth less than half of what it is today. But the house will give you the same value and may have appreciated in value. A 30'year fixed mortgage at near inflation rate is a fantastic deal
- Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes9y
Money is cheap based on historical data. If you look a the total paid for the house including interest paid it is a large number. However, There are 3 areas that offset that number:
1. Inflation - it will average 2% in the long term 2% x 30 yr mortgage. That number will be compounded.
2. Interest deduction
3. Appreciation - It is a safe be that the property will be worth more in 30 years than it is today. Trying to predict when and how much is simply not possible
If you are buying this house because you love it, then go for it!
If you are buying as a live in / investment, you should think twice.
- Lender · Colorado Springs, CO · Member since 2016 · 11 posts · 4 votes9yMortgage insurance on an FHA with 3.5% down can NOT be removed. (If 10% down, It will go away after 11 years) MI on conventional 3% down in really expensive. If the lender pays the MI through the rate, it also can never be cancelled bc it is built into the rate.
- 9yMark SpidellPro MemberGlenwood Springs, CO · Member since 2012 · 127 posts · 22 votes
Here is another way of looking at it. Let's say that someone asked you to lend them a couple hundred thousand dollars at 4% with a 30 year amortizing repayment. Would you give them the loan if you had the cash? No! Because that is not a very good return, especially over such a long period of time.
- Avondale, AZ · Member since 2017 · 65 posts · 8 votes9y
I also am in your position im about to close on a house i want to semi-renovate, live in for a year, and airbnb extra rooms then rent out. i put 20% down list price was 219k i was able to negotiate to 213k and $6000 sellers credit and the loan is for 170k i got my closing disclosure today and the total amount is coming out to 330k on a 4.375% interest rate.
seeing those numbers scared me too but i know i once i rent i can cash flow at least $300 not to mention the money i can make to airbnb 2 extra rooms meanwhile.
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