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Your Mortgage: How to blow $88,000 in 5 years

Shawnee Mission Post Sponsor - December 18, 2018 10:00 am

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Mike Miles
Mike Miles

By Mike Miles

Have you noticed all the giant apartment complexes popping up around the metro? Perhaps you’ve wondered why? Two words: Money Machines. Meaning, there are a lot of renters out there, and rent pricing has been averaging increases of 8 percent every year for the last several years. In short, investors are cashing in — big time!

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Most renters rent because of perceived convenience and are also either fearful or uneducated about the home buying process. Don’t get me wrong. There are certainly circumstances where renting makes sense. For example, if someone is temporarily re-located for a job for less than 24 months or if someone is working on repairing a credit score, renting could be the best option.

However, most renters rent for too long, and it’s costing them their ability to build long-term wealth. In fact, young adults are owning their homes at only half the rate of the overall population (34.1 percent vs. 62.9 percent), and it is likely the biggest financial mistake of the millennial generation. Entrepreneur and self-made millionaire David Bach recently warned, “If millennials don’t buy a home, their chances of actually having any wealth in this country are little to none. The average homeowner to this day is 38 times wealthier than a renter.”

Let’s take a quick look at how. Financially, it’s impressive (in a bad way):

Consider a rent payment of $1,250 a month. What if you paid that for five years and absorbed an 8 percent rent increase in each year? How much is that?

  • YEAR 1 = $15,000
  • YEAR 2 = $16,200
  • YEAR 3 = $17,496
  • YEAR 4 = $18,896
  • YEAR 5 = $20,407

Wow. You just spent $88,000 on rent in five years. This doesn’t even include utilities or renter’s insurance. The kicker? You have nothing to show for all those hard-earned payments. You have no ownership, equity, or tax write-offs. In short, no wealth. Let’s look at the same $1,250 a month spent on a home….

  • YEAR 1 = $15,000
  • YEAR 2 = $15,000
  • YEAR 3 = $15,000
  • YEAR 4 = $15,000
  • YEAR 5 = $15,000

Notice how each year is the same? A mortgage payment is fixed every month. So over five years, you spent $75,000 instead of $88,000. You also have paid down the loan balance by about $15,000 during this time; which is part of your equity/ownership gained. Additionally, you are gaining appreciation on the value of your investment. Even a modest 2 percent annual appreciation is earning you about $4,000 a year which would equal about $20,000 in this five-year window adding to your equity/ownership. You also get a tax deduction for your paid property taxes and mortgage interest. This could generate a tax savings of around $1,800. Let’s add that up again:

  • $13,000 saved in payments
  • $35,000 gained in equity (loan balance paid + appreciation)
  • $1,800 in tax savings

That’s almost $50,000 saved in the same five-year comparison to renting.

Even if you start off with a smaller, more affordable home, owning will get you closer to your dream home faster than waiting to buy while you pay rent. You could sell that starter home after five years and use the equity toward your next down payment. Best of all, you saved up for your down payment while you simply lived.

As I said earlier, most renters rent because they either think it’s convenient or because the home buying process is intimidating. Fountain Mortgage prides itself on educating our clients throughout the home buying process. Using technology (Yay! No paper hassles!), experience, and local service without the big bank red tape, we have helped thousands of people buy their homes and build their wealth. Give us a call. We’d love to help you, too.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268

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