Re: Owning a house.
[ QUOTE ]
I've always understood the benefit of buying a house this way:
If you take out a mortgage at 6%, but the interest is tax-deductible, it's really only 4%.
If your house appreciates at least 4% a year, then you are basically borrowing the money for free. If it appreciates more than 4%, you are getting a positive return on the bank's money that you get to keep.
Not only that, but your gain when you sell is tax-free also. Based on this theory, the idea is that if you buy a house and live in it for at least 5 years, you will have lived there for free, at worst.
Thoughts?
[/ QUOTE ]
You are ignoring taxes and maintenance, and transaction costs. In Oregon for example, taxes are 1.5-2% per year (I paid $5600 on a $360k house), with maintenance included you probably reach 2% per year on average. My house in Arizona costs 1/3 of 1% in taxes, but maintenance brings me up to about 1% per year.
Then you are assuming that all mortgage interest is deductible. In Oregon again for an example, you have high income taxes and property taxes, which means the AMT (alternative minimum tax) kicks in earlier and reduces some of your deductions if you have a high income.
Plus you are tying up cash in your home that you should be able to invest at better returns elsewhere. Your 20% down payment (and any equity you build) could be earning a lot more than 4% a year.
And if houses have appreciated 4% per year during the last 37 years, ending in one of the biggest bubbles in history, what level of appreciation should we expect going forward from now?
And while gains are tax free, you usually have to pay a hefty transaction cost, 6% of the total sales price. For example, if your $500k home appreciates 4% per year for 5 years, you would sell it for $608,000. But you'd have to pay the realtors $36,000, leaving you with $572,000. Your annualized return has sunk to 2.7%.
So no, it's highly unlikely that your home will be "free" in the future. But that doesn't mean it can't be a better deal than renting, both financially and intangibly. Each house is an individual case, and should be evaluated as such.
|