Quote:
Originally posted by Moneyguy1
Rick:
Just curious; perhaps a bit of defining terms. Is not paying 30 years worth of interest not sinking a bunch of money into a house? Generally, that interest will sum up to more than the amount borrowed. Am I the only one that has aversion to making the lenders richer than they already are?
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Well, that depends. Everyone gets worried about how much interest they are going to pay.
Here is the interest you pay on a 30 year note for $200,000 at 6% interest (assuming you pay $1200 a month on the note, I just estimated that):
$231,095.51
Including principle you have paid $431,095.51 for the $200,000 house.
Sounds like alot.
Now then, here is the amount you would have if you invested the same $200,000 at 10% return in the market over the same 30 years (compounded annually):
$3,489,880.45
So, at the end you would have $3 million more dollars by investing that money instead of putting it into the house. Of course, the house would appreciate in value over those same 30 years. I would be surprised though, if a $200k house would be worth $3 million in 30 years, not to mention that in my scenario I STILL own the house. I just paid $231k more for it than you did. I turned those years into $3 million though. Now then, if you pay cash and invested those $1200 every month that you would have paid on a note, the numbers would be similar, but I would still come out ahead because I started with $200k while it would take you 13 years to do the same.
One last point. Let's say you buy a $150,000 house and sell it 10 years later for $500,000. That's a 233% return. Pretty good. If you put $15,000 as a downpayment on the same $150,000 house and finance the rest, when you sell for $500,000 10 years later you have made 2,333%....
Certain types of debt are to be avoided at all costs. High interest revolving debt comes to mind. Certain types of debt are useful though, low interest mortgages are one of them.
Companies and investors use this principle all the time, they get financing for purchasing new acquisitions and such. Most corporations continue to carry debt even when they have enough cash to pay if off. That is because their return on that cash outweighs the interest they pay the lender.