Myths & Reality of Buying vs. Renting
There are several Myths about buying versus renting a home. Once upon a time, there was a myth that buying a home was the biggest decision of your life. And it still is in most parts of the world, a house is considered to be the biggest asset for most households. However, this is a false mentality.
Myth 1: My House is my Biggest Asset
Truth: the House that you live in is not your Asset … but a Liability
Most of the people in US and all around the world still believe that their house is their biggest asset and that’s why buying an expensive house requires a wise financial decision. Keep in mind that an asset is something that puts money into your possession. So the house is not your asset because every month it doesn’t make any money towards your financial gain.
Of course, rental properties can be your Assets or Investment opportunities, never consider your house an asset. Another factor to keep in mind; is to not have any emotional attachments to your Investments. Otherwise you won’t sell them when the market is up … same with buying, when the market is down.
Another scenario is living in a rental property paying $1,500 every month, while having $1 Million in Investments and bank accounts is much better than living in $1 Million house. This is because you can generate cashflow from your invested $1 Million, but you cannot generate cashflow from your $1 Million house that you live in.
Myth 2: Renting is throwing money away
Reality: Renting is never throwing money away if you understand the human psychology
Most of the people argue that it is better to pay your mortgage rather than living in a rental house and paying $ 1,500 every month. Rather than that, you could pay that money to the mortgage company and own your own house.
Again, this is a Myth. Years of studies show that most people never dream of living in their rental home. It’s just human psychology. If you are paying $1,500 every month for some rental property and planning to buy the same house by paying $1,500 down in mortgage every month … then it’s a wise financial decision. It’s theoretically possible. In reality, if you plan to live in your own home, you will definitely select a much better house than your current rental property and you could end up paying $3,000 mortgage payment every month …
That’s just human nature. Theoretically it is easy to say that rather than to pay $1,500 rent, obviously it’s good to pay $1,500 mortgage payment. But practically it is impossible to follow. So if you are planning to buy the same house that you live as a tenant, then Renting is throwing away your money. Otherwise it is not.
Pay Off Your Mortgage ASAP
Most mortgage lenders will give you 25 to 30 years of mortgage loans … which is ridiculous. Never take a mortgage loan for more than 15 years otherwise you will end up paying a lot more money.
If you do the math, 25 years of mortgage loan will be much more costly than the 15 years of loan.
Most lenders show mortgage payments based on a 25 year amortization. It’s recommended to never take a mortgage longer than 15 years. Say you have $100,000 mortgage for 25 years at 6.6% interest rate. Your payments will be $676 a month and over the life of the mortgage you will pay $102,800 in interest. If you shorten the term to 15 years, your payment will increase by just $196 a month but you will save $45,840 in interest.