renew:"List of Costs for Buying or Selling a House in the United States》
I've been dealing with house matters again lately, and I've re-examined the loan process, etc., although I previously wrote an article titled "..."Is it still worthwhile to take out a mortgage to buy a house in the US now?The previous article clarified the concepts, but it was still not very clear. Here I present it in a clearer way, using real-life examples from my own experience. Some numbers have been simplified for easier understanding and do not represent rigorous calculation results.
In January 2015, I took out a loan of 350,000 yuan, with monthly repayments of 2,000 yuan. However, in January 2018, I still had 325,000 yuan remaining. Over 36 months, at 2,000 yuan per month, I should have paid 72,000 yuan. Why then did my account show only 25,000 yuan repaid? The problem lies in taxes, insurance, and interest.
- Property taxes are calculated based on the assessed value of the land. For example, if the house is worth 0,000 and the government estimates the land at 0,000, then you pay taxes based on 0,000. Fairfax's tax rate is 1.115%, so I need to pay approximately ,000 in taxes annually.
- Home insurance costs approximately ,000 per year.
- The interest rate is approximately 3%, around 11,500.
Based on the above calculations, I need to pay an extra 16,500 each year, totaling approximately 50,000 over three years, which exactly matches the previous shortfall. So the question is, with such an extra amount to pay annually, how much will I ultimately repay if I take out a loan of 350,000? This requires a calculation tool. I used Zillow to estimate that I will have to repay approximately 530,000.
So here's the problem: I buy a house for 500,000 yuan, take out a loan of 350,000 yuan, and pay an interest rate of 3% (now it's at least 4%-5%). Over 30 years, I'll have to pay 530,000 yuan, which exceeds the cost of the house itself. Wouldn't I be losing out big time? If you don't live there, yes, but if you do, it's actually worthwhile. Your monthly rent is 2,000 yuan, which is 24,000 yuan a year, and 720,000 yuan over 30 years. You'd only pay 150,000 + 530,000 = 680,000 yuan over 30 years. And! The house is yours! That means if you sell the house for 500,000 yuan (assuming no price increase), you'd only have paid 180,000 yuan. 720,000 vs. 180,000… the difference is obvious.
Furthermore, house prices will rise, and interest can be tax-deductible, which haven't been factored in. Of course, costs such as house maintenance are also not included. Moreover, currency depreciates at a rate of 2%-3% annually, so 500,000 today is not the same as 500,000 30 years from now, just as 100 in the 1990s is not the same as 100 today.
Therefore, if it is a self-occupied house, the earlier you buy it, the better, as long as it is within your budget.
Another point I'd like to make is about condos. Many friends have recently asked if condos are a good investment. My advice is to buy a townhouse if possible. While condos are more convenient (no need to worry about housing issues), their value actually declines over time. This is because you don't own the land, and there are many condos on that land, so the increase in land value isn't well reflected in condo prices. Therefore, in the long run, the investment value of condos is completely outmatched by houses.
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Original author:Jake Tao,source:"2018 Home Buying and Selling Notes ②: US Home Purchase Mortgage Estimation - Simple and Clear Calculations"
Comments list (2 items)
Your analysis is excellent. I have a few questions to discuss.
1. The 530,000 only covers principal and interest payments, not annual property tax and insurance, right?
2. Will the rate of increase in housing prices and inflation remain roughly the same over 30 years?
3. The opportunity cost of the 150,000 down payment was not taken into account. If the 150,000 were invested in an S&P 500 index fund or other well-known stock funds and held for 30 years without any investment, what would the return be? Of course, I did not consider the pressure caused by drawdowns.
4. Interest tax deduction is also an advantage.
Do you have a detailed cost-revenue analysis for this case? If so, I'd like to see it.
Also, your interest rate is really low.
Thanks
wei
@ wei：Thanks for reading such a mind-bending article, *facepalm*. Now, let me answer the question:
1.53 refers to a loan of 350,000, which will be paid out in total over 30 years, excluding taxes and insurance.
2. House price increases are generally higher than inflation, although a major crash like in 2008 cannot be ruled out.
3. I didn't consider putting the 150,000 in fixed deposits, government bonds, or other forms of income. However, it's important to note that bank deposits generally don't keep up with inflation, so it would be a loss. Government bonds and the stock market are risky, especially the stock market, which requires manual trading and is quite complex, so I didn't calculate that. I only calculated what the 150,000 would be worth after 15 years, even after inflation (it might be over 200,000).
4. I have two cases of my own; you can add me later to discuss them in detail.
After several interest rate hikes, the price rose sharply. I got the lowest rate at 2.7% back then. However, now that the rate hikes have stopped, the rate seems to have come down. The 7-year ARM seems to have returned to 3.5%, and it is said that the balance sheet reduction will be stopped.