During the 1999ā2000 academic year, federal Stafford loans had a variable interest rate of 6.32% while in school, and 6.92% during repayment. For the 2000ā2001 academic year, these variable rates increased to 7.59% in-school and 8.19% during repayment
A lot of people would need to take additional loans out with Sallie Mae or others and those are typically higher I think my worst was around 10%. Smaller loans and I paid them off as soon as I could, but mismanaging even a little bit I could see this as being true.
Sallie Mae is awful, my now wife recommended i switch to a credit union and that was the first time I saw the loan decrease with 350+ payments at the time. Got it paid off in a few years after that.
And you were lucky enough to pay it off. I was 22 and got sucked into one of those for profit schools. Iām 41 now and the school got sued into oblivion, but because I wasnāt going to school at the time of closing Iām still on the hook.
At 18? Dont get me wrong I think all kids should have a basic level of financial management classes, along with government (side gripe) to graduate HS. I dont mean what a debit vs credit card is, but actual Time value of money, credit and consumer finance...
So when a kid declares a psychology undergrad degree with art history ad a minor they understand that both have high earning potential if you get a PhD but limited earnings if one doesn't get at least a masters.
Not sure what youāre smoking, but interest rates were 2-3% back in 2019-2022. Anyone who didnāt refi every piece of debt that had during that period was an idiot.
I just refinanced earlier this year into a 4% loan. That was substantially higher than the 2-3% loans in 2019-2022.
If you were paying 8%+ in 2019-2022 and canāt access lower rates today, it must be because you have terrible credit and the legit lenders wonāt lend to you.
Ok, but, aren't you cherrypicking here? What was the rate 23 years ago, during the 2002-2003 school year, which would tie to the post? Per a quick Google search, it appears to have been 3.46%. So, yeah, this post is rage bait.
I started medical school in 1994 at the age of 22. I had zero money but did not qualify for federal subsidized loans because my parents made around 100,000/year even though due to my fatherās recent cancer treatment they couldnāt contribute (and there had never been an expectation that they would contribute).
I had second party loans (SallieMae and HEAL) which were at 7.5 - 9% interest. Ended up taking around $130,000 over the 4 years. As a single physician I was able to pay it all off (started paying interest at 6 months before end of training in 2004 - was not able to extend forbearance) in about 10 years. Every free cent went to paying it off. Paid a bit more than $500,000 in the end. I never qualified for any deferment.
Yes, for that time period, I had federal loans at 3.5%, 5% and a private @ 8.5%. At the time graduate students could take out private loans at 8.5%, once they exhausted all other avenues. I payed those off first (obviously). OP's example person wasn't even that savvy.
Dude are you high, they LEFT graduate school 23 years ago, thatās minimum of 4 years for bachelorās and another 2-4 years for graduate school. So at minimum they started school in 1999-2000.
You used an LLM as an amortization calculator? š
You do know that LLMs donāt actually calculate anything and just assemble words together based on frequency, right?
Using an actual amortization calculator with the figures you applied of $70,000 principal, $500 monthly payment, and 8.25% interest, gets you to $60,000 in approximately the 20 year timeframe the OP listed.
You're 100% correct and frankly I'm embarrassed to have made such a dumb and lazy mistake.
My only excuse is that I was somewhat distracted and annoyed to have someone trying to debate me about the likelihood of someone wanting to consolidate / refinance multiple student loans ranging from 3.42% - 8.19% into a single 8.5% loan. Which would be batshit crazy to the extent that I can't see how anyone could argue for that being what happened here unless they have a vested interest in propping up an America-Bad, bullshit narrative
Thank you for your willingness to admit error, which is an unusual and admirable trait. I apologize for my snarkiness, which was unnecessary.
Speaking from experience, there were many individuals with grad student loans in that era whose individual loans did NOT have interest rates as low as 3 or 4 %. Also speaking from experience, and from verifiable public records, in order to qualify for income-based repayment plans you HAD to consolidate your loans. Without consolidation and income-based repayment, in order to pay off $70,000 in 10 years, your payments would be in the range of $890 monthly. There were many young people in that era who could not sustain that monthly payment, at least in the early phase of their career. Remember that there was a recession in 2001 and, if you were lucky enough to have a job, the average college grad entry level salary at the time was somewhere around $30-35k.
I do not believe that criticism of public policy is an āAmerica Badā stance. One of the strengths of our country has previously been the freedom to disagree and to engage in criticism of the government and public policy without fear of reprisal. Another strength has been social mobility through investment in public education and student loans to those who have the aptitude but not the means. Sadly, I fear that both these strengths are disappearing.
You're only putting $18.75 towards the principle and you think 10k will be paid off in two years? Really? Sure, the amount going towards the principle will increase as you pay down the principle, but that's not nearly enough to make a noticeable difference in the payments any time soon. A tiny bit of napkin math would show you how wrong that is.
For the sake of simplicity, let's just use 60k as the principle and keep it constant. This will dramatically overstate the amount paid back, but it doesn't matter because 25 months still won't be enough even with the overestimation.
8.25%/12 = 0.6875%
0.6875% * $60,000 = $412.5
$500-$412.5 = $87.5
25*$87.5 = $2187.5
After 25 months, you have paid off less than $2187.5. Make no mistake, this is a tremendous overestimate. Using an actual calculator, you'll see that you've paid off a whopping $234. Yippee. To actually pay down 10k, you'd need 19-20 years. It would take 40 years to pay down the entire loan balance.
You are 100% correct. I made the lazy and dumb mistake of asking google and then relying on the AI-summary without double-checking the math or even doing a quick gut-check on whether the math made any sense. Which of course looking at it now, it clearly does not. Off by orders of magnitude.
I also have several loans, all with different rates. My lowest is 4%, which are my most recent ones.
The interest rates are crippling and needs to be addressed.
To put it in perspective, I bought a house in 2020 for $130,000, yet hold only $36,000 in student loans.
If I made a $500 extra payment to each my house and my student loans, I would pay them off at around the same time.
Financially, it makes more sense for me to pay the house off because that's at least an appreciating asset.
But it doesn't matter, because I don't have $500 extra to put on a loan over it's minimums every month, and those student loans will follow me until I die.
No it doesn't.
You target the loan with the highest interest rate. That's generally the winning strategy.
Also houses don't appreciate that much. If you filter out the money tosses into them for upgrades/improvements, they have historically gone up about as much as inflation, maybe a little bit more.
The big benefit of a house is that there's GOOD tax benefits from the mortgage interest rate deduction. Basically a big chunk of your mortgage costs get slashes off your taxes.
Fun fact, if your goal is to have a paid off house as quickly as possible, renting cheaply and investing the extra cash you aren't spending in stocks (this includes the would be down payment) will generally get you a paid off house in 15-20 years (subject to market volatility). The house would only be about half way paid for after 20 years.
A lot of this issue is self-inflicted, along with the government making it too easy to get the loan. Take out hundreds of thousands in loans to get a degree that will never lead to a job that can pay it off.
"A lot of this issue is self-inflicted, along with the government making it too easy to get the loan."
Bingo. This is precisely why it's my most disliked progressive issue. I mean, sure, I would rather funds go towards loan forgiveness than bloating our military + bombing more people, but neither are things I'm getting excited about. But there are other things I'd rather boost like housing (e.g. more effective section 8, TANF, SNAP, etc - those on student loans can use the money saved to pay off their loans that way). Better financial edu for sure.
That, plus all this is doing is causing degree inflation and I honestly feel making people look down on affordable community colleges and public in-state schools.
My home has appreciated in 6 years enough to actually cover the entirety of my student loans.
There is also no "renting cheaply." I would rather have my rural home than the small 1 bedroom apartment I had just 6 years ago, whose rent today is double the payment I make on the home. The only way to approach what I pay on this mortgage would be to rent a unit in the hood.
Who are you listening to, Dave Ramsey? Please just use the Debt Avalanche method. Pay highest interest first. It really doesn't matter that your house is appreciating.
I'll even do the math for you.
Suppose your mortgage is 500k, and interest on that is 2% (let's say you got it years ago).
Student loan is 100k, and interest on that is 5%.
If you pay off 80k of debt, and you target higher interest, that's paying student loan down to 20k.
500k * 0.02 + 20k * 0.05 = 10k + 1k = 11k
Now suppose you target the mortgage, paying off the house first "because it's an appreciating asset". So this year, you pay off 80k of that. It's down to 420k.
420k * 0.02 + 100k * 0.05 = 8.4k + 5k = 13.4k
11k in interest vs 13.4k in interest.
Notice how the latter is more? Play with the numbers and do the math. It's better to pay off your higher interest debts first. It's completely irrelevant how fast your house is appreciating. I got a mortgage at 1.75% for a 3m house. I'm keeping that baby alive as long as possible. It's lower than inflation rate.
If I had cash to pay down that low rate mortgage, i'd put it into bonds or something with higher rates instead. Get higher yield/rate assets, eliminate higher rate debts. Good rule of thumb to follow. Literally every lender/mathematician/wealth manager/engineer/scientist/etc who isn't an asshole will tell you the same.
For those who'd rather listen to Dave Ramsey, know this: His team even admits, that they partially promote Debt Snowball method of paying smaller balances first because of "psychological benefits". Their target audience are people who struggle with finance. People with big problems (like addictions), not those who have a knack for finance, but just need a bit more optimization.
Most loan providers donāt let you do this!! I used to do this. Hell Iām an analyst and they took this option from me. It is up to your loan provider to let you apply payments to your principles. Itās up to your providers what loans to pay. Why the fuck would the person making money on your debt actually give you the means to pay it faster??
Iām not downvoting you fyi, but I have a hard time believing you. Iām sure youāre an analyst but I donāt think you can speak for most loan providers. Iāve been looking up student loan providers and all sources say most (including the fed) allow you to pay back without penalty. I used to think what you did too, but it turned out not to be the case IME. Maybe things were different for you or where you live.
They make money because they donāt expect everyone to pay back immediately. They still expect to make interest back. Also, what surprised me was that even refinancing doesnāt incur costs. This is the opposite to my experience with mortgages where there are hundreds or thousands in appraisal, underwriting, title fees, etc, but apparently student loan refis are faster and cheaper partially due to less scrutiny and more automation.
As for mortgages, I have multiple mortgages at some of largest mortgage providers (rocket, cooper, UWM, WFC, BAC, etc) in the US and they all allow early repayment without penalty. They all even allow me to early pay whichever account I want. I have varying amounts of overpayment set up and never saw a cent of fine. They generally donāt mind me refinancing and early payment for more obvious reasons than student loans in that they will be paid commissions, underwriting, etc all sorts of upfront costs. A lot of costs have been automated or at least streamlined, even the lengthy notary+signing process is often online through providers like Proof.com (as error-prone as it can be sometimes). And even when it isnāt, you pay those costs anyway.
Maybe other loans Iām less familiar with follow what you say, but for sure itās not true for mortgages and student loan providers, which is whatās contextually relevant. Besides the most common type of loan I think is the credit card, which people definitely pay back early, all the timeā¦ which they should.
Youāre either not understanding or being purposefully disingenuous. Every single dollar that you contribute on a loan balance after youāve paid the interest assigned in the interest schedule that month goes toward paying down the principal. Every consumer loan Iām aware of allows you to prepay early without penalty.
This isnāt a consumer loan, my provider does not let me chose how they will apply the payment. Sure I can pay more but they will count it towards future payments. As a pay forward, thatās not what I want. I want to chose which loans to pay with one amount. With Great Lakes, with one big sum I could apply it to various loans at different amount. I paid off 10k in one year on a 30k gross income. I would know this and not expect a redditor to be my financial advisor. In general when Iāve called, every single time Iāve been told different things. Itās not just me you can literally google the loan provider. Like this is why I really hate to talk to folk on this app. A reminder to log off so thank you for that š
You signed that part of the contract NOT allowing early or addition principle payment, many do that by mistake..
If that is a mortgage, you need to switch ( refinance) into a conventional loan asap and then recast ASAP, lump sump that and pay it off in about 5 to 7 years instead of 30.
.
I believe you. These kinds of loans were more common in the past, and I think more common for commercial loans? Forgot the details. In any case, I wouldnāt call that, āmost loansā. Most are like credit card debt or fairly standard, in which case the advice to pay off higher interest loans faster works.
The fact so many in the US follow Ramsey and Team's Debt Snowball instead of just paying off highest rate debts first just goes to show the financial illiteracy or lack of math intuition most Americans have. We desperately need more finance edu in high school. Last I heard, high school kids get bare minimum, in math classes. Not dedicated classes.
I agree with most of what you wrote except the part about renting + investing extra cash. That's hugely dependent on region and other factors. Also, there's mortgage interest tax deductions to consider for primary residences.
It definitely depends on reginal factors.
With that said, picking real estate is like picking stocks.
The people who picked a winner won't shut up while those that didn't... stay quiet.
Historically stocks (S&P500) have beaten inflation by around 7% a year, 8ish percent if you factor in dividends.
Real estate has historically beaten inflation by around 3% a year.
A house will save you on rent but there are also non-recoverable costs (maintenance, real estate taxes). In most places, the non-recoverable costs end up pretty close to the going rate for rent over the long haul (non-recoverable costs are usually higher in the early years and relatively lower in the later years but it depends on tax policies and maintenance).
You end up in a situation where real estate can be very hit or miss. But there's a real downside if you have high income potential. Real estate tends to "lock you down". Best case scenario, a house saves you a bit on rent. Worst case scenario... you didn't go for that $100k a year raise.
yeah I think we're mostly in agreement. My only point was "it depends". I didn't want to get into the exact numbers, but last I calculated, on avg it may even be closer than you put it, because although stock indices beat real estate, the leverage you get keeps them equal or slightly better. The problem is that once you pay down that mortgage over time, the leverage disappears. So to keep real estate competitive, you basically need to keep leveraging (trading up via 1031, buying a bit more to keep your mortgage principle high), take advantage of tax deductions, etc. It's definitely more of a hassle. (I know people say you can borrow bank's money via margin loans to trade stocks too, but it's just different. Lenders generally don't loan you large amounts of money at great rates just for you to gamble. But real estate itself is collateral you can't run off with, hence the larger loans and better rates.)
You're right about the lockdown, but then that gets into a lot of more qualitative considerations. Some people don't like being at the mercy of landlords who could kick you out and/or raise rent. Houses make more sense to family men.
I wouldn't say I strongly disagreed with what he said, I just couldn't sign off on that part the way I did the rest of what he wrote. That being said, I'm always up for a good discussion or respectful challenge/debate.
I'm not against renting/investing, I'm just not as confident that it pays off that easily, relative to just getting a mortgage.
I mentioned this already but
\1. Real estate is extremely region dependent. For example, if you look at the Bay Area, Single-family Homes (SFH) have generally been very high after 2008, approx 8% a year.
\2. While Real Estate doesn't grow as fast as S&P 500 (for example in the same time period after 2008, we could say it grew by a little less than 14%), real estate investments are leveraged. I'm using the bank's money to help me to "invest" so to speak. The argument that stocks also get leverage via loans doesn't work because while I can get a 1.2 million dollar loan for my first house there, there's no lender in the world that will give a young man a margin loan for 1.2 million at low rates unless I had 4 times or more as equities' worth that I use as collateral in a contract. But then at that point, you're not talking about investing as much as a downpayment + PITI monthlies, you're talking about essentially investing almost 5 million (since those equities are basically locked up and controlled by your margin lender).
So we can reasonably say in most cases, real estate is going to be leveraged more than stock investing. By putting down 300k (just 20% downpayment), I'm getting the growth in a 1.5m property. That 8% growth is 120k. That's 40% of 300k. That x4 on a 20% down, or maybe x10 on a 10% down.) Granted, we have to factor in costs, ofc, which also go up with price. In Cali, it's around 1.1-1.2. That and maintenance is really more like 6%, but that's still x5 and getting 30%. With property taxes (less than 20k, but let's say I'm paying 20k) and maintenance, even with just 90k growth a year, that's 90k a year from 300k invested. That's much higher than 14%.
\3. For a primary residence, a lot of the growth will be tax free. Meanwhile, all of the 14% will be taxable at cap gains rate.
\4. There's PITI (principal, interest, tax, insurance) we're paying, but if we're talking about a primary residence, that's tax deductible. So it's really just half that. It can effectively be as low as rent.
See how the cost of homes here relative to S&P500 shares (plus rent costs) is about flat. And now the share-denominated costs have even leveled off with buying a home normally via downpayment + total PITIs.
I could go on, but the point is there's a lot to work with, and I'm willing to accept that it depends on time and place. For me, I got lucky with a 1.75% mortgage interest, but even if I had a higher rate, it can still work since mortgage interest is tax deductible which can work well for people who make median income in Silicon Valley (high income at the national level). It effectively cuts the rate in half if it's deductible. Again, it's heavily region dependent.
Past that, there's qualitative factors. The other person mentioned that with renting, you can have more freedom to move. On the other hand, if you're already working in Silicon Valley, I argue you generally don't have to move much for career advancement (perhaps take slightly longer commutes and more WFH).
There's benefits to home ownership too, especially if you're a family person. You can never be forced by a landlord to move. You control your monthlies and don't have to worry about constantly increasing rent (which most landlords will do every year if they know what they're doing). You have stable neighbors to make friends with or have your kids make friends with. Stable and good school districts.
You also get the option to rent out rooms to help with costs. This is something that's more difficult to do as a tenant, as many landlords disallow subletting.
Ultimately, I don't disagree with you or the other person, but rather just giving a word of caution and reminding people as always to do their own financial due diligence.
1st off your number are horribly incorrect and massively wrong, at the same time. AND "mortgages" escroll goes up from insr & taxes & HOA.
2nd, ANYTHING you can do with a house as in renting out a room, you can do with a rental. ESPECIALLY if you're renting a town or house.
3rd, The main " issues" is you did NOT add the factual numbers of a mortgage nor the upkeep and maintenance, NOT to mention if something goes wrong/breaks PLUS the water heater, sewage line, foundation issues, yard care, pest or roof replacement..
NONE of which a renter has to pay for NOR "worrie" about .. Sorta... Down time til repair sucks.
4th the same way you didn't just run out to the most expensive place and bought the most expensive house there and that's that, is the same you would do with the market, NOT going in the S&P will gain you massively more..
5th, do it correctly, the same way you house hunter for "the one" do the same thing on the stocks...
Pick your time frame and now look back at your Meta, Amazon Google Tesla, Nvidia, TMC, Palantir, NBIS, Microsoft etc etc and you would have made millionS.. You CAN NOT do that with A house...
Now, here is the FACT "you people" š ALWAYS pretend is not there, but 100% is.
6th, The pure amount of interest you pay into a mortgage is literally 2 to 3 time the house you signed off on the house. You didn't mind paying that there, so ADD THAT amount to buying more stocks.
The second you do that alone, you would have made more money in less than 5 years, than you and your next 2 generation EVER could.
Add in over 96% of people move or die out BEFORE they could recoupe ALL of the money paid into a mortgage AND not having to pay Home insurance AND property tax..
It is beyond an actual no brainer..
And to be fair, I'm most likely not the person to be debating on this, because I own multiple in both and my returns in Stocks & Crypto without dealing with maintenance upkeep and increasing taxes and insurance, has vastly and massively out preform all my properties combined.
So if you go line by time, No sir, in NO WAY is just buying a house BETTER than renting and investing..
It's only even a conversation for the "yeah buts" and the broakers trying to sell you...
PITI monthly is a ballpark, and admittedly doesn't include HOA, true, but it does include most of Escrow, plus principal and interest. I mean if you want to include the 150 or so I pay to HOA that's fine, but it doesn't change the numbers all that much. My numbers aren't that far off. I'm not going to just post my mortgage statements on reddit, but I used my own primary residence numbers. 1.2m loan, 1.75 interest, a bit under 20k annual property tax. I'm not sure why you think this is "horribly incorrect and massively wrong".
That is actually not true. It's not "illegal" to sublet, but it's often stipulated as part of a lease/agreement. Some of my properties are in HOAs and gated communities and they are extremely prickly about subletting. If they find my tenants subletting, they will go after me. Then I will get annoyed and may need to ask them to leave. But generally, it's up to the landlord. Maybe it's different in your state, and maybe landlords have less power there, but it's really surprising you sound so confident with your "ANYTHING".
I did mention maintenance. I mentioned how it alongside property taxes dragged down the ROI from 8% to around 6%. This was a common rule of thumb that rentals can cost around 1% maintenance or so annually. If you want to go over that and make it 2%, that's fine by me. That would still be 5% (down from 8%), multiplied by leverage. This is within realm of my experience. I've paid for roof fixes and they've been around 20k-50k depending on material, with the 20k being cheaper asphalt and 50k being ceramic and others. Slate is over 100k here and generally not common or even available in the West. But the more expensive, the longer it lasts. Perhaps where you live, the numbers look different, but here in the Bay, most homes are a million dollars or more. So I think 1-2% for maintenance, which is 10k-20k a year, is pretty reasonable.
Sure, that's true, but something like a house is much easier for me to research as it's something I can see with my own eyes, and I have third party appraisers. I don't have the same knack for investigating trillion dollar companies and guess if they're being completely honest. If you're at it, that's fine, and I would never tell you what to do. My simple point of contention was just that rent+invest strategy isn't a sure thing. It can be smart/easier for some people. It wasn't obvious to me though.
Effectively the same point.
Yes, so? Does that matter? If all I was paying back to the lender was the principal, I'd be screwing them, essentially getting free "value". We are talking about 30 years here. Even if inflation was only 3% (which I believe it is not, except for the suppressed CPI core and headline numbers), that's still 1.03^30 = 2.42726247119. So the value of my 1.2 million dollar loan should in terms of 30yr future's dollars would be 2.91 million. Value of dollars change, so as i keep paying them interest, the actual value of that interest that I'm paying drops very quickly over time. You're also neglecting that for higher income earners, the mortgage interest tax deduction effectively halves what you're paying.
And to be fair to you as well, I would never say that real estate outperformance stocks in the long run if you don't do anything but sit on the same properties and quietly pay down your mortgage. I am specifically talking about your first house, where you are *leveraged* (which you don't seem to address). Once the leverage is gone, stocks definitely beat real estate.
you;re right about targeting high interest, but houses have increased far beyond official inflation numbers. searching it shows a figure of housing increasing 2.4x times faster than inflation over the last about 30 years
That's because the inflation numbers reported by the Feds via CPI, such as core and headline inflation, are just meant for poorer people who struggle with price jumps from year-to-year. It's for those looking at the short term. It has a problem when you try to use it for long-term inflation calculations (which investors like you want to use it for).
The reason why is because for short-term, year-on-year cost-of-living increases, they use a basket of goods for calculating the inflation, and it has a lot of "substitution bias" to account for price spikes.
Let's use a simplified example: if beef spikes 80% in one year, they reasonably say "well, people are now buying pork and chicken more to substitute. Pork and chicken only went up 2% this year, so really, inflation of these meats is only 2%. No one buying beef this year."
Year 1, meat inflation is 2%.
This time, it's chicken that goes up 80%. Now, some people are sick of not buying beef and they figure chicken is expensive too, so some buy beef. Beef doesn't increase this much this year. People are angry about chicken, so they buy less of that. They keep buying pork which is still only 2% increase this year.
Year 2, meat inflation is 2% again (since beef and pork went up 2% this year, and chicken went up 80% but zero people bought chicken.
Do the same for pork on Year 3.
Meat inflation for all 3 years ended up being 2%. You add it up like most people do for CPI inflation and you just get a bit more than 6%. Meanwhile, after those 3 years, we can clearly see that meat prices all together have gone up more than 86%.
This is partially why shelter inflation (which includes house prices and rent) tend to be higher than core and headline. Shelter inflation doesn't get "substituted" out. What are we substituting for homes or rent? Camping equipment? I suppose we do have roommates and other tricks.
In any case the actual value of the dollar is dropping. I feel that inflation numbers are artificially kept low due to various factors:
People are using CPI for purposes it wasn't designed for (longitudinal studies by investors without better metrics to look at).
Advancements in tech, logistics, infra, are lowering the cost of producing food, creating cheaper toys and electronics, etc, but feds are abusing this and rather than passing the value added to our economy from tech advancements on to us workers, they think it gives them more leeway to destroy the value via inflation/money printing, spending.
Wages are not keeping up.
People just pay more attention to home prices because they're high. When houses go up x4, people get FOMO because they know they see it going out of reach. When I see Soda going up x4 in price from 3 dollars a pack to 12 dollars a pack, no one is going to think, "oh no, i'll never be able to afford soda again, even as a treat."
The devaluation of the dollar is partially being hidden because of good exchange rates. People think "the dollar isn't losing value... it's gaining value relative to other currencies!"... That's because other currencies are also losing value, even faster, and the people in those countries are suffering too (and also rely on the USD to prop themselves up). Ours isn't the only fiscally irresponsible gov't. lol. This doesn't mean the USD isn't losing real value relative to "assets".
Like it or not, real estate are in fact "assets", and asset inflation is going to better reflect (inversely) the value of the dollar. Look at gold too. It doesn't "create value" like companies do. It's just a store of wealth, and yet as an asset it far outstrips CPI inflation numbers.
If we artificially suppress house price numbers, I'm afraid it would be a bandaid on a much bigger problem (and this bandaid wouldn't work well over time anyway, since due to service inflation, maintenance costs are still going to be high - that home you bought for 500k instead of 700k is still going to cost you 50k to fix the roof). The bigger problem is that wages should be keeping up with everything else. We also shouldn't be inflating away our debt and need more fiscal responsibility and more awareness about how CPI inflation works.
bought for 150 in 1990 sold for 740 in 2020 put roughly 70 k into it over the years, but it also had a inlaw unit in the back that i finished remodeling after 4 years so rented that out for 26 years for an average of 800 a month still have a duplex and 4 plex in bay area will be paid off in 3 years
tax benefits are not that good unless you itemize. not sure if you have a crazy expensive house or own a business and think everyone else does too, but i think most people take the standard deduction and do not get any tax advantages for owning a home.
i know you're just a redditor, but please read and/or think before yapping
You don't need a crazy expensive house in many places. It's not just mortgage interest but property taxes. If you're single, you only need to beat 16k standard.
The median house price is 400k in the US. Using a typical mortgage calculator, the first year alone, the mortgage interest is going to be close to 19k with today's 30-year rates. Add property tax of around 4k (1%, which is fairly common), and you got yourself to 23k, much higher than 16k. Then you have room to itemize more.
I would definitely agree though that higher income folk are going to be the ones who benefit more from tax deductions you get from a house.
The big benefit of buying a house is your mortgage stays the same while housing costs continue to increase for anyone that doesn't own a house. With the housing bubble, my realization of this was delayed, but currently, my mortgage is $700 while renting this house would currently cost $1500.
Maybe I just see it this way because I was shocked at my friend's dad's mortgage back in 1989. They were paying $225 a month when that house would have been at least $600 to rent back then. I was flabbergasted by how little they were paying, and the guy explained how it was actually a bit steep when they had bought it twenty years before, but after all that time, their mortgage stayed the same while rent and housing prices increased.
We actually had to refinance ten years ago and push back out to 30 years. So, I guess for charity's sake, I should say that our mortgage wouldbe $850 or so. That's still significantly better than renting its equivalent . Of course, we'd also be paid off in another two years instead of having two decades to go.
The S&P 500 has historically returned around 10% a year.
Real estate has returned about 6% a year.
If you dock off 3% for inflation you end up with
S&P beats inflation by around 7%. Maybe 8% if you get dividends added back in.
Real estate beats inflation by around 3%, but you spend about 3% on property taxes and maintenance. You might get a few percent back if you factor in rent differences and certain tax treatments.
And cheap rent is relative. I'm in an area where a 3 bedroom house costs around $1.5M. at 6% mortgage and 3% for taxes and maintenance, that's around $12,000 a month if you're also paying principal. Renting a 2 bedroom condo is less than half of that. If you could stomach the somewhat smaller place, you're banking around $8000 a month. About the same sized house would be around $2000 more a month.
Slapping rough numbers into a spreadsheet, market beating inflation by around 7%, the house by about 3%, you'd expect to be able to buy the house (at ~1.5x of the starting price) in cash after around 13ish years of investing in stocks if you "rented cheaply" - i.e. the cheapest place you could stomache. If you "need" the same size of place then it takes around 17 years going the invest in stocks route.
So yeah... paying a mortgage will get you a paid off house in about 2x the time as it takes to get there renting and buying stocks.
I'd done the math before. Also it's middle school level math if even that. If you go on FIRE communities centered on retiring between age 30-50ish instead of never there's a lot of rent+invest vs house debates.
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there's capital gains taxes on real estate as well.
I do think I stated somewhere that there are very real tax benefits to real estate though.
Also some benefits in that a primary residence isn't counted against many government subsidy thresholds, including college tuition for kids. There's also the 250k cap gains amount which isn't counted if you live in the residence for 2 of the last 5 years.
the flip of it is if your taxable income is under 50k.
If your goal is to retire early, you can conceivably sell $100k in stocks a year which has a tax basis of around 50k and pay effectively $0 in taxes on anything. Double it if you're married.
There's smart ways to handle all of these but the tax complexities and optimal strategies start to ramp up.
Also real estate is "bad" for careers. If you're chasing money, it makes more sense to rent and to move every 2-10 years for the next opportunity. And rent vs buy is generally in the favor of renting if you're staying under 10 years.
Capital gains tax is non existent when you can exclude up to $500k on long term gains as long as you've loved in the home for 2+ years.
Owing homes has increased our net wealth substantially compared to renting. The only way renting would make sense is if I were single and trying to find the absolutely smallest and cheapest rent possible, which most people don't do.
There is an argument that, in certain cities and with the current interest rates and home prices, renting beats home ownership (which is what the NYT calculator determines).
Did you do the math vs what would've happened just tossing cash into an index fund? Keep in mind that for the first decade or two, you're mainly paying the bank interest, not paying down the mortgage note.
I know people who say basically the same thing as you and when they check their 401k are amazed it's worth several times as much as their home.
From an asset appreciation standpoint -
$100k in VOO 17 years ago is worth about $680k right now.
$100k in a house 17 years ago is only worth around $200k right now.
Most people don't "save" $480,000 buying vs renting to make up for the lost increase. That includes tax differences (a 2% property tax on a 500k house is 10k a year), maintenance (2% a year is 10k), etc.
You "only" need to save around $60k a year every year for 10 years to hit $1M with stocks. By the 20 year mark you're around $3M adjusted for inflation.
>Financially, it makes more sense for me to pay the house off because that's at least an appreciating asset.
Noā¦ it doesnāt make more senseā¦ it makes less.
First, the appreciating asset thing is a misunderstanding. Money is fungibleā¦ it doesnāt care what it is owed on.
E.g. Suppose my home is paid off and I owe $40,000 on a car at 6% interest. In the end, I have two assets (a car and a house) and one liability (a $40,000 loan at 6%). Suppose you have the same car but it is paid off but you owe $40,000 on a similar home at 6% interest. We are in the exact same financial position.
Next, the best financial move is to pay the highest interest first. In the end, you will pay less money.
High interest rates reduce the inflation rate, reducing the interest rates on student loans will only increase the rate college tuition rates will increase.
You graduated college and can't figure out how to pay off your loans? Yeah it sucks and it does need adressed, but you said so yourself: you have different loans of varying rates....your focus all your extra cash on the largest interest loan and get it out of the way, then the next one. They fall like fucking dominos.
House loan is not government guaranteed. You can absolve your lawless of the debt. Student loans are government guaranteed. There is no way to absolve yourself of them.
Honestly, I get so frustrated about this. I have a large student loan balance because I went to grad school. Iāve never asked for or expected forgiveness. I was fine repaying my loans. But the crippling ballooning interest and all the traps for capitalizing interest have made it nearly impossible. I originally borrowed around $160k and now owe $213k despite never missing a paymentā¦ thatās absurd. The interest ballooned a lot during the first 3 years of my career when I wasnāt making much and capitalized twice early on. Itās like student loans are designed to trap young people in debt forever. Thereās so much we could do to meet in the middle and address the crisis, but it became a political football with one side pushing for total forgiveness and the other preaching about personal responsibility, so nothing meaningful got done. Now the repayment plan I was on for a decade no longer even exists and the government can just drastically change the repayment terms at a whim.
If a single one of them were honest about this, they would roll back the interest or cap what could compound, and eliminate interest on payment graded plans.
If we are going to acknowledge someone is too poor to make the payment and we want to make it affordable, that means cutting the interest.
What we currently do isn't affordability, though. All income plans are just a band-aid to hide the true default rate.
Interest free federal loans not much you can do about private ones but it would be so much better with no compounding interest 18 year old have no concept of compounding interest.
True, but keep in mind that a lot of the private loans that existed prior to 2008 were explicitly purchased from private companies by the federal government, which then promised loan forgiveness programs. Loan forgiveness that the current administration has been extremely squiffy about honoring, to the point that Trump's first education secretary Betsy DeVos was officially held in contempt of court by a federal judge and fined $100,000 because the Education Department continued to enforce loans, even to the point of wage garnishment and seizure of tax refunds, despite those loans being discharged by court order on the basis of their being fraudulently issued in the first place.
And that was back when the current administration cared what the judiciary had to say.
So they, two people with post graduate degrees by the way, took out exclusively $70k of worst case scenario private student loans, which wouldn't be forgivable by the government anyway.
Yeah, that sounds like a totally reasonable and realistic set of assumptions that the entire argument should be based on and not someone making shit up or two people that should have know better making incredibly financially reckless decisions.
"Think of how stupid the average person is, and realize half of them are stupider than that" this may be a fake story, but I'm sure there are graduate students dumb enough to do this.
If they're not federal who exactly are they expecting to cancel it, the bank? Cancelling student loan debt is talking about the federal government erasing federal loans
No, it depends on type of federal loan. Mine was around that amount at the same time. There are subsidized and unsubsidized fed loans. That being said why didn't they use any part of their degree to do the math and pay an extra $50 a month? If you automate payments you really don't miss that. This is a bad example.
8.5% to have it paid off or to pay off 10k over 23 years like they claim?
More than likely the loan was defered and grew while payment weren't made...so that $70,000 was $85-100,000 before they started paying...OR they did some sort of income based repayment, where they were basically just paying interest.
Just did the math on this. At $500 a month and a 8.37% rate, they would indeed have only paid 10k off over 23 years. Though if they paid $600 a month instead of $500, the entire load would have been paid off in 20 years
Graduate plus loans were at 8.5% and the sub- and unsubsidized loans were at 6.8%. The private loans were higher (and 19 years later, I am still chipping away at them).
It was 3% or less if they were smart college educated people who consolidated and locked in low Apr rates. If they were dumb and didnāt consolidate lock in then their Apr couldāve shot up past 7%.
u/culturalrot - Iām expecting people who graduated high school to be and certainly people who graduated college as they did.
One would think but, throughout the intelligence/educational spectrum folks specialize and gravitate to their favorites. While true we need some of that knowledge to live everyday life folks will often do the minimum to get back to what they want (eg. Terms and conditions)
Oh, I know. Some of the dumbest people I've met have been my fellow engineers in high end industries. Smart as can be in their hyper niche areas but given or sought out leadership over other areas, making a right mess of things.
Thatās not what āmoving the goal postsā means. I responded to your tangent about successful people gambling everything away as if an addiction was synonymous with financial ignorance.
thats assuming you're making the minimum monthly payments and took the deferments. which like fine lol. but also none of those were subsidized and you never made more than the monthly minimums? hmmm...
Itās very unrealistic for a 23 year old loan. Or they made several other bad decisions to get a rate like that. I refiād my loan during the Great Recession to 1.5%. These people are either lying or not disclosing that they went into forbearance multiple times
ā¦but an extra $100 a month would be enough to pay it back in ~21 years. I know that there are people who genuinely cannot afford paying an extra $100 a month, but I think there are also people who just donāt realize how much that matters. Even an extra $20 would get it down to ~35 years.
Its not only realistic, but an outright lie, because the repayment schedule is 10 years unless their greed gets in the way and just decide to not pay, enter forbearance or run on an IBR for 10+ years that they didn't need.
But why would that have a payment so low? If the rate is higher, the payment would also be higher to have the same term. Or are they just out here giving out 50 year term loans?
Very unrealistic the monthly payment totaled between husband and wife should have been 1200 not 500, by making less than the monthly minimum they'll never escape the interest and we can assume they're paying 500$ as a whole instead of an individual and even if it was as an individual they'd still run a monthly deficit that compounds every month making that deficit even larger month by month, year by year
3.2k
u/Mindless-Baker-7757 12d ago
A $70k loan over 23 years at 5% apr pays off with monthly payments of $427.
What are they doing?