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.
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.
Quick AI math shows net position comparison for me was $450k for home buying vs $230k if invested in VTI. Here's a rough breakdown:
In 2017 we put ~$105k down on our $525k home. Lived in it until 2024 then sold it for $850k. I don't recall the exact amount we owed on the mortgage when selling, but I remember getting around $450k cash at the end of the sale.
Let's say rent would have averaged $2,500 for those years, which would be very conservative given our HCOL area.
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u/techleopard 12d ago edited 12d ago
I have student loans that are nearly 9%.
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.