Rent Costs Add up Over Time
Updated: May 4
How much do you pay in rent every month? What if you paid that amount to yourself rather than your landlord? How much money would you have after one year?
The answer is A LOT! Equity is the amount of ownership someone has in an asset, like a home. The equity you would have in a home is made up of the down payment you put down, the payments you make over time, and the increase in value a home gains.
Down payments do not need to be big. There are loans that require 0% down, 3% down, and then any number you can afford up to making an “all cash offer”. If you are buying a $300,000 home and you put 3% down, that is only $9,000 and you when you sell that home, you still get to keep the $9,000.
Payments you make over time are broken into two parts, there is the principle and the interest. If your monthly mortgage payment is $1,500 per month, the majority of it will be interest payments. After about 20 years the majority becomes the principal payments (for the $300,000 house example: $9,000 down payment leaves a $291,000 loan amount. Plus the interest…say 6% interest on top. Your total loan amount would be $291,000 x 1.06 = $308,460. That is the amount you are paying off over 30 years). By year 20 you will pay off the $308,460 loan chunk much faster. Those payments made before year 20 still go towards paying off the $291,000 principal part of the loan and you get to keep those payments as well.
Over the years your home will increase in value. Some years it will increase double-digits like in 2020 (17.6%) and other years will average about 5% (this year economists are estimating 6.6%). If your $300,000 home goes up 5% a year over the next five years, it would be worth about $375,000. That $75,000 also is equity you would get to keep.
So paying rent for $1,500 per month for the next five years gets you… nothing.
Paying a mortgage for $1,500 per month for the next five years gets you… $9,000 + $75,000 in increased market value + whatever number of payments you made during those five years.
There are a number of variables, like interest rates, down payments, how much homes will increase in value over time in a specific neighborhood or market, etc. to be able to tell you how much money you’ll have after five years of home ownership. One thing we can say is that it will be more than if you just kept paying your landlord rather than yourself.
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