Archive for the ‘money’ Category

Home Ownership and Mortality

January 1, 2007

Those who've spoken with me recently will know that paying off my student loan has been something of an obsession of mine.  I had an opportunity to work overseas for Engineers Without Borders in 2003, but couldn't because I would have to make payments on this big honkin' debt while in Africa earning nothing.  So I passed it up and moved out to Edmonton to follow Sarah.  It's a decision that I've always felt a bit bitter over.  Now that I'm single, I've been throwing a large portion of my income into getting rid of this (more mental than financial) burden, and  If I keep up the current repayment rate I'll have it paid off by May.  At 29, I'll owe nothing to no one for the first time in my life.   Yay.  I may even apply to do a work-term in Africa, though I'll probably wait until I take my P.Eng test next fall.

So I've started to think about what the next item on my financial to-do list will be.  There are a number of good candidates.  I could buy a car, but I've made do without one for three years now, and I can last a few more.  (Ask me again after another winter on the bus.)  Instead, I've taken the advice of some friends and family and spent today looking into buying a home (Becki and Steve recently bought a house, and Jordie is starting to look for his first).  Despite the lofty promises of home ownership, I'm still not convinced.  Let me illustrate:

Using this awesome Java calculator, I've compiled the following representative numbers:

  • I currently pay about $800 a month in rent
  • For a 25 year mortgage at 6.5% interest (roughly the going rate):
  • With my salary, I would qualify for a loan of about 165k
  • A $165K loan would cost about $1100 / mo
  • A $120K loan would cost about $800 / mo
  • Over the length of the loan, I would pay about as much in interest as the principle.  For a 765k loan, that would average to about $550 / mo in interest, and about $400 / mo for a 720k loan.
  • For a 17 year mortgage at 6.5%
  • I qualify for about $130k
  • A $120k loan would cost about $1000 / mo
  • Over the length of a $120k loan, I would pay about $80k in interest, averaging to about $400 / mo
  • For a 10 year mortgage at 6.5%
  • I qualify for about $120k
  • A $120k loan would cost about $1100 / mo
  • Over the length of a $120k loan, I would pay about $35k in interest, averaging to about $300 / mo

So basically, any house over $120k (less what I can save for a down payment) is going to cost me more per month than I currently pay in rent.  "Fine", you'll tell me, "at least you're investing that money."  Not so! I would be losing $300 to $550 a month in interest payments (not to mention property taxes and maintenance, which, I'm told can total over $200 / mo).  That's comparable to what I now pay in rent.  Plus I would have to put off any hope of going to volunteer overseas for 10 to 25 years.  (OK, that last bit isn't really true, but this is the internet, so I'm allowed to write thoughtless crap which confirms my bias 🙂

However, I did think of one way I might be convinced to buy a house – I could rent part of it out.  With $600 / month in rent, I could cover the interest charge on the mortgage, leaving only the principle to pay (which is effectively just savings).  But can I get a suitable house in Hamilton, loacated where people would rent it, that costs less than $165k?   A quick search on finds a bunch of possibilities (but their database seems to be all screwed up right now – I get a bunch of hits from Burlington and the mountain, and the titles don't match the ads).   Cool.  So this time next year, it's likely I'll be looking for a house and a tenant.   In the meantime, I'll be asking all the landlords I know for advice, and reasons why I should get a car instead.

On a last little depressing tangent, I can't help but summarize this kind of planning as "Save for the next 30 years, so that I have enough to make it for another 20, then I die".   When my budgets only covered one month  I could pretend that my existance was sustainable.    Oh well, hopefully the awareness will help me appreciate the time and resources I do have.