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Home Buying - Cash or Credit?


I've been saving up for a house for a while. I heard it's better to wait to actually be able to afford things than go into debt.


How's it going guys?! As you've noticed by the title we'll be discussing home buying today! One of my favorite topics and one many people have questioned for years. I'll toss some numbers at you today and you can continue deciding your plan from there.  The biggest point of controversy is whether to save save save save save and buy your house outright OR take on a sizable amount of debt to get into your dream house early. Right now we'll be discussing the facts, and my personal opinion on the situation.

To get this all started off we'll go ahead and get some quick info out of the way for buying a house outright to see where we stand and elaborate on it later:

Pros:

  • No debt hanging over your head to stress you out.
  • If repairs come up you'll be more financially flexible enough to tackle it.
  • If you decide home buying isn't for you a couple thousand dollar hit on the resale won't sink you.
  • No interest paid to a bank

Cons:

  • Astronomical upfront cost
  • Typically puts home buying off by up to 30 years depending on your savings plan
  • Could require much more upfront costs than expected as houses are known to generally appreciate in value over the years.
  • No guarantee you'll save money going interest fee (I'll explain).

Let's get this out of the way now so you won't be questioning it the whole time. I'm about 80% pro financing your home. The numbers don't make enough sense for renting or leasing to take the time and effort to save the total cost of a home. My main reasons for this: 
  • If you're going to save up 100K, there are much better things you could do with it.
  • If I'm going to be paying a monthly payment for something I would at least like a portion of that go to an end state of owning that item instead of some business mans pockets.
  • Leveraging large amounts of other peoples money effectively boosts your financing report.

Time to get down to the facts. These numbers are very generic as interest rates and home prices change all the time.

  • Home Price: $100,000
  • Monthly Budget: $1500
  • Rent: $500

Buying your home with CASH


This is a tough argument to have because I don't really know anybody saving the kind of money it would take to actually be able to grab a house in cash. There are always things that come up that the money could better be used for at the time. This is immediately a huge flaw with this option, but for arguments sake, lets say you can save perfectly for 10-20 years and make this happen. 

During this time you'll be renting or living with parents(weird) and that living costs money. As you can see above we parked this number at $500/m. I know, that number is extremely reasonable and it supports your argument. So that takes $500 out of our monthly budget leaving us with $1000 to save for a house each month. $100,000 / $1000 = 100 / 12 = 8.3 means you'll have enough money to purchase your house after 9 years. 

9 years living in your "cozy" 2 bed / 1 bath apartment. At an assumed 3% appreciation per year for that dream home you'll be looking at $100,000 x 3% = $3,000 x 9 = $27,000 with a variable rate that brings us to around $22,000 / $1000 which means you'll need an extra 2 years to buy this home you've been eyeing. 11 years later you have your dream home! $22,000 over budget with $500 per month x 12 months in a year  = $6,000 per year. Now we'll take that $6,000 x 11 years of rent paid = $66,000 in "Interest" / Lost Money paid in rent that could have gone to your home bringing you to a grand total of $188,000 for your $100,000 you saved so religiously for. 



Buying your home on CREDIT


Back to traditions. With todays interest rates you're looking at about 4.5% on your first home(depending on your credit) coupled with a 3.5% down payment. You're buying your home today meaning you have to fork up $3,500. You spend a couple months at home saving your full $1,500 bringing you into your down payment amount after 3 months of saving(woohoo). 3 months worth of saving to buy a home. 

$100,000 - $4,000 = 96,000 financed over 15 years. Reinventing the wheel ending somewhere in B.C.'s so listed to the left of this post is an image of an online mortgage calculator including Private Mortgage Insurance and home owners insurance along with interest paid. You automatically come out saving a little over $200 a month if you take the full 15 years to pay down the loan. 

If you'd like to pay that down earlier you easily have room for that option as well. With the current plan, you'll pay $161,000 total and you'll be occupying your beautiful hand picked residents the entire time. Even with interest and home insurance you still come out paying less than the amount you would have paid for rent plus savings. 





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