One of the reasons we would often hear people use to justify overspending on a home during the bubble was that they wanted to stop “throwing away money” on rent.
I would hope that by now most people have realized how ridiculous that concept is, but I thought it might help dispel the notion if we consider a pair of hypothetical (but completely plausible) scenarios.
Couple A is renting a 2-bedroom, 1.5-bath townhouse for $1,000 a month in Ballard. Their $1,000 pays for not only the roof over their heads, but the water/sewer/trash, any necessary maintenance, and access to shared facilities such as a pool, hot tub, and workout room.
Over the past three years Couple A have spent around $35,000 on shelter. If they decide they want to move, it’s as easy as waiting until the lease is up and collecting their security deposit.
Couple B decided in 2006 that they were tired of “throwing away money on rent.” They didn’t have a down payment, but that of course didn’t stop them from qualifying for a $400,000 loan on an adorable 2-bedroom, 1.5-bath Ballard craftsman. With an interest rate of 5.7%, their (PITI) payments are around $3,000. Of course, this doesn’t include any services or maintenance.
Over the past three years Couple B have spent around $67,000 on mortgage interest alone, and their home is now valued at around $340,000—15% less than they paid. If they decide they want to move they have three options: Come up with about $40,000 in cash to cover the difference between their mortgage and the house’s value, convince the bank to accept a short sale, or walk away.
Now, which of these hypothetical couples seems more like they have been “throwing away money” to you?
