WARNING: This post contains math.
There is definitely something compelling to owning your own home, from both a psychological standpoint but also a financial standpoint.
But I’m not a fan of debt. You know this by now. And in case you haven’t noticed, homes are a little expensive these days. For most people, this means a mortgage, which is lots of debt.
So one question one could reasonably ask at this point is: why not save up until you have 100% of the purchase price of a home and then buy it outright?
Don’t laugh. It’s a reasonable question. Why do I get the feeling that you’re saying “you can’t do that“? People do. You can. It just takes a long time. A really really really long time.
How long? Well, let’s say that you live super cheaply and can put away $1,000 a month. To buy something that would cost $250,000, that’s around 21 years. That’s a long time, but within the ball park of the time scale for a conventional mortgage.
So maybe there’s no difference. Why not just save up and pay cash? Wouldn’t it be nice to not have to muck about with lenders and mortgages and the like? I know I’d certainly like to avoid it.
Let’s see how this plays out.
Table of Contents
Two scenarios
Here are two scenarios. In Scenario A, you are going to go for a mortgage, and in Scenario B, you wait to pay all cash.
In both scenarios, you start out renting at $1000/month, with $1,000 to put away each month. But in Scenario A, once you get to 10% down, you opt in to a 25 year mortgage on a $200,000 home. In Scenario B, you stockpile cash until you have enough to buy the $200,000 home outright.
Ready? Let’s go.
(A note for sticklers: I’m avoiding things like closing costs and mortgage insurance as they wouldn’t alter my point, and it would make this post way too detailed and confusing. Also, some of the math is rounded.)
Scenario A
It will take you 20 months, or a little under two years to get to your 10% down payment ($20,000). Then you buy, move out of your rental, and into your home. Congrats.
Total paid so far: $1,000 × 20 + $1,000 × 20 = $40,000
Now, a $200,000 mortgage with 10% down, over 25 years, costs about $300,000 dollars. (Interest, if it’s not obvious.)
So you’re going to be paying that $1,000 a month for 300 months. So you will own the home outright by month 320.
Total paid so far: $40,000 + $1,000 × 300 = $340,000
I’ll have to add in $200 a month extra for property taxes etc. over that period. Sorry.
Total paid: $340,000 + $200 × 300 = $400,000
Here’s where it gets fun. Now you will effectively have to pay nothing. From here on out, all the remaining money either goes into your pocket, or trips to Hawaii, or supporting Planned Parenthood, or whatever you want.
Scenario B
This one is much simpler. Every month, you put $1,000 toward rent, and $1,000 toward your home. On a $200,000 home, that will take you 200 months, or a little under 17 years to get to this point, by which point you will have paid $400,000 total.
Then you buy.
Then, to match things up with Scenario A, you get to live in the place for 120 more months (10 more years) with that same $200 a month I mentioned above. More fun.
Total paid: $400,000 + $200 × 120 = $424,000
Analysis
I have to admit: I’m surprised how close these scenarios matched up. So that would on paper seem like an argument for going all-cash, especially if you dislike going into debt.
And indeed, it might be. But there are some caveats against Scenario B:
- We’re assuming that in 17 years you’ll be able to find the same home for the same price. Home prices may not always rise, but do you expect things to be more expensive or less in 17 years? I know my choice.
- We’re also assuming that your rent won’t rise for 17 years. Ha ha.
- Since you’ll be living in one place while saving for another, you’ll have to pay a lot more per month for a longer period of time with Scenario B.
- You’ll be in your rental place much longer in Scenario B, which among whatever else, could be more risky.
So while the numbers are fairly equivocal here, the uncertainty grows larger in Scenario B.
That said, unless my math is wrong (please check my work!), it’s not as terrible or as unaffordable an option as one might initially think. For most people, though, maybe somewhere in the middle might suffice. Either way, don’t rush the process.
But enough about me. What do you think about paying all-cash for a home? Are you as surprised by the numbers as I was?
