Buy a home now and live almost free after 5 years ! How ?

Let us assume that you are paying $900 rent per month for a 1000 square ft apartment. This rent does not include any utilities such as water, electricity, and gas.

You are interested in buying a home. The value of the home is $200,000 or $200K. This future home is 3 bedroom townhome or 3 bedroom condominium or may be a 3 bedroom single family home. This home has much better living space than the current apartment/townhome for which you are paying rent. Do you know that you can live in this $200K home with the rent of $104.16 per month?

Let us assume that you (a potential home owner) are willing to come up with a down payment of 5% ($10,000) of the value of the home’s current selling price ($200K), and you have a decent credit history.

Your real home loan would be $200,000-$10,000 (5% down payment) =$190,000.

Also the home buyer needs to come up with a closing cost. It is common for a variety of costs associated with the transaction (above and beyond the price of the property itself) to be incurred by either the buyer or the seller. These costs are typically paid at the closing, and are known as closing costs. Some lenders offer a promotion in which the entire closing cost is fully paid by the lender or a majority of the closing costs are paid by the lender.

Let us assume that the closing cost at the time of closing is approximately 2% of the home loan, and you need to pay this cost out of your pocket at the time of closing. Hence the closing cost in this case is 2% of the $190,000 = $3800.

Sometime, the home you are purchasing may have the dish washer, dryer, refrigerator, gas range ( in real estate language it is called All appliances conveyed, meaning that these appliances are included in the home purchase). But let us assume that none or very few appliance were conveyed. So let us add $3000 to buy a good quality appliance.

Total you need to pay out of pocket at the time of closing will be as follows :

  • 5% down payment ($10,000) + at the most 2% closing cost ($3800) = $13,800
Cost of Home : $200,000
5 % Down payment
$10,000
2 % Closing Cost
$3800
Appliance that you need to purchase as soon as you move in
$2500
Total Money you need to buy a home in USA
$16,300

You’ve decided to go for 20 Year Fixed Rate Loan at 4%. Your intention is to sell this home after 5 years.

Each month you will be paying $1151.36( Yearly $13816.32 ) in principal + interest which is distributed in each year as follows , in addition you would also be paying around $1000 ( Home owner Insurance Cost ) and around 1% of your home price towards real estate tax annually.
$1000.00 Home owner Insurance Cost + $2000.00 ( 1% of $200K as real estate tax) = $3000.00 annually or $3000/12 = $250 monthly.
Let’s add $250 additional cost to monthly payment of $1151.76 , so total you would pay is : $1151.76 ( Principal + Interest ) plus $250 ( Insurance + Real Estate Tax ) = $1401.76

Table A : Loan Payment & Outstanding Loan Balance
Total Principal
Paid Anually
Total Interest
Paid Anually
Outstanding Balance
of your Loan

At the end of 1st year ( first 12 months)
$6331.57
$7484.75
$183,668.43
At the end of 2nd year
$6589.51
$7226.81
$177,078.92
At the end of 3rd year
$6858.00
$6958.32
$170,220.92
At the end of fourth year
$7137.39
$6678.93
$163083.53
At the end of fifth year
$7428.19
$6388.13
$155655.34
Total ( in all above 5 years)
$34,344.66
$34,736.93

Each year your home price appreciates at 6.34% per year, this is known fact.

Visit this link : http://www.realestateabc.com/graphs/natlmedian.htm

But here we will consider just 4% home price appreciation rate per year as we want to play real safe here. Also real estate market was down for last 4 years and it is now picking up back again.

You purchased home at $200,000. Also, yearly you pay almost 1% of the value of your home towards real estate tax. Also you pay approximately $1000 per year towards home insurance.

Table B : Home Appreciation
Principal
+
Appreciation

(4%)
Home Price
If you sell it now..
1% of home price
( real estate tax)
At the end of 1st year

( first 12 months)

$200,000.00
+
$8,000.00
$208,000.00
$2,080.00
At the end of 2nd year
$208,000.00
+
$8,320.00
$216,320.00
$2,163.20
At the end of 3rd year
$216,320.00
+
$8,652.80
$224 ,972.80
$2,249.72
At the end of 4th year
$224,972.80
+
$8,998.91
$233,971.71
$2,339.71
At the end of 5th year
$233,971.71
+
$9,358.86
$243,330.57
$2,433.30
Total Real Estate Tax Payment in 5 year
$11,265.93

Your total out of pocket expense at the end of 5 year is :

Table C : Total Out of pocket Calculation

Expense Type

Amount
5% Downpayment and Closing Cost
$16,300.00
Real Estate Tax
$11265.93

5 Years worth of Loan Payment

( Principal $34,344.46 + Interest $34,736.93)

$69,081.59
5 Years worth of Private Mortgage Insurance Payment ( $100 X 60 )
$6,000.00
5 Years worth of Homeowner Insurance ( $1,000 X 5 )
$5,000.00
Total Expense At the end of 5th year
$107,647.52

At the end of 5 year, you decided to sell home, your current home price based on 4% annual appreciation rate is now : $243,330.57. (See Table B to see how your home price appreciates year by year)

Your current outstanding home loan amount at the end of 5 year is $155,655.34

So if you sell it at $243,330.57 now, bank wants its outstanding loan amount ($155,655.34) to be paid off : Current Home Price($243,330.57) – Outstanding Loan Amount($15,0636.04) = $92,694.53 will come in your pocket.

But you spent nearly $107,647.52 in last 5 year which means at the end of 5 year you would have really paid just $107,647.52-$92,694.53 ( the profit from sell) = $14,952.99.

Let us divide $14,952.99 by 60 months that comes to $249.51. It means you have been paying a rent of just $249.21 per month to live in your own home ! .

Now let us assume that you didn’t buy a home and continue to pay rent at $1,000 per month for 60 months ( 5 year) , you will pay $,1000 x 60 = $60,000 and at the end of 5 year it would be all money spent, and you cannot get back a dime out of it.

Other intresting argument renter makes is that with rent of $1,000 per month, it is less money upfront. And I don’t need to shell out any extra money. But such renter completely forgets that if he continue to be renter, it is like spending the money with absolutely no return.

What would you prefer a decent living at approximately $250 per month in your own decent size home or living at $900 or $1,000 per month in just 2 bedroom apartment.

Please note that in the entire calculation , we haven’t counted tax advantage on total interest($34,736.93) and real estate tax ($11,265.93) you pay in those 5 years. Also first time home buyer also gets additional tax breaks like first time home buyer credit etc. We just assume that it will be offset when you sell the home, association fee ( if it is a townhome/condominium); also selling home would require you to pay approximately 4 to 5 percent of your home price.

Most of home owners complain that after borrowing a home, they became poor while paying mortgage because their real equity is in their home that they’ve not cashed out yet.

Uncle Sam wants you to borrow the money from them, and usually the interest you pay ( usually 4%) offsets against the rate of appreciation ( 4%) and hence you are just living in your own home for almost $250!

Also buying a home is a sure way to build a wealth and become a millionaire. Seems like a gimmick or fairy tale ? Do you believe that our analysis is lacking insight ? Or simply can’t trust us ?
Please read this book and you would have a wealth of information about becoming millionaire just through buying a home.

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