Is buying a home always better? | Housing | Finance & Capital Markets | Khan Academy

Summary

In this video, the speaker challenges the common belief that buying a house is always better than renting. Using Northern California as an example, he compares the costs of renting a $1 million house for $3,000 a month versus buying it with a $250,000 down payment and a $750,000 mortgage at 6% interest. He calculates that renting costs $26,000 annually after bank interest, while buying, with tax deductions, still burns $41,500 annually without building equity. The video questions the assumption that mortgage payments are savings and suggests renting might be financially smarter.

Takeaways

• 🏠 The speaker emphasizes the importance of considering whether to rent or buy a house, especially in high-pressure environments like Northern California.
• 💭 There's a common belief that buying a house is always better than renting because mortgage payments are perceived as a form of savings.
• 💰 The speaker challenges this notion by comparing the costs of renting versus buying a $1 million house in Silicon Valley, with a $250,000 down payment.
• 📈 The annual cost of renting is calculated to be $36,000, with an additional $10,000 in interest earned from a CD, resulting in a net cost of $26,000 after interest.
• 🚫 If buying, with a $750,000 mortgage at 6% interest, the annual interest payment alone is $45,000, which is a significant outflow not contributing to equity.
• ✅ The tax deduction on mortgage interest can reduce the effective cost, with the speaker estimating a 30% tax rate saving approximately $13,500 per year.
• 🏦 However, the speaker points out that the $250,000 down payment does not earn interest when used for buying a house, unlike in a CD.
• 🏡 Property taxes on a $1 million house amount to $10,000 per year, which is an additional cost of homeownership.
• 📉 The speaker concludes that, after accounting for all factors, buying results in an annual 'burn' of $41,500, compared to renting for $26,000, challenging the idea that buying is always better.
• 🔍 The script hints at a follow-up discussion on the topic of housing price appreciation and its impact on the decision to rent or buy.

Q & A

Why does the speaker choose to rent instead of buying a house?

The speaker chooses to rent because they are almost 100% convinced that housing prices are going to revert back, and they believe it's not a good time to buy.

What is the common misconception about renting versus buying a house mentioned in the script?

The common misconception is that buying a house is always better than renting because the money paid towards a mortgage is seen as going into savings, whereas rent payments are perceived as disappearing with no return.

How much does the speaker spend on rent annually for the house they are considering?

The speaker spends $36,000 per year on rent for the house they are considering.

What is the interest the speaker earns on their $250,000 if they choose to rent?

If the speaker chooses to rent, they earn $10,000 in interest annually from their $250,000 at a 4% interest rate.

What is the total amount the speaker would pay out of pocket annually if they rent the house?

After accounting for rent and interest earned, the speaker would pay $26,000 out of pocket annually if they rent.

How much money does the speaker need to borrow to buy the $1 million house?

The speaker needs to borrow $750,000 to buy the $1 million house, as they have $250,000 in cash for a down payment.

What is the annual interest payment on the mortgage if the speaker decides to buy the house?

The annual interest payment on the mortgage would be $45,000 if the speaker decides to buy the house.

How does the interest on a mortgage affect the speaker's tax liability?

The interest on a mortgage is tax deductible, which means the speaker can reduce their taxable income by the amount of interest paid, resulting in tax savings.

What is the approximate tax savings the speaker would get from the mortgage interest deduction?

The speaker would save approximately $13,500 in taxes from the mortgage interest deduction, assuming a 30% tax rate.

What are the additional costs associated with owning the house that the speaker mentions?

The additional costs associated with owning the house include property taxes, which amount to $10,000 per year on a $1 million house at a 1% tax rate.

How does the script suggest that the cost of owning versus renting compares in the speaker's scenario?

The script suggests that the cost of owning the house, after accounting for interest payments, tax savings, and property taxes, is higher compared to renting the same house.