Therefore, the yearly compounded rate is higher, actually, than the disclosed rate. In Canada, mortgages use semi-annual compounded rates, while payments are still monthly. Mortgages in the U.S., however, are mostly payable and compounding monthly, which means that U.S. homeowners are paying more in interest on their homes than Canadians, as the yearly compounded rate is higher than the disclosed rate.
Buying a home, we found, is a lot like buying smaller things, as we have been doing, on credit, with credit cards, which is called "installment buying." Installment buying stipulates that, although one may "purchase" something with a credit card and use it, it legally still belongs to the seller until the last payment is made. If the buyer defaults, the goods revert to the seller and the buyer forfeits all past payments. Layaways are also a form of installment buying, in that payment "installments" are made monthly or weekly, however often the purchaser wishes to make payments, but the merchandise is held by the retailer until the item has been paid for completely. (Infoplease)
If one buys on the installment plan, one pays interest on unpaid balances, and therefore pays a higher price for goods than those who buy outright. The Board of Governors of the Federal Reserve System supply statistics show the amounts of credit extended and outstanding to finance automobiles, mobile homes, and other consumer goods.
We were investigating purchasing a home, but found that the cost of home ownership is higher than we thought. In order to own, and not rent, one must pay not only for the mortgage (which monthly payments may be higher or lower than the rent we now pay), but probably another 40-50% more. There are property taxes on the value of the house and property, which would come to thousands...
There is the need to have homeowner's insurance (required by mortgage lenders), which might run $25 per $1,000,000 per month. If a down payment is not paid, or is borrowed from another source, an additional Private Mortgage Insurance will run about $45 per $100,000, which would be about $90 a month. In addition to these mortgage-related costs, there is the simple fact that home maintenance is up to the homeowner. If the plumbing bursts or the roof leaks, that is a major expense that must be paid for by the home-owner, and these things happen periodically.
We thought that buying would be a good idea, since we would be getting a tax break. But we were advised that right now income tax brackets are at a 40-year low. If we were in the 20% tax bracket we would only get a 20% break on interest payments, and for our $1,079 per month payment our tax savings would only be $2,148 per year, or $180 a month. This break only begins to help out on the cost of property tax, homeowners insurance, mortgage insurance and maintenance costs on the house, which would probably total $440 per month. Actually, even with increases in property tax deductions, we would have to come up with $200 more per month for these additional expenses, just because we were buying a home, rather than renting.
After investigating the actual costs of buying our dream double-wide, we decided that, given the additional costs (and also the fact that most banks will not mortgage a double-wide), we are better off renting.
Works Cited
Orman, Suze, "The True Cost of Home Ownership." Yahoo.com. January, 2007. http://biz.yahoo.com/pfg/e10buyrent/art011.html.
Infoplease. "Installment Buying and Selling." Infoplease.com. Website: http://www.infoplease.com/ce6/bus/A0825286.html.
