MYTH# 2: Paying rent is throwing away money

Reality: For the first five years of ownership, you are simply giving away money to the bank.

During the first five years, more than 80% of your monthly mortgage payment is interest. And nearly one third of all homeowners move within five years, before they start building any real equity.

Add in the money they spent during that time on maintenance, taxes, insurance and the costs to buy and sell their house, and most would have saved money by renting.

Reality Check

Assume you buy a $200,000 house with a 5% down payment at a 6% interest rate. After five years of mortgage payments, you will have paid $55,152 in interest and only $13,196 in principal. In addition, you will likely have paid between $10,000 and $20,000 in maintenance and repair (see Myth# 3) to earn that equity.

Chances are you could earn more than this in a number of investments that are more diversified and less risky than putting all of your eggs in one basket.

NOTES

3. Magali Rheault, “Tax Time: How America Files.” Kiplinger’s Personal Finance, April 2004.

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