I originally posted about the concept of “Total Interest Paid” way back in 2020. Back then, many people were getting mortgages with around a 3% interest rate. EVEN AT 3%, the total cost of a $400K, 30 year fixed loan would be $607K. But at 7.5% that number JUMPS to over $1M.
This TIP number can be shocking because many of us are numb to the concept that a loan isn’t just free money and a monthly payment amount. You have to make those payments and they ADD UP. Sure, when you sell the house you’ll get some of it back. But in most cases, the costs associated with owning a home (mortgage interest, taxes, insurance, maintenance, remodels, realtor fees, etc) dramatically outpace any of the growth of value of the house. So instead of some wealth creation machine, most primary homes are actually forced savings accounts with a negative rate of return. That doesn’t mean owning is BAD, it just means you should do so understanding the implications.
How do you reduce this mortgage cost? Borrow less or pay it off faster. Spending less on your home will help you accomplish both. So when looking to buy a home, remember that the less home you buy, the more you’ll have available to go into positively growing investments like index funds or investment real estate (which has the significant difference of generating income while you own it).
p.s. I’m curious if people will yell at me in the comments for saying that renting is always better on this post. Because, you know, I literally never say that.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Jeremy
