Why do people buy houses they don’t plan to pay off? Most people don’t spend their entire lives paying off one house, so what is the financial benefit of getting a “starter home”? I’m new to the economics of real estate and I’ll take any wisdom offered.
In: Economics
You have 2 dollars and want to buy a house for 10,the bank gives you 8 dollars.
Now you have 2 dollars worth of a house and with your recurring payment you pay 1 dollar of interest (cost of the loan) and another 1 dollar as paying off the loan.
So after a year you will pay 2 dollars and own 3 dollars from your house, the bank will own 7.
This does not sound good, except there are two additional things happening. You don’t have to rent and inflation is affecting the loan.
You probably save a dollar on renting, so it’s not more expensive. Additionally if the price of the house increases to 15 dollars, the bank still own only 8 dollars, so now you have 7 dollars worth.
The generic advice is that you should always pay back the loan as soon as possible, because house price inflation is rarely higher than interest rates.
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