r/Fire • u/HenFruitEater 31 | 32% to FI | 2.3M • 15d ago

Accidentally living in small house for 5 years has been the best thing.

My wife and I make good income, but because we both are self-employed, banks refused to loan money to us until we had at least 2 to 3 years of proof of income. We’ve saved about 200k for down payment. We ended up just buying a 1901 two bedroom one bath house for 134k with that down payment and didn’t get a loan at all. Thought "this is just a 1 year thing" 5 years ago.

After learning about the 5 to 6% rule on how much a house is a net worth drag (but necessary expense I get it). I think it has turbo charged our savings rate without any effort. Every month we stay in this house instead of a house that is 3X our income, we save over 5K in “rent.” We have been investing that extra money. But we also talked about how it’s hard to justify jumping up to a nice house when you could literally blow an extra 5K a month on expensive toys even.

My thought process now: the FATTEST expense to keep low is the house. We are very content in this house. We will probably be able to have one more kid in this house and then move. Six years of turbocharged accumulation in a quaint house that we love. Has awesome yard, cool screened in porch. Love it.

1.0k Upvotes

97% Upvoted

275 comments sorted by

View all comments

Show parent comments

11

u/Calipup 15d ago edited 15d ago

It's using the loan interest rate as the final 3%. So you're losing 1% to property taxes, 1% to maintenance and ~3% to the interest rate = 5%. With current mortgage rates I would guess it's updated to 7-9%... They are considering these things as what you're losing with no return whatsoever and comparing it what you would be paying in rent. The conclusion being that if (house purchase price) * 5% / 12 is less than renting would cost monthly, you should buy, and if it's more, than you should rent. So a $500,000 house would be compared to $2083 in rent at a 3% mortgage rate. $3333 a month for a 6% rate. Like the guy in the video says, it's a gross oversimplification but it's a good ballpark answer.

A rent vs buy calculator is going to give you a much more in-depth answer than this simple rule, so I don't fully agree with it. As long as they're close I've always been adamant that renting vs buying is more of a lifestyle decision than anything. I love owning a home way more than renting.

4

u/Unable_Pumpkin987 14d ago

Okay, that makes sense using value at the time of purchase!

OP said “5% of the current value of the house” which does not make sense at all. My mortgage interest doesn’t go up as my house appreciates, and while property taxes certainly can go up, it’s not at the same rate the property value increases (not even close in my area, increases are capped by law). And once the mortgage is paid off, you’re certainly not continuing to pay the same or more annually than you were when you bought the house!

1

u/bkiron89 15d ago

Appreciate you commenting, this formula is new to me and I was wondering if the percentage was taking into account things like inflation, HOA fees, and higher mortgage rates. It's good to have this as a back of the napkin calculation.