Now that he’s making more money from his new job, Charlie is wondering if he should stop paying a landlord and start making payments on a home of his own. He has $20,000 saved so far. He tries to estimate how much he will have at the end of 25 years if he buys a home, compared to investing those savings.
This chart sums up how he estimated his return with each option:
|Option||How much the investment goes up in value over 25 years||How much the investment will be worth after 25 years|
|Put $20,000 down on a $200,000 home||Increases 4% for the first 5 years, then 3% a year||$440,000|
|Rent and invest $20,000||Increases 6%||$360,000|
Charlie decides: Charlie compares the $360,000 with a home potentially worth $440,000, and decides to buy the home. However, he knows these numbers are estimates only. There is no guarantee on what he will make on either investment. Housing prices in his area may not increase, and may in fact fall. Stock markets could drop, dragging down his investment return.
Also, he will have certain costs to pay with each option. For example:
If Charlie buys a home:
- He will have to pay for repairs. These costs could be higher than he expects.
- If he buys a condo, he will likely pay monthly fees. These fees can increase over time. There may even be extra fees from time to time for major repairs.
- There is no tax on the money he makes on a home, as long as it is his main home.
If Charlie invests his savings and rents:
- He will likely pay less for home repairs.
- He will likely pay fees to invest. He may also pay taxes on the money he makes.
So why does Charlie buy the home? Like many people, it's not about the math. He simply decides he wants a home of his own.
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