It’s time to buy a new car for your family. You go to the car dealership and after some haggling get the sticker price of $22,000 down to $20,000. The payments fit well within the $350 budget you have. Except that after making payments for 6 years the great price you haggled for swells to over $24,000. Not such a great bargain anymore.
The real estate market is a buyer’s market so you take the plunge into home ownership. A house worth $200,000 back in 2007 is now yours for a sweet $150,000. 30 years down the road you’ve paid over $250,000 for it, not counting any renovations or maintenance.
Are you willing to pay over $24,000 for a car you purchased for $20,000? Or pay $250,000 for the $150,000 home?
Am I saying it’s wrong to buy a house or car if you have to take out a loan? No, I’m not. There are many factors in whether or not you should do so. In many cases it may be significantly cheaper to buy than rent a house or pour more money into an older vehicle. My point is that it’s not about the payments, it’s about the end result of how much money you’ll spend after making all the payments.
Try saving your $350 for two years and using that as a down payment. $350 put into a 0% account monthly for two years gives you a $8400 downpayment. Then you can finance the car for 4 years instead of 6 and put the full $350 on your loan each month. You’ll end up paying right about $22,000 for the car- the original cost!
Save $680 a month for 7 years, and you can take out a 15 year $90,000 loan on your $200,000 house that you purchased for $150,000. You’ll end up paying a total of $181,000.
Even though 0% – 20% down loans are available, they are extremely costly. Striving for 40% or more down will cut costs significantly and keep your money working more for you than for the lender.
Soooo true! If only we’d known & fully understand that in our 20s.
Soooo true! If only we’d known & fully understand that in our 20s.