The Opportunity Cost of Mortgage Interest
In case you're not familiar with the term, opportunity cost refers to the value of what you give up when choosing one course of action over all other alternative courses of action.
As it applies to money, if you spend a given amount of money to purchase something that loses its value with time and use, you simultaneously give up the right spend that money on anything else of equal or lesser value.
In the case of taking out a home loan to purchase a house, one of the things you will be spending money on is interest charges. And while the house may grow in value over time (pure speculation), the money you pay out for interest charges represents a value that is lost forever.
To determine the opportunity cost of the interest charges you will pay on a home loan, you first need to determine how much these interest charges will add up to over the home loan repayment term (the monthly house payment calculator on this page will help you to do just that).
Once you have totaled up the home mortgage interest charges, the next step is to ask yourself, "What else could I spend that money on if I chose not to borrow money to purchase a home?"
If you're like most people, who ask themselves this question, one of the answers that may not have occurred to you is, "time off from work."
The Opportunity Cost of Lost Time Off From Work
Every dollar you spend on home loan interest charges is money that could have been used to meet your other financial obligations. This means that if your cost of living averages out to $100 per day, then every $100 you spend on interest charges represents one day that you could have taken off from work had you paid cash for a home rather than borrowed the money to purchase it. The monthly house payment calculator on this page will estimate how many 40-hour work weeks it will take you just to pay the interest charges on your home loan.
Sure, we all need somewhere to live. But we do have a choice as to whether we satisfy that need with a $30,000 mobile home or with a $3,000,000 ocean-front mansion.
Unfortunately, most of us have been brainwashed into believing that we are entitled to the instant gratification we can get from purchasing a home without having to pay cash for it upfront. And the reason no one is trying to convince us to do otherwise is that no one stands to get rich from promoting the concept of saving up and paying cash for the things we desire.
The reason you won't likely find another monthly house payment calculator on the web that calculates the opportunity cost of taking out a home mortgage is that all of the other calculators are created for mortgage and real estate companies. And the last thing they want you to do is to become aware of the drawbacks to following their advice.
I know this may be difficult for you to comprehend, but it is possible to purchase a home with cash -- thereby preserving a mountain of your free time for other things besides working to pay the interest on your mortgage. It's called the "Grow Slow, Pay As You Go" method of purchasing a home.
Grow Slow, Pay As You Go Method of Home Buying
Here is what mortgage companies don't want you to do:
- Rent or buy the smallest, most inexpensive mobile home, house, or apartment that you can tolerate.
- Estimate the size of the mortgage you could qualify for based on what the mortgage companies are telling you.
- Each month deposit the difference between your monthly rent or house payment and what the mortgage companies say you can afford to be paying each month. Also include any money you will save in homeownership costs (insurance, utilities, maintenance, repairs, property taxes, etc.) from buying or renting a much smaller residence.
- Once your savings have grown to the point that you can afford to pay cash for a larger residence, pay cash for the larger residence but continue to deposit the previous amount into your home buying savings account.
- Repeat step #4 as often as you deem necessary.
If you follow the Grow Slow, Pay As You Go home buying method, three things will happen.
First, you will fully appreciate every dwelling upgrade. After all, you can't fully appreciate a larger living space until you've lived in a cramped living space. Nor can you fully appreciate a free-standing home unless you've lived in a thin-walled apartment surrounded by other apartments.
The second thing that will happen is that over time you will be able to afford twice the house you could have afforded if you had bought into the instant gratification home buying plan promoted by real estate and mortgage companies. This is due to all of the interest you will earn on the invested mortgage payments you won't have to make, combined with all of the mortgage interest charges you will save by not having a mortgage.
And finally, the third thing that will happen is that at some point you can choose to stop buying larger homes and instead simply use your investments to supplement your income -- meaning you can take more time off from work to spend time doing things that are most important to you.
If you opt for the popular instant gratification home buying plan (Grow Fast, Pay Later), all of the interest charges you will pay will only insure that the top executives of your home's mortgage company will have more time to do what is important to them.