Total Cost of Ownership
Mortgage principal and interest represent only a portion of true homeownership cost. The mental trap: comparing mortgage payment to rent while ignoring 40-50% of actual housing cost. Complete cost modeling requires accounting for all recurring and non-recurring expenses:
*Opportunity cost: $100k down payment invested at 4%/year = $333/month forgone returns
Cost Comparison: Total monthly cost ~$4,261 for a $500k home — not $2,661. Compare this to equivalent rental plus investment returns on the down payment.
The Forced Savings Myth: "Paying yourself" through mortgage principal paydown sounds good, but the math is: you're earning your mortgage rate (minus inflation) on an illiquid, undiversified asset. The down payment tied up in home equity could compound at stock market returns. The "forced savings" argument only holds if you genuinely wouldn't invest the difference — and that's a behavioral issue, not a financial one.
Buy vs Rent Analysis
The rent-to-price ratio provides a rough heuristic for the buy/rent decision:
ratio = (annual_rent / home_price) * 100- Above 5%: Buying often favorable over 5+ year horizon
- 3-5%: Depends on specific assumptions and time horizon
- Below 3%: Renting + investing typically outperforms
Break-Even Analysis: Transaction costs (6% selling + 2-5% buying = 8-11% total) require 3-7 years to amortize through appreciation and principal paydown. Shorter horizons favor renting.
When Buying Tends to Outperform
- 5+ year time horizon: Transaction costs amortized, appreciation compounds
- High rent-to-price ratio (>5%): Relative cost of renting is high
- Stable location requirements: Job security, family needs, preferences
- Mortgage rate locked low: Fixed payment provides inflation hedge
When Renting Tends to Outperform
- Under 3-5 years: Transaction costs exceed equity accumulation
- High-cost markets (ratio <3%): Capital better deployed in investments
- Career mobility expected: Relocation probability is high
- Investment discipline: Difference reinvested systematically
Down Payment Considerations
Down payment size affects both monthly cash flow and opportunity cost:
20% down— No PMI, lower monthly payment, higher opportunity cost10% down— PMI until 20% equity, more capital remains invested3-5% down— Maximum leverage, highest monthly cost, PMI for years
Liquidity Constraint: Maintain 3-6 months emergency fund after closing. Home repairs are non-deferrable expenses that don't wait for market recovery or next paycheck.
Affordability Ratios
Standard debt-to-income ratios used by lenders:
- Front-end ratio (28%): Housing costs / gross income
- Back-end ratio (36%): All debt payments / gross income
- Conservative rule: Home price <= 3x annual household income
- Reality check: What payment allows 15%+ retirement savings rate?