A Tale of Two Sisters

Once upon a time, there were two 25-year-old twin sisters named Mollie and Maggie. The twins had a well-to-do uncle pass away and each found themselves with a $10,000 inheritance.

Mollie used most of her cash for a lavish vacation, saving just enough for a security deposit on a new home available for rent at Overlook in Stuarts Draft. The $1,195 monthly rent would fit her budget just right. She was content with her life and happy in her new home.

Meanwhile, Maggie used her money as the down payment on a new home next door to Mollie. Maggie’s new home sold for $216,900 with the builder paying her closing costs. Maggie secured a 30-year fixed rate mortgage at 4.25 percent, making her new home payment only $1,018 per month. After adding taxes and insurance, her payment totaled $1,125. At tax time, Maggie will get back an extra $2,400 thanks to deductions for interest and property taxes, making her actual housing costs only $925 per month.

Fast forward thirty years. Maggie still lives at Overlook and has just paid off her home. She is looking forward to an early retirement at age 55. The fact that her home is paid for means that she will have lots of money for travel and to just enjoy life. Inflation has been modest over the 30 years she has owned her home, averaging just over 3.3% per year (just like 1980-2010). She is pleasantly surprised to find that her home is now worth about $575,000.

Next door, Mollie continues to rent her home. She just received notice from her landlord that, in keeping with his practice of the last 30 years, her rent will take a small increase to keep pace with inflation. Mollie never worries much, because her employer just gave her a small cost-of-living raise and that should cover the increase. As usual, Mollie will get by.

Comparing finances with her sister one day, Mollie came to the staggering conclusion that she has become a member of the “working poor” while Maggie is financially independent. That is a surprise as the sisters have equivalent jobs and similar lifestyles with only one big exception — home ownership.

Maggie tells her to add up 30 years of rent receipts and check the total. Mollie is devastated when she realizes that she has paid over $715,000 in rent over 30 years. Maggie points out that over the same period, her cost has been $366,418 for principal and interest and about $60,000 for taxes and insurance, putting her $288,000 ahead on the 30-year cash flow in addition to the increase in value of the home. And that’s not all — Maggie points out that the real estate taxes and interest have been tax deductible, netting her another $50,000 through income tax savings.

Maggie owns a paid-for home worth $575,000 and has saved and invested her savings of $338,000 for a net worth well in excess of $900,000. Meanwhile, Mollie has a box of worthless rent receipts that cost $715,000. Maggie will live on easy street the rest of her life; Mollie will scrape to get by.

The moral of the story is to save, borrow or inherit enough cash for a down payment on a home. Do it now while rates are low and prices are affordable. Think that your financial security depends on it — because it probably does!

Scared of the economy? Check out our owner financing.

– Franklin Root