#personal-finance

Home Ownership

Ignoring risk, evaluating the financial benefits and costs of home ownership (as opposed to renting) isn't simple, but it is straightforward: just an application of computing net present value Net present value using your expected investment returns as the discount rate. As an example, see this spreadsheet.

The complexity arises when we realize that taking a mortgages is equivalent to leveraging your investments, which necessitates increasing your investment's risk.

Recall that in the log-normal model, investment returns grow linearly with leverage, but investment risk grows quadratically since they're based on variance rather than standard deviation.

The complexity mainly comes borrowing higher amounts. For instance, if you borrow 70% your net-worth, then you run into a very real possibility of losing everything.

Wikipedia contributors. (2020, June 7). Net present value. In Wikipedia, The Free Encyclopedia. Retrieved 06:09, August 2, 2020, from https://en.wikipedia.org/w/index.php?title=Net_present_value&oldid=961189033 Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77-91. https://doi.org/10.2307/2975974