Ramit Sethi explains why the first 20 years of a 30-year mortgage don't build equity the way people think. Most of your monthly payment goes to interest, not principal, meaning the bank gets your money while you're told you're building wealth. Renting isn't throwing money away; paying interest is.
How many of us have heard this phrase? Maybe from your parents at Thanksgiving, maybe from your uncle who bought a house in 1987 for $80,000. This is what they'll tell you: Rent is throwing money away. You're just paying your landlord's mortgage. At least when you buy, you're building equity. These phrases are so deeply embedded in American culture that they're practically law. Guys, renting is not throwing money away. You know what is throwing money away? The interest that you never actually accounted for. I'm going to show you the actual shocking numbers right now. When you take out a 30-year mortgage, how long do you think you'll be paying more in interest than the actual cost of your house? For the first 20 years of your 30-year mortgage, you will be paying more in interest than towards the actual principal of the house. So while people are talking about building equity, What they're actually doing is pretty much primarily paying the bank. When people say they are throwing their money away on rent, you could more accurately say homeowners are throwing their money away on interest.
