Principal Pay Down

Owners of real estate are afforded many benefits that renters are not. Principal pay down is a frequently overlooked benefit.

Think of principal pay down as a forced savings account. That is, of the money you spend towards your mortgage, a certain amount goes towards interest, and a certain amount goes towards principal (see an example on the tax benefits page). The money spent on principal is money that, if prices stayed the same, you would effectively be recuperating all of it, less the closing costs of the sale. If prices appreciated, you would have effectively made a return on the amount of money you put into the property (down payment + total principal paid).

Therefore, when analyzing the benefits of home ownership, it is important — especially when comparing renting to buying — to consider the all of the benefits of home ownership. For instance, in reference to the example on the tax benefits page, where the effective monthly payment for a $500,000 house reduces to 2,886.00, subtract from this number your monthly principal pay down of $685.00. Therefore, you are effective owning a $500,000, which may rent for $3,400 per month, for a net cost of $2,201 per month.

This is why some people remember how to spell “principal” by noting that principal is your pal.