Rent Your Way to Retirement With a 'Rental Mortgage'

Retired couple in rental homeRenting is too often considered a stepping stone for people busy saving up for that prototypical American dream: homeownership. But what if we looked at renting as a sound investment choice, rather than a runner-up prize? There's a new school of thought doing just that.

With the disillusionment brought by the recent housing crisis, more people are choosing to rent homes rather than sink money into what can be a risky investment. (How times have changed: When your grandparents scrimped and saved for their first home, the mortgage term "underwater" hadn't been coined.)

This new group of "lifetime renters" are breaking new ground in the housing sector, making the conscious choice as 20- and 30-somethings to ignore the advice of their parents and the National Association of Realtors and settle into a long-term rental.

But without the formal structure of a mortgage helping them bank money in the form of home equity, how can they make sure they're saving enough to cover housing costs through their golden years? The radical new idea for long-term housing is to establish a "rental mortgage" for yourself.

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Who in their right mind would elect to saddle themselves with a mortgage payment when there's not even a house to be gained at the end of 30 years? With a little discipline, the idea of setting aside an amount of money each month equivalent to what you would be paying in a mortgage is smart strategy -- and though there may not be a house at the end of the road, each payment to yourself is 100 percent principal, and you earn and keep all of the interest.

But even though it's your money deposited into an account set up by you, rule No. 1 of the rental mortgage is that you do not touch the money until you turn 65. Treat it like your IRA or any other retirement account: Hands off!

How to Set Up a Rental Mortgage(from

  • Use an online mortgage calculator like the one at AOL Real Estate to calculate what your mortgage payment would be, based on home prices in the area where you live (or the one where you'd like to retire).
  • In the "mortgage term" field, enter the number of years you have until retirement (or until you turn 65). For instance, if you're 30 years old now, put in 35 years.
  • When you calculate your mortgage payment, click on the "Show/recalculate amortization table" button, which will show what you would pay in principal and interest each month. For instance, a $200,000, 30-year mortgage with a 5 percent interest rate would have $240 going to principal in the first month. Each month, the payment amount allocated toward principal gets larger, while interest paid to the bank gets smaller.
  • You can save the full mortgage payment, or just the principal. By depositing the principal amounts into a savings account for the next 35 years, by the time you turn 65 you should have accumulated, in our example, $200,000 -- plus interest.

It's a radical new way of thinking about one of the biggest investments you'll ever make, but if recent history has taught us anything about the housing market, a new way of thinking is sometimes just what we need.

See more perks of renting vs. buying a home.

Not sure renting is right for you? Here are some AOL Real Estateguides to help:

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.
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