I have been renting for a few years now and can’t get past the idea that I am just throwing my money away. Can you help me figure out if it is better to keep renting or to buy, especially since housing prices have dropped considerably in the past few years?
There are a number of factors to consider before making your decision. First and foremost is: how long to you plan on staying in your next (or current) home? As I advised last week, “Do not buy unless you know you can afford it should your worst case scenario happen (separation, unemployment, etc.), and do not buy unless you can plan on living in that home for more than five years.” These two items are the biggest considerations you need to work through before signing another lease, or in this case, a purchase contract.
Once you have come to that conclusion, we can work through the numbers to help you figure out which is the best financial decision for you. One great (and easy) comparison calculator can be found on the Ginnie Mae website: http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?
Let’s work through your calculations: You said you are paying $2200 a month in rent for your 3 bedroom/2 bath home. If you can afford 10% down payment toward a $650,000 home, here are the numbers for a 30 year fixed rate mortgage at 5%, if you plan on staying in your next place for ten years. This also assumes a yearly property tax rate of 1.15% and a yearly home value increase of 2%.
The Calculations:Rent Buy Price of Home After 10 Years Appreciation -- $792,346 Remaining Loan Balance after 10 Years -- $475,914 Equity Earned -- $316,432 Tax Savings (at 28%) -- $102,830 Average Monthly Payment over Time $2,448 $1,566 Total Payment over 10 Years $293,760 $187,923
Which is Better?
From this example, we can see that over a ten year period, you will pay $105,837 more if you continue to rent instead of buying. This doesn’t, of course, take into consideration and repairs, maintenance, or upgrades you will have to put into the house, but hopefully anything you upgrade will also add to the value of your home at the time you decide to sell.
So Rita, in my opinion, based on your current rent and what type of home you would want to buy, you would be better off buying in this case. You can lock in a low interest rate at the moment, get into a home at or near the bottom of the market and should end up saving money in the long term. But remember: Be sure you can afford that house if the worst case scenario is to happen!
Happy House Hunting!
Brian Ayer is a Realtor® with Intero Real Estate and offers his professional advice in the Patch Real Estate section. For questions or a consultation, please email Brian (firstname.lastname@example.org) or visit www.650pro.com