Why Rent When You Can Purchase a Home
for Less Money per Month?
by Realtor Brandon Brittingham
You already know the disadvantages of renting: cramped spaces, noisy neighbors, regular rent increases, and paying tens of thousands of dollars to a landlord––only to leave with nothing when you move.
Owning a home can have its occasional challenges too, but for most people, the benefits of ownership are significant. Let’s take a look.
Cost: Owners Pay Less Per Month
You may find it hard to believe, but thanks to today’s low interest rates, you would probably pay less per month to own a home than you’re currently paying in rent. Here are the numbers based on actual properties currently listed in and around Salisbury, Md.:
|Square Footage||Purchase Price||MonthlyPayment||Monthly cost per sq. foot||Your Equityafter 5 Years(How much you own)|
|Rent:Newer 2-bedroom apartment,Mill Pond Village,Salisbury, Md.
|Own:Newer 2-bedroom condo,Whispering Ponds, Salisbury, Md.||1,425||$89,900||
Borrow: $75,920 at 3.75% for 360 months.
Monthly payment includes taxes, insurance, and condo fees. Amount borrowed includes typical closing costs.
+ any increase in the value of the property.
(Based on a 2% increase in value per year, the property would be worth $99,250 at the end of 5 years, and your equity would total $34,862.)
|Own:3-bedroom house with 2-car garage, Rustic Acres,Salisbury, Md.||1,686||$128,200||$671 Down payment:$25,640.
106,560 at 3.75% for 360 months.
taxes and insurance. Amount borrowed includes typical closing costs.
|$0.40||$36,213+ any increase in the value of the property.(Based on a 2% increase in value per year, the property would be worth $141,543 at the end of 5 years, and your equity would total $49,556.)|
|Listings as of 3/1/15|
The above model is based on a conventional loan, but what if you want to go FHA or USDA??
With an FHA loan on the first model your payment would be $742.41 and you would only need a 3.5% down payment!
The property in Rustic acres could qualify for USDA financing which is 100% financing product which means you can get in the house with no down payment. Based on today’s low interest rates you could purchase the home and your monthly payment would be $909.01
and with FHA your payment would be $928.92!!
Either way, whatever loan program you chose, you essentially can own a home for less of a monthly cost than you can rent!!
Did you notice that the renter in our example is paying more per month for much less space? Did you also consider that both the renter and the owner must make monthly payments? The renter’s money goes to a landlord who uses it to cover expenses and, in many cases, to pay down a mortgage which he or she owes on the rental property. The home owner’s payment goes to pay expenses (insurance, property tax, and loan interest) and to pay down his or her own mortgage. If you are a little shy about taking a mortgage, ask yourself this question: “Do I want to make monthly payments to help pay for my landlord’s property, or do I want to make monthly payments to purchase my own property?”
Also consider the following: while the renter’s monthly payment may increase substantially over time, the owner who has chosen a fixed-rate mortgage will always pay the same total amount for interest and principal. Yes, increases in taxes and insurance premiums will cause the owner’s monthly payment to climb gradually over time, but usually those increases will be modest compared to those which many renters experience.
It’s Your Home; Do What You Want
As a home owner, you and your family will enjoy relaxing, cooking, eating, and sleeping in larger rooms. You’ll have space to pursue your hobbies and to properly store your clothes, cookware, tools, books, and papers. Your children will have room to study in quiet surroundings, and you’ll probably have more space to park your vehicles. You’ll also have the freedom to decorate and enhance your property according to your own tastes––not your landlord’s.
Other Benefits of Ownership
Forced Savings. Each time you pay your mortgage, you’ll be paying interest and principal. The dollars which you pay in principal will remain your money. With them, you will be purchasing additional equity in your home––money which you will take with you when you sell years later. In a sense, therefore, a home is like a bank account into which you put money each month. In this way, owning a home requires you to save regularly for your future. This is good news for families who have difficulty saving otherwise.
Significant Tax Benefits. The dollars which you pay in interest each year are deductible from taxable income. If you earn $60,000 per year and pay interest of $10,000, your taxable income will be reduced to $50,000. So how much would you save in actual taxes? Other deductions and factors aside, if your federal and state tax rates totaled 30 percent, you would save 30 percent of $10,000: $3,000. Divide this saving by 12 and your saving would be $250 per month. After you purchase your home, you may wish to ask your employer to reduce your paycheck withholding so that you can use your savings immediately to help pay your monthly mortgage.
Using the Bank’s Money to Increase Your Net Worth. Bankers believe that owning a home is a strong and safe investment. That’s why they willingly lend money to home buyers. As a result, you can use the bank’s money (the amount they lent you) to increase your own wealth. Each time your home increases in value, you benefit––while the bank continues to accept the original principal-and-interest amount which you both settled upon years earlier. Now wouldn’t you think that the bank would demand a portion of your profits? Fortunately, that’s not the way it works. When you use other people’s money to make money for yourself, you benefit from leverage. Borrowing money to buy a home gives you powerful leverage. In addition, since houses often appreciate at a rate that is greater than the inflation rate, owning a home allows you to “stay ahead” of inflation over time, making gains––as opposed to losing ground against inflation by leaving large sums in a low-paying bank account.
The Cost of Waiting to Buy
Waiting to purchase can increase the price you’ll pay per month. Let’s imagine that you delay one year to purchase the three-bedroom home listed in the chart above. Let’s further imagine that, during that 12-month period, the value of the house increases by 2%. The price would then be $130,764, a jump of $2,564. Now suppose that the interest rate increases by 1 percent (a very real possibility in the second half of 2015, given the current leanings of the Federal Reserve). Given the higher rate and the higher price, your monthly payment would increase by $73 to a sum of $744. That difference becomes significant over several years.
Need Help with Your Down Payment?
“I’d love to buy now,” you think, “but I don’t have enough money for a down payment.” Are you sure about that? Right now, there are several government programs that can assist you with your down payment. One program––from USDA––even allows you to purchase without a down payment. As a Realtor who is very knowledgeable about all types of purchasing arrangements, I can explain these programs to you and steer you toward financing sources that will work best for you right now. Give me a call today at 443-339-9200 so we can talk about the opportunities that are out there for you. Learning about the possibilities is the first step toward owning your dream home. Please note interest rates are subject to change and the information provided is only an example based on rates the day it was published.
The Maryland and Delaware Group of Long & Foster
1405 S. Salisbury Blvd., # 102, Salisbury, Md.