Why Buying A Home Puts More Money into Your Pocket Than Renting
By Fred Ostovar · Are you currently living in a rental, planning on renting or sharing rent on a house?
If so, let me help you take a realistic look at the situation that you are in or about to get yourself into.
Many people, especially the younger generation, rent because they are afraid of taking on the responsibility that comes with owning a home. Some people simply think they can’t afford a monthly mortgage. Here, I want to tell you why renting is NOT your best financial option.
Renting can seem less complicated and easier than owning your own home; yet when all the factors are taken into consideration you soon realize how significant the financial rewards of owning a home can be, as opposed to renting property.
Let’s examine a situation where you are moving in with two friends somewhere in Fairfax or Prince William County and want to live in a 3-bedroom house. Houses in our area run around $100,000 to purchase or $1,000 per month to rent. Putting 10 percent ($10,000) deposit down on the cost of a house and taking out a 30-year mortgage of $90,000 at 5.25 percent interest, leaves your costs per month approximately around $711.
| Monthly cost | Amount |
|---|---|
| Mortgage payments | $496 |
| Taxes and insurance | $140 |
| Miscellaneous / repairs | $75 |
| Total expenses | $711 |
So instead of $1,000 a month, you can have your own home and begin building equity for about $289 less per month.
When you are the one taking the risk of buying the house, you may want to calculate your roommate’s rent on the original $1,000 per month rate. You bring in $700 ($350 x 2) per month, plus they are paying two-thirds of the utilities. Take the $700 from the $711, and that leaves your expenses at $11 per month, plus your portion of utilities.
But we are not done yet! Assuming your home increases in market value (or appreciates) at an average of 3 percent per year (this is low for some areas, especially Northern Virginia) and you live there for three years, it will be worth $109,250 when it comes time to sell. During those three years, your mortgage (loan) will also be paid down to $86,500, creating an extra $3,500 in equity.
| Equity after three years | Amount |
|---|---|
| Equity (down payment + mortgage payoff) | $13,500 |
| Appreciation (increased value) | $9,250 |
| Total equity | $22,750 |
Ok, so let’s make sense of all those financials. In three years, you turned $10,000 into $22,750. In investment terms, this is an annualized rate of return of 31.5 percent per year. This doesn’t even calculate the amount you will have saved in living expenses. The best part is, all of this money goes in to your pocket and not the landlords!
Here are some final thoughts on owning vs. renting:
- Housing prices are the lowest they have been yet in the past 10 years. If you look at Real Estate history, you see that home prices fluctuate based on the economic conditions and the supply and demand of consumers in the market. So now that market prices have hit rock bottom what could you possibly have to lose?
- The mortgage rates have been dropping every week. The Federal Reserve has cut its target for the federal funds rate to a range between 0 percent and 0.25 percent and promised to keep it there for some time. This will make the prime rate fall to about 3.25 percent.
- Foreclosures (bank-owned homes) are also at an all time high. It is sad to see that many people have lost their homes and were forced to surrender their properties back to the lenders. However, the banks still need to resell these homes in order to make up for their losses. The bank’s loss is YOUR gain.
Why rent when you can own!