Many people ask the question, “is it better to own or rent“? A good answer to that question is, “you are paying for housing whether you own or rent, so you should take advantage of the financial benefits of owning a home“. Instead of renting for $3,400 a month, a buyer can purchase a $650,000 home with 20% down for the same monthly payment. Check out the “Own vs Rent 10 year Home Purchase Plan” I shared with a client this week that shows all the financial benefits that come with owning a home, vs renting for $3,400 a month.
Financial Reasons to Buy a Home versus Rent
Here are some of the financial reasons to buy a home instead of rent.
Homeowners get to take advantage of tax benefits and paying down the principal on their loan, whereas renters help pay the landlords loan so he can take advantage of tax benefits and principal payments.
When you own a home it is also a hedge against inflation. You will get a low fixed rate mortgage and your principal and interest payment will never change. Whereas rent will continue to go up over time with inflation.
Homeowners get to take advantage of the magic of appreciation. Over time the value of a home will increase. If you bought a home anytime over the past 8 years, you have probably made some good appreciation on your home. Compare this to paying rent over the past 8 years.
Compare Owning vs Renting for $3,400 a month
Here is a “Own vs Rent 10 year Home Purchase Plan” I shared with a client this week, that shows the benefits of owning a home with a payment of $3,400 a month, versus renting for the same payment.
You can also review this Own vs Rent report online at https://mcedge.tv/1cb5pl
With a $3,400 payment, the buyers can purchase a $650,000 home with 20% down.
On the left column is the $3,400 in monthly rent.
On the right column, is the $650,000 home purchase with a down payment of 20% with conventional jumbo financing, with an interest rate of 4.625%. The total PITI payment is $3,398 a month, which includes principal and interest, property taxes and homeowners insurance.
As you can see above, the owner will get tax benefits of $923 a month, and pay down principal of $669 on the loan, versus no financial benefits from writing a check for $3,400 in rent every month.
Compare Principal Paid vs Rent Paid over 10 years
In this section of the report, it compares how much rent versus principal is paid over the next 10 years.
The owner will have paid down the principal on the loan by $101,881 over the next 10 years.
Compare this to paying $467,726 in rent over the next 10 years to the landlord.
Compare Net Worth in 10 years
In this section of the report, it compares the net worth after 10 years of owning a home versus renting.
The owner will accumulate a net worth of $455,427 over the next 10 years, by paying down the principal on the loan, tax benefits, and accumulated equity gains due to appreciation on the property. In this example I used a conservative 3% annual appreciation rate.
There are no financial benefits to paying rent over the next 10 years.
The Impact of Rising Rates on Buyer Purchasing Power
As interest rates have continued to rise recently, a question that many renters and buyers are asking is, “If rates rise how will this affect my affordability?”
Here is a chart that shows the “impact of rising rates on a buyers purchasing power or affordability”.
As you can see below on the chart, if rates just increase by 1%, from current levels of 4.5% to 5.5%, a buyer will lose 10.75% in purchasing power.
This means, if a buyer can afford to purchase $600k today, but rates increase by 1%, they will only be able to afford $535,500 using the same monthly payment.
If a buyer can afford to purchase $800k today, but rates increase by 1%, they will only be able to afford $714,000 using the same monthly payment.
If a buyer can afford to purchase $1,000,000 today, but rates increase by 1%, they will only be able to afford $892,500 using the same monthly payment.
It is still a good time to buy a home
It’s still a good time to purchase a home, especially as the cost of borrowing money with today’s interest rates is still very low historically. The average 30-year fixed rate over the past decade was 6.7% and 8.9% over the past 30 years.
When you crunch the numbers and weigh up all the financial benefits that come with home ownership, and compare it to what you are paying in rent, buying a home is a better financial decision.
It is important that buyers are given all the information they need so they can make an informed decision about buying a home. Buyers love these “Own vs Rent Reports”above, because it shows them all the financial benefits and different figures they need to see when making the decision to purchase a home.
If you would like to review one of these “Rent vs Own Reports” like this example above, please contact me directly at 858-442-2686. I look forward to chatting soon.
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