Owning a home has always been the American Dream. Unfortunately the recession and bursting of the housing bubble has caused concern among home buyers. Now we have too many buyers sitting on the fence thinking renting is a better alternative to owning a home. I wanted to share with you an example of a “Rent vs Own” financial analysis report that I have been sharing with my clients recently. In this report, we will compare renting versus owning with a $2k a month payment, as well as show all the financial benefits of why owning a home is a better financial decision than renting.
Renting versus owning
In many parts of San Diego, I would say $2k a month is an average rent a lot of people are paying these days. So let’s take that $2k a month payment and see what you can buy with that monthly budget. We will assume the buyer only has a small down payment of 5% available. Now most people will assume that this buyer will have to go with FHA financing because of the small down payment funds available, that is not true anymore.
For example, a buyer can now get conventional financing and pay NO mortgage insurance “MI” with only a 5% down payment, all they have to do is choose the loan option whereby they take a slightly higher interest rate and “buyout” the mortgage insurance. This is a much cheaper alternative to a 3.5% down payment FHA loan, as FHA loans require buyers to pay really high MI payments each month. For example on a $350k purchase, a FHA buyer will pay an extra $323 a month in FHA mortgage insurance versus the 5% down conventional No mortgage insurance loan option. Now the conventional buyer can use these additional monthly savings of $323 to purchase an extra $50k in home and still have the same overall monthly payment as the FHA buyer. Here is more more information on this Conventional No MI program.
How Much Home Can I Purchase with $2k a month?
Here is the example of a “Rent vs Own” report below comparing renting versus owning for $2k a month. For a total monthly payment of $2k a month, a buyer will be able to purchase a property for $350k, using only a down payment of 5%, and get an interest rate of 4.375% on a conventional loan with NO PMI, and have a total PITI (Principle & Interest, property taxes & insurance) payment of $2k a month.
As you can see above, the buyer will be able to take advantage of a tax benefit of $451 a month and also pay $448 a month towards principle, versus the renter who will receive no benefits from writing a check for $2k in rent every month.
Rent vs Principle paid over 10 years
In this section of the report it shows the rent versus principle paid over 10 years. You can see the buyer will have paid down the principle on his loan $67k over the next 10 years, whereas the renter has paid no principle, and in fact will pay over $274k in rent over the next 10 years.
Net Worth in 10 years
In this section of the report it shows the buyers net worth after just 10 years. By deciding to purchase a home, the buyer will have accumulated a net worth of $205k over 10 years from the financial benefits of home ownership. These 3 main financial benefits are, paying down the principle on the loan, substantial tax deductions at tax time, and accumulated equity gains due to appreciation on the property. Whereas the renter has a zero net worth due to no financial benefits of paying rent to the landlord over 10 years. Here is a link to view this report in full http://mcedge.tv/16a9w8 .
It’s time to buy and not rent!
If a buyer is one of those who is worried about prices declining further, then they should consider the following: Prices are low and rates are low. If you talk to your accountant and find out what the mortgage interest deduction and deduction for real estate taxes will do for you, you will probably find it is now cheaper to own than to rent in many areas. Because when prices decline investors rush to buy properties. They hold on to these properties because they expect the values to increase. In the meantime they rent them out. Demand for rentals goes up when fewer owner occupant properties are sold. As demand for rentals goes up so do the rents.
But if you own your own home, and get a low fixed rate mortgage, your principle and interest payments are constant and will never change. The taxes and insurance usually go up, but guess what? Landlords also add this to the rental increase if you are renting.
The clients I work with love these “Rent vs Own” reports, because it compares the financial benefits of owning versus renting and shows all the figures they need to see when when making the decision to buy a home. If you would like to see one of these reports with figures you are interested in looking at, please feel free to contact me directly at 858-200-9602 and I would be happy to put this together for you. I look forward to chatting soon.