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Own vs Rent: How Much Home Can You Purchase For $2,500 a Month? Saturday, November 15th, 2014

In many parts of CA it is now cheaper to own a home versus rent, especially when you factor in all the financial benefits and tax deductions you get to take advantage of when you own a home. I wanted to share a “Own vs Rent”analysis report that shows how much home you can purchase for $2,500 a month, vs renting for the same monthly payment.

With Rising Rents, Owning a Home is a Better Investment

With monthly rents continuing to rise in most parts of California, home ownership is looking like a much better investment for renters.

As you can see below, just a 4% increase in annual rent, can drive a $1,500 monthly rent up to $1,974 in just 8 years, an increase of $474, which is a 32% increase in overall rent.

When you own a home, it is a great hedge against inflation for the future, as you can obtain a low fixed rate and monthly mortgage payment that will never change. Whereas rent will continue to go up over time.

Compare Owning vs Renting for $2,500 a month

In many parts of California, $2,500 a month is an average rent that many people are paying. What many don’t know, is how much home they can purchase using the same monthly payment.

Instead of paying $2,500 a month in rent to your landlord, did you know you can purchase a $435,000 home with only 5% down conventional financing, and also have No monthly mortgage insurance “PMI”, for the same total monthly payment.

Here is the example of a “Rent vs Own” report comparing renting versus owning for $2,500 a month. On the left column is paying rent of $2,500 a month.

On the right column, you can purchase a property for $435,000 with only 5% down, with a 4.25% 30-year fixed rate with No monthly PMI. The total monthly mortgage payment is $2,470 a month.

As you can see above, when you own a home, you will get to take advantage of tax benefits of $639 a month and also pay $569 a month towards principal. When you pay monthly rent, there are no financial benefits.

Rent vs Principal paid over 10 years

In this section of the report, it shows the rent versus principal paid over 10 years. When you own, you will have paid down the principal on the loan by $84,950 over the next 10 years, whereas with renting, you will pay $343,000 in rent over the next 10 years.

Compare Net Worth in 10 years

In this section of the report, it shows the net worth after just 10 years of owning a home. You will accumulate a net worth of $201,963 over 10 years from the financial benefits of home ownership.

These 3 main financial benefits to owning a home are, paying down the principal on the loan, substantial tax deductions at tax time, and accumulated equity gains due to appreciation on the property.

In this example below, I used a conservative 2% annual appreciation rate (*homes have been appreciating on average 5% annually over the past 5 years). When renting, you will have a zero net worth due to paying rent to the landlord for the next 10 years.

As you can see above, there are lots of financial benefits you can gain by owning a home. 

If you are short on down payment funds, check out the new 1% down conventional loan program with No monthly mortgage insurance “PMI” (Click HERE), there is also a Q&A section in the article too.

This 1% down program also allows for the 1% down payment to be gifted. There is also a lender credit available for closing costs. Ask me for more details on this program.

Compare Current Mortgage Rates To Average Rates Over the Past 40 years 

As you can see below, the average 30 year fixed mortgage rate over the past 40 years is roughly 8.7%, and 6.29% over the past decade! Compare this to current rates around 4%.

Current mortgage rates are not that far off all time lows, which leaves the cost of borrowing money very cheap historically.

It is still a good time to get approved for financing to purchase a home and lock in a low fixed rate.

The Impact of Rates on Buyer Affordability

It is important that potential buyers also understand the impact of rates on their purchasing power. Changing mortgage rates do more to influence home affordability than changing home prices.

This chart below shows the impact of rates on buyer purchasing power or affordability“. As you can see, when rates increase by 1%, a buyer loses 10% in purchasing power.

For example, see below how the payment at the 4% rate on a $400k loan, is roughly the same payment as the 5% loan at $360k, a loss of 10% in purchasing power for a buyer.

Mortgage rates have been declining recently, so buyers are gaining  in purchasing power and affordability.

Tips for Homebuyers

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, you will be surprised how much home you can actually afford to buy in many cases.

A good idea is to talk to your accountant when you are doing your taxes, and ask them what the mortgage interest deduction and deduction for real estate taxes will do for your income, you will probably find it is now cheaper to own than to rent in many areas.

When you own a home, it is a hedge against inflation for the future. When you own a home, you will get a low fixed rate mortgage and your mortgage payment will never change. Whereas rent will continue to go up over time.

Homebuyers love these “Rent vs Own” reports, because it shows them all the financial benefits and different figures they need to see and understand 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 for a specific purchase price, please feel free to contact me directly at 858-442-2686.

P.S. If you would like to be updated faster on important industry news or any new loan programs that come out, please join my Facebook page .