Question: We are looking at buying a fairly inexpensive house, keeping it for about 3-5 years, and then selling and buying a nice home to raise kids and grow old in.
We can afford a nice home now, but are not sure if we want to stay in our current area or move to another part of the country. We can easily afford the downpayment and closing cost of a 50-75k home now, but we would have to save for a year or two to come up with a downpayment for the type of house we want which runs about 150k.
We’re just wondering if y’all have any advice for us. We were wondering about a few things:
1) Assuming property values stay about the same in our area for the next 5 years, is it better to build up equity in a starter house or to rent? Hear are my calculations.
The cost of a 60k house seems to be about $412/month for a 30 year mortgage at 8.5%. I am guessing at about $2400/yr in taxes and insurance in our rural PA setting. Add another $100 per month for general maintainence. We can rent a comfortable place for about $600, so after 5 years, we will have about $15,960 plus interest saved/invested. (I added the 7,620 downpayment/closing we will save by renting).
House Cost: $60,000 Downpayment: 6,000 (10%) Financed: 54,000 Closing 1,620 (3%)
Yearly: Tax/Insur/Misc 2,400 (Rural PA) Maintainence 1,200 Mortgage 4,944 (12xMonthly Payment) Closing Amort 324 (1,620 / 5 years) ——- Total Yearly $8868 Yearly Rent 7200 ——- Difference 1668 == 8340 (over five years)
My handy-dandy mortgage calculator I got from the Net states that we would have 13.7% equity in the house in 5 years. This is $8220 (60,000 * 0.137). This amount is about half the amount we could save by renting.
Now the question. What did I miss? I understand all the intangibles of owning vs renting. I perfer to own. I was assuming that buying a house for short term would be closer to the cost of renting. My calculations show that we would be better off renting. (I know I am not a financial expert so please point out all the stuff I missed. Also, I know that putting the savings in the bank is easier said than done.)
How much would I save on interest deductions for income tax purposes? My handy-dandy mortgage calculator tells me I would pay approximately 22,500 in interest over the 5 years.
2) Assuming we do opt to buy instead of rent, what kind of mortgage would make the most sense. — 15 vs 30 year — Fixed vs Variable rate — Smaller downpayment amount (assuming we can put down less that 10%) — Making double payments when we can to increase the equity vs paying the minimum
Thanx for any advise/info you can give us.
Answer: No, bottom line is that every rent/own situation is different, and sometimes it makes sense to rent, while sometimes it makes sense to own. You should always run the numbers for both situations and see what makes sense for you. In my case, renting is much more financially attractive, because:
- I live in the SF Bay Area where the real estate market is a total seller’s market, with sellers routinely gettting _more_ than the asking price. – I have a good cheap renting situation – I am young (27), so I can invest the money that I save by renting rather than buying in high-risk, high-reward investments that pay 15-20% per year, and I have enough time that short term downturns won’t be a problem. – The real estate market is so highly valued now, that it is not clear that real estate prices have much room to grow before they are simply unaffordable.
While I think there are many good reasons to buy a home, I want to point out some reasons not to buy a home:
The value of the tax break on interest is overrated. Basically, if you are paying 33% taxes, and you get a 9% loan, that effectively reduces the loan rate to 6%. People often don’t seem to realize that that 6% is money they are throwing away. If you buy a $200,000 house, that is $12,000 a year that does not go towards principal. That is wasted money, not savings. Sounds like a simple concept, but many people just don’t get it. When you add on the closing costs, property taxes, ammortized closing costs, PMI, insurance, maintenance costs, etc, you may be paying $18,000 a year in money that does not go towards principal. So suddenly paying $12,000 a year for rent and saving $6000 in the stock market starts looking not so bad.
When you buy your home, you are committing your principal to one kind of investment: real estate investment, for 30 years or however long you will live there. Is real estate investment a good place to keep your money? Maybe for some people. But the real estate market isn’t what it used to be for our parents. I personally like to have the ability to switch my investments around to whatever is appropriate for the present time. There are lots of other places to put my money that I feel will do better than real estate.
One way to look at buying a home is that you are taking out a margin loan at a rate with a 1/3 discount (to simulate the tax deduction), and investing that money in the real estate market. If the real estate market rises, you win. If the market goes down, you lose. It is funny to me how so many people who would never think of taking out margin loans for investments don’t think twice about taking out a several thousand dollar home loan. Yes, you can lose most of that money if the real estate market goes bad. Renting is safer in that sense; you don’t have to risk your principal unless you want to.
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