Tuesday, November 25, 2014

Rent vs Buy - Example

Below is an article on Freddie Mac's blog about renting vs purchasing a home.  The benefits of homeownership help increase net wealth over the long term as seen in the calculations below.  This is a big part of why homeowners have a net wealth 30 times greater than renters on average.  If you are ready, willing, and capable of buying a house, now is the time to do so with low interest rates and home prices.

The $1.5 M Question: Rent vs. Buy? 

Does it make better financial sense for Mike and Jen to rent or buy given their current $1,400 rent payment? How much home can they buy knowing they can afford a $1,400 monthly mortgage payment and can put 5% down at today's rates?

Let's find out using our new calculators with the following criteria:
Mike and Jen's Current Rental Scenario Mike and Jen's Potential Homeownership Scenario
  • Monthly rent = $1,400
  • Monthly renter’s insurance = $10
  • Annual rent increase = 7%
*These inputs will result in a monthly mortgage payment around $1,400
  • Purchase price = $200,000
  • Down payment = 5% ($10,000)
  • Annual property tax = $2,000
  • Annual homeowners insurance = $500
  • Annual home maintenance = $2,000
  • Mortgage rate = 4.5%

We've also put in other assumptions and costs for Mike and Jen, including: a 3% home appreciation rate, a $1,500 origination charge, $1,000 for settlement services, 3% for selling costs, a 33.8% state and federal tax rate, and a savings rate of zero.

You ready? With this scenario, Mike and Jen will save $106,513 by buying instead of renting over a seven year period. If they stay in their home for 15 years, they will save $369,155. Thirty years? $1,592,717.

These figures include costs for Primary Mortgage Insurance (known as PMI) that they will have to pay until they reach a 20% loan to value ratio.