Should You Buy Or Rent A House?

Posted on May 14, 2015 by Ray Williams (NMLS #216267).

This is a great conversation piece in Denver right now. Should you buy or rent a house? There are many opinions on both sides of this topic. So, let’s break this down further. I am doing this on the fly, but check it:

Let’s say you make $75K a year, and pay $1,500 a month in rent. Your concern may be, “I don’t have that large of a down payment saved” “Can I really buy a house?”. So as you go through the motions you will talk to friends, family members, and others about this. There are a few key points to look at here, so let’s break this apart.

Let’s say you are actively saving $500 a month to buy a house, and your goal is to get to 10% down for the home. The rent you are paying will likely go up 3-5% in the next year, and again, for a few years. So while you are saving your rent goes from $1,500 to $1,550, and then to $1,625 to $1,705 in 4 years. You could move to something less expensive, but where is that and what does that place look like? So maybe for 12 months you were saving $500 a month, then $450, and then $375, and then $285 a month. You have amassed just under $20K for additional down payment, great job!

The housing market. So that house you wanted to buy. Maybe that was $300,000 in the beginning of this timeline. If the conservative estimates are right, it will be 3-5% more per year for the next 5 years. That means in this example (4 years) it is now 12-20% more expensive. So the house now costs $336-$360K to buy when you are ready. But you have your 10% down payment. What are rates at that time? We know what they are right now. So that house would have cost you (5% down, current time) maybe $1,800 all in with loan costs, PMI, and escrows.

The tax equation. While you own the house you will get an interest deduction, potentially can write off the PMI (yes, ask your CPA), property taxes as well. But for simplicity sake, let’s say you are in the 25% effective tax bracket. So that would mean just under $3K of mortgage interest tax credit every year (without regard for PMI, or property taxes). That averages $250 a month if you were to forego the bump in tax return, and change your W4 to take the credit through the year. So your payment effectively is now $1,550, and fixed (compared to rent).

The equity game. So after 4 years you would owe about $265K on that mortgage, which is $20K less than you borrowed. And remember your house appreciated at 3-5% during this time, so it would be worth $336-$360K after four years. That is equity between $70-$95K in the home.

So in short, you paid rent instead to save that extra $20K to buy. You paid about $76K in rent over this time (poof, money gone). You will now buy a house for between $336-$360K, which we don’t know the actual cost (rates?). But lets’ say they went up only 1% (unlikely) that means your payment will be between $2,025-$2,165 with 10% down.

You bought instead (yes even with the crazy market, you did it!!!!) You would have about $70-$95K in equity (off a 5% down payment), received about $10K in tax credit from owning the home as well. Oh yeah, and you have a fixed mortgage payment that is around $1,800 a month!

I am just a numbers geek, but I do own 4 houses with plans to have them paid off when I retire and have a net (yes net) rental income of over $10K a month to supplement my retirement. We have to pay someone to live somewhere, so pay yourself folks!

Ray Willliams, Branch Manager, Mortgage Maestro Group @ Summit Mortgage

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