Oct 03 2008
Why purchase a home when you can rent?
Despite the gloom and doom of the financial market, buying a home that you plan to live in for 5 to 10 years is not a bad idea if you meet the financial requirements.
Let's run some rough numbers: First-time buyers purchase a home for $400,000 with 20 percent down ($80,000). The loan amount is $320,000 (let's assume the buyer paid all the fees, costs, etc.). At a 6% interest rate your interest payment is around $1920 per month for a 30-year loan. Incorporating the cost of property tax ($400) and insurance ($70) your mortgage payment is $2390. If you are also paying principal on the loan, let's guestimate another $300. So your monthly mortgage is between $2390 and $2690.
While that's some serious change, and I'm not recommending anyone purchase a home they can't afford, let's look at the comparison. Say you rent the same home for $1700/month. Using the interest-only figure for the comparison ($2390), after 5 years:
Renting: $102,000 spent over 5 years
Owning: $143,400 spent over 5 years
So how likely is it that in those five years your home will go up in value $41,400? Yep, it's quite possible. Even probable. If you're handy around the house, you certainly can do a number of improvements yourself and gain sweat equity that benefits you even in a difficult market.
Yes, you put down $80,000. I'm not forgetting that. But it's unlikely you stuck that saved $41K in the bank while you were renting and "saving all that money." If you paid principal in addition to the interest, then you gain equity by paying against the balance of the loan. So at $300/month you've paid off $18,000 of your $320,000 loan.
Sure, you may own a home and drive an older car. But economically, borrowing to buy a house is money far better spent than borrowing to buy a new car. Fat chance that car will go up in value in five years.
