Some years ago a comment from my dentist’s secretary shocked me. According to her, my dentist, someone with a well-established clientele, believed that renting a home was just as good as buying a home if not better in the long run. As someone who strongly believes in the benefits of home ownership, I tried to illustrate with examples of how home ownership beats renting in hopes that they might reassess their position.
This conversation took place several years ago before the real estate market collapsed, then rebounded, and before rents skyrocketed in Southern California.
I get it, not everyone is able to buy a home unfortunately so if you must rent then so be it. There are, however, many people that could buy a home but just have not made it a priority and some have even expressed the same opinion about renting being just being fine in the long run when compared with being homeowners.
How about if we analyze the cost of such a decision?
A quick glance at the years 2003 through 2015
Between 2003 and 2015 homes appreciated steadily due in great part to the availability of easy financing which created a terrible housing bubble and eventually, the worst recession in US history which resulted in the nightmare housing crisis because of which millions lost their homes and became renters again. But then after 4 long years, the economy started to stabilize and coupled with low-interest rates the real estate market rebounded.
Now let’s go through a real scenario with a beginning in the year 2003. In 2003 you could have bought a home with ZERO down by getting two loans; a first mortgage for 80% of the value of the home and a 2nd one for 20%. Let’s say the purchase price was $283,000 and the total payment was $2500 PITI (Principal Interest Taxes and Insurance) roughly and this was a 3 bedroom, 2 bath home. In the same year, you could rent a similar home in a similar area for about $1400.00 to $1500.00 a month.
Homeowners may lower their mortgage payments through lower interest rates
When interest rates came down the buyers of the home refinanced their two loans, which still had a fixed interest rate but would become adjustable in a couple of years, into a new low 30 year fixed interest rate with a lower payment of $2,000.00 PITI. Their new interest rate was 5.375%. A few years later, in 2014, interest rates went even lower and it made sense to refinance again to a lower interest (4.375%) and lower their payments to about $ 1800/month including taxes and insurance (PITI). A year later interest rates dropped to an even lower, all-time record so they decided to take advantage of this and once again they refinanced their mortgage but this time into a 15-year loan with an interest of 2.875%. Because they want to pay off their existing mortgage as soon as possible, they even paid down their mortgage by $10,000. The new payment was now about $1890.00 PITI.
Rents increase over time
In the same time, period rents of similar homes went from $1400 to $2500 (some even higher).
Now let's compare the total of payments over the years
Let’s do the math and say that the renter never had a rent increase. From 2003 to 20015 he paid $201,600 ($1400x144 months).
The homeowners conversely went from owing $283000 to $215,000 and due to appreciation, their home value is worth around $530,000 now. Their payments went from $2,500 a month to just under $1900 PITI.
Because they are accelerating the repayment of the mortgage by paying more into their principal balance every month, they are on track to pay it off in 10 years (or sooner) instead of 15. Not only will they save 5 years of payments but they will save thousands of dollars in the process.
When their home loan is paid off they will only have to pay the property taxes, homeowners’ insurance, and maintenance. Property taxes and insurance currently are $430 and obviously will increase over time. Property taxes increases are limited to 2% annually. Let’s say that eventually in 7-10 years these homeowners are paying $550-$600 a month on these expenses. That would be $6,600-$7,200 annually.
The renter, on the other hand, would be paying $2,500 a month in rent which is $30,000 a year, $150,000 in 5 years and $300,000 in 10 years. That’s if the rent stays the same which probably won’t. The rent more than likely will increase and the renter will never see a single dollar back of his rent.
Now I ask you, whose shoes would you rather be in? Which one is a better deal?
When we buy a home, we usually will pay more in the new mortgage compared to what we currently pay in rent but eventually, these amounts are reversed. When I got into real estate my first broker told me this and I just didn’t believe it. Since we (my sister, my parents, and I) had just bought a home a couple of years earlier and gone from a rent of $450.00/month to $900.00 in mortgage payments plus taxes and insurance, the statement just didn’t make sense to me and I actually doubted its veracity. That was 29 years ago. Now I know better. Investing in your own home will almost always be better than renting. Not only will your payment be lower eventually but your net worth will increase due to home values appreciation coupled with the forced savings as you pay down your mortgage.
In case you might be thinking, what about the cost of home maintenance, home improvements and now having to pay all of your utility bills? Even with all these added costs, it is still better to own your own home than renting.
May I suggest you check out the following link to determine if it would make more sense for you to rent or to buy?
This is not a link from a real estate related entity. It is actually from a non-profit organization dedicated to aiding people to achieve financial freedom.
By the way, my dentist and his receptionist seem to have changed their view on renting vs. buying after witnessing everything we just discussed. It took them close to 10-12 years to catch on. Hindsight is 20/20, right?
How long will it take you?
If you would like to get started on your way to become a homeowner and stop renting, contact me via text, call, or email.
I’m here to help you!