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To Buy or To Rent A Home
If you’re asking yourself this question, whether it’s time to buy or to continue renting, the answer is two-fold. It is not only a financial decision, it’s a lifestyle decision. To buy or rent a home…
Lets dissect the financial side:
At first glance, it looks like renting is cheaper than buying in the Frederick Maryland area. The median rent for an apartment in Frederick is $1105. [citydata] The median home value is about $220,000, which computes to a monthly payment of $1,300, which includes taxes and mortgage insurance, assuming a minimum 3.5% down payment. On a surface evaluation, renting is cheaper.
When you consider the tax write-off you get for the interest paid that reduces the monthly payment by roughly $200. (exact numbers vary, based on income and mortgage amount, etc.) Now the monthly payment you have is pretty close to the median monthly rent.
But consider what you are getting for that payment. If you are renting, you are getting a 2 or 3 bedroom apartment. If you buy, most likely you’ve bought a 3 bedroom townhouse. This is where the lifestyle choice comes in. Compare what you are getting in a 2 or 3 bedroom apartment with the lifestyle you would have in a 2 or 3 bedroom townhouse.
Buying Means Staying
Buying a home can be cheaper than renting… if you plan to stay in the home for 6 years. Calculating the costs of ownership, down payment costs, property tax, maintenance, as well as monthly mortgage, it takes about 6 years in most markets to break even if you amortize these costs over the years. Consider these facts:
- Home values are expected to increase 2% annually over the next few years. This is a conservative number, considering the usual amount is 3 to 5%, but we’re still in recovery as far as real estate is concerned, so conservative numbers are good to go with.
- Rents are increasing an average of 3% per year. (also conservative) This is simply a matter of supply and demand. Demand for rentals is up.
Let’s look at what happens if we compare our rent and buy scenario for 6 years.
Rent over 6 years: $85,772 (includes rent increase 3% yearly)
Mortgage Payments over 6 years: $93,600
Home Value Today: (2% yearly increase) : $242,898
Balance owed on home after 6 years of payments: $189,000
Equity in home: $53,898 ($242,898 less 189,000)
Rent Paid vs. Mortgage payments: +$7828 ($93,600 – $85,772)
Actual Savings: $53,898 – $7828 = $46,070
Just to be fair, let’s subtract the initial 3.5% down payment at the time of purchase, $7700.
The savings is now $38,370.
Equity is the Difference
This kind of calculation can only be legitimate in an economy where home values are increasing, not something we’ve experienced for a decade. Now we are seeing average and median prices climbing steadily year over year. Economists are calling for appreciation again this year, in most areas of the country. In Frederick Md, we have seen home values increase in most communities. Even in the luxury home price range, we are seeing positive signs.
Today’s historically low rates and bottoming home prices make for one of the most affordable real estate markets in modern history. It’s a great time to buy if you plan to stay for more than 6 years, if you have steady income and employment, and if you have some cash for a down payment. (3.5% on an FHA loan).