I have a lot of new home buyers ask me if it’s really a good idea to buy a home or should keep renting? For those of you who have been reading and watching videos about real estate investment strategies, please, don’t get confused about investment experts saying, “NOT to BUY the property you live in”. That is not for all first time home buyers. If you’re someone who has been putting money aside, but don’t really understand asset strategies besides your 401K account. I think the best investment strategy is to buy a home, IF your new mortgage payment is equal to or less than your current rent.
Let’s look at this comparison scenario: If you were to purchase a home for $300,000 in Plano Texas, an interest rate of 4.75 % (4.79% APR) on a 30-year fixed mortgage with 10% down payment. You’re currently renting a home for $2,200/month.
You have about $10,000 in savings, and a family member who is willing to help with down payment of $30,000 as a gift. Yes, it happens all the time! I would suggest putting 10% down payment ($30,000) leaving the additional $10,000 aside for closing costs, and reserves, and emergency funds. Annual Property tax rate at 2.13% (Collin County, TX) $6390, home owner’s insurance annual premium at $1500 ($125 monthly), and monthly mortgage insurance $85 (90%LTV, FICO 740, MI Base rate 0.38% by Radian MI Calculator).
In this scenario, your new mortgage loan amount will be $270,000, and the estimated monthly mortgage (principal and interest) payment is $1,408, property tax & insurances $734. The total monthly expenses of $2,142 in the home purchase scenario.
Now, let’s look at the details if you were to rent a home instead. Monthly rent is $2200 and estimated renter’s insurance is at $27, that leaves your total monthly rental expense at $2227.
Assume a 9-year time span in both scenarios. You will be spending $277,765 for rent that includes 3.6% annual rent increase, which is the yearly average rate. Monthly rent will be estimated at $2919 on year 9, while your mortgage payment stays consistent. Although, you will be paying $236,206 to the mortgage payment over 9 years, the total cash savings will be $41,559 over 9-year term if you were to own a home versus renting. Additionally, you will gain $137, 008 for home appreciation and $45,666 amortization that you paid to principal over 9 years.
Let’s say if you were to sell your home and move up or down size after 9 years, your home price will be $437,008 based on average forecasted appreciation rate at 4.27%, according to MBS Highway. After paying 6% Real Estate Commission $26,220, your NET GAIN from Buying a Home is $192,012. As you can see clearly in this scenario, you should buy a home versus renting. But please keep in mind, if you’re thinking about buying a home and your new mortgage payment is higher than your current rent, total savings will decrease.
Every situation is unique, which is why you should consult with your trusted mortgage advisor, to help analyze your financial situation and to determine what home price is the optimal investment strategy. It’s not based on how much you can qualify to purchase. Always consider your lifestyle, and overall financial portfolio before making a decision to buy a home. It’s never too soon to begin preparations…
By Summer Kim-Davis, Aug 14th 2018