Buying a Home is Cheaper Then Renting…
Category : Buying & Selling Tips
Most renters feel that they cannot buy a house because the payments would be too high. They feel that, even
though rent every month seems like a waste of money, they cannot afford to buy a house, despite the fact that
they would love to own.
This may have been true in the 70’s or 80’s, when interest rates were higher, but with interest rates still on the
low end of their history, renters can actually buy and pay the same as they would if they were renting. The trick is
finding a suitable property whose price is affordable.
Following the end to the housing boom of the early 2000s, home prices are currently far more affordable than
they have been in quite a while. It is the perfect time to buy, but renters still need to see that they won’t be
paying more to own.
Imagine a renter who has a two bedroom, two bathroom apartment and rents it for $1,300 a month. This renter
thinks it is only a dream to buy a house and still pay the same. Provided one is not located within the city limits in
most cities in California and Nevada, a suitable property at a reasonable cost is actually quite realistic.
There are six parts, or variables that make up a mortgage payment: Initial loan amount, interest rate, term,
mortgage insurance, homeowner’s insurance and property taxes.
First, there is the loan amount. Believe it or not, a house costing as much as $160,000 using an FHA loan is
possible for our comparison. This would create a loan amount of approximately $157,000.
Next, there is the interest rate. Currently, 30 year fixed interest rates are in the low four percent (4%) range. But
we will use five percent (5.00%) for our comparison to compensate for a low credit score and/or the inability to
pay closing costs.
Next, there is the term. Currently a 30 year repayment schedule is the maximum most lenders will allow.
A $157,000 loan at five percent (5.00%) over 30 years would make a principle and interest payment of
approximately $839 a month.
Then, there is mortgage insurance. Mortgage insurance on an FHA loan of $157,000 would be approximately
$163 a month.
Then, homeowner’s insurance. Safely, a figure of approximately $75 a month would cover a house with
$160,000 of value.
Lastly, there are the property taxes. Using 2.25% of the purchase price annually, monthly property taxes would
be about $294 a month.
Taking $839 a month and adding $163 (mortgage insurance), $75 (homeowner’s insurance) and $294 (property
taxes) gives us a final PITI (principle, interest, taxes and insurance) of $1,371 a month.
Through this illustration, one can easily see that purchasing a similar property to the one being rented is entirely
possible, while keeping the payment the same.
So renters, strike while the iron is hot. It’s a buyer’s market as home prices are low and sellers are motivated to
sell and rates are great. Buy your home before it’s too late.