subject: Paying Rent Might Be More Expensive Than Buying Right Now [print this page] Even in the current declining housing market, all time low interest rates are making home ownership more affordable than renting for people who aren't going to be moving.
Interest rates for mortgage loans are at all time lows. Because less has to be paid for the interest portion of a housing payments, home ownership is more affordable. From a monthly payment standpoint this makes buying real estate less expensive than paying rent, without even considering tax benefits and equity gained.
Three bedroom, two bathroom Logan condos are renting for $700 a month. Condos like these are selling for about $90,000. If someone bought a condo like this with a down payment of 4,000, and got a 4.5% interest rate on a 30 year fixed mortage they would have a mortage payment of about $650 a month. This includes Principle, Interest, Taxes, Insurance, and the Home owners association fee. In this case, owning is less expensive than renting.
While rent payments are more expensive than mortgage payments right now, this doesn't mean that it is the best interest for everyone to buy real estate. There are associated significant costs associated with both buying and selling real estate. It typically costs about 3% of the the loan amount in closing costs for home buyers.
Selling a home is even more expensive. Sellers usually end up paying about 7% of the purchase price as closing fees to real estate brokers, and title companies. This adds up quickly. That's $10,500 in fees for the sell of a $150,000 home. Because these costs are so significant, buyers want to make sure they'll live in the home for a period long enough to gain at least the amount of equity that they will require to sell their home.
Home owners gain equity by paying down the balance of the loan, relative to the homes actual value. If home prices keep deflating, just paying down the balance of your home loan may not keep up with dropping home values. Figuring out how much equity you have is fairly simple and can be done using an amortization schedule. 15 year fixed mortgages gain equity much faster than 30 year fixed mortgages as the loan is paid off twice as quickly.
In normal times, homes also gain value as they keep pace with inflation. Because most people buy homes with mortgage financing, this makes a leveraged asset investment. However, the current economy is not doing so well and the home values in most areas are expected to continue to drop for a few more years.
For those who won't be moving for a very long time, buying real estate is a much better financial decision. The current low interest rates make housing expenses very affordable.
by: Benjamin Sharp
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