Are you still renting because the initial cash required or maintenance costs once you own seem out of reach? If you are continuing to rent for one of these five reasons, let’s run through a quick side-by-side comparison on renting vs. buying over the initial years or even the next thirty! While renting provides a practical housing solution short-term, time and again the data tells us it is not the best solution in the long run for building wealth and financial independence. So read on to make sure your choice to continue renting is, in fact, based on all the facts and not easily debunked myths. Myth #1: Buying a home requires too much cash up front. Renting typically requires a first and last month’s rent deposit. Home ownership may require that same amount - or less - rather than the massive cash injection many renters fear. Many buyers are unaware of programs – called down payment assistance programs – that subsidize the start-up costs of buying. Whether grants (literally free money) or 2nd loans (some even forgivable), these programs provide the cash you need for down payment or closing costs - the two big tickets when you buy. Example: Using the nation’s average rental cost of about $1,200 a month, a renter would need to give a landlord $2,400 when moving in. While many assume that home ownership requires a 20% down payment, common loan products like Conventional, FHA and VA loans require as little as zero to 3.5% down. This down payment cost may be covered entirely by the over 2,000 down payment assistance programs designed to create affordable housing solutions. That $2,400 you need to rent may end up being more than you’d need to move into home ownership! If you haven’t already, you should look into it. Myth #2: Renting is the only affordable housing solution. The reality is your rental payment today will become more expensive than your mortgage payment in a matter of just few years. If you can think of ways to take the slight initial hit - stopping Starbucks alone may do the trick – by your third year of owning you’ll likely start seeing savings monthly. Example: The typical sales price of a home in the US rose in 2021 to $293,000. At a 5.5% interest rate, a monthly payment for that priced home may tally up to about $1,600 before taxes and insurance. Using the current national average for rent, a mortgage payment would cost an extra $400 a month in the first year. But historically, rental prices have increased about 9% year over year since 1980. So the $1,200 rental payment today will hit right at $1,600 a month within 3 years. Since your fixed rate mortgage payment will never change, by year five you are saving $250 each month over renting. And by year thirty, you are literally saving thousands a month by owning vs. renting! Giving a little a couple years to save money over the next 28 years? Sounds like a great deal to me! Myth #3: I can’t afford the maintenance and upkeep a home requires. Renting offers the appeal of a landlord being on the hook for future expenses when things break. But the good news is that homeowners have access to home warranties - insurance policies against unforeseen issues. Home warranties cover things like an appliance breaking or your heat going out. You pay an annual premium and then a small deductible any time you have an issue. The service provider will either repair or replace what’s gone wrong. As is the case with anything, not all warranties are created equal so be sure to read the fine print before making a selection! Myth #4: I’ll lose money paying property taxes & insurance. While you will need to budget for property taxes and insurance, the reality is that these costs add only a little more to your monthly budget while the value of owning creates significant wealth building potential. Example: Property taxes (the charge that each county or city charges on the home’s assessed value) and property insurance (the policy that covers major catastrophes or damage to your home) may tack on an extra $300 a month in our $250,000 home example. Think of that $3,600 extra per year as a savings deposit. Why? Since the data tells us homes historically appreciate 4% on average year-over-year, you can expect to see your home’s worth increase by $10,000 in the first year and more each year thereafter. So this $3,600 in new fees provides almost triple the return on your investment! Myth #5: I won’t be able to save cash anymore. If you’ll forgo setting some cash aside each month to own initially keep in mind you’re building equity which is a different way of saving. Each month, part of your mortgage payment is going towards interest (the lenders charge) and the other part goes towards equity – the value you cash out when it’s time to sell. Your home’s equity is essentially a different type of savings account - think of it as cash that you can’t touch unless you refinance or sell your home. Example: Using the same $250,000 home example above, your equity gain in your first year would be right at $3,000. By year five, you’d have built up over $18,000 in equity! That means you’ve saved $300 a month just by owning your home. Good on you! Have I got your attention? If not, across 30 years of owning vs. renting you’d be better off to the tune of almost $600,000. Still think you can’t afford to buy? For more useful real estate tips & tricks, subscribe to my mailing list or contact me with any real estate questions.
Kat Medaries, REALTOR® Long & Foster Real Estate, Village of Midlothian Sales Licensed to sell in the Commonwealth of VA Equal Housing Opportunity For informational purposes only. Not intended as legal, financial or credit counseling advice.
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