Cutting prices or offering sales prices will generally bring people buying anything out of the woodwork that may have not been serious buyers before. In today’s market, renters can easily lower their monthly housing costs by half or more by buying a home with all the financial benefits that it brings.
A renter’s mortgage payment could be less than their rent they are paying in today’s market. Because mortgage rates are right around 3 percent, this makes it a huge factor in the savings.
Appreciation and amortization are the other two major contributing factors of a mortgage, but neither are available to tenants paying rent. According to the FHFA House Price Index, home prices rose 5.4 percent from July 2019 to July 2020. Influencing appreciation is the fact that there were 400,000 less homes on the market during summer 2020 than there were last summer.
Each payment a homeowner makes on their mortgage, reduces the principal by a set amount each month. This is termed “forced savings” because it forces the homeowner into a savings account as it lowers their unpaid balance and increases the equity in their home.
The increasing equity becomes an asset that a homeowner can access by doing a cash-out refinance or a home equity line of credit once the equity in the home reaches 80 percent loan-to-value. For information on the what the tax consequences would be with either of those choices, read my last post Tax Deduction Issues with Mortgage Interest.
A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium. If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.
For the first year, the monthly principal reduction would average $500 a month and lower the net cost of housing. Then there is appreciation to consider. If we assume, in our example, the home was appreciating at 3 percent annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.
| Rent | $2,400 |
| Total House Payment | $2,013 |
| Less Monthly Principal Reduction | $513 |
| Less Monthly Appreciation | $750 |
| Plus Estimated Monthly Maintenance | $200 |
| Net Cost of Housing | $950 |
In this example, it would cost over $1,400 per month more to rent than to own.
You could also look at it as the equity in this home in seven years will be $121,579 based on appreciation and principal reduction. If you have a person who chooses to continue renting, they would have no equity build-up, their landlord would.
If you’re curious as to how much you could cut your housing cost, go to the Rent vs. Own Calculator or contact me today!
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