Even with taking the standard deduction instead of itemizing to take the interest and property tax deduction, homeowners still have considerable advantages from the amortization of the mortgage and the appreciation enjoyed by most homes.
There is a saying, “Rent or buy, you pay for the house you occupy.” Either you pay for it yourself or you pay a landlord. You can enjoy the many financial and emotional benefits of homeownership if you have job security, sufficient income, good credit, and the funds for a down payment.
For example, a home purchased for $350,000 with an FHA mortgage with a 3.5 percent down payment at 3.25 percent interest for 30-years, would have a payment of $2,420 a month. During your first year of ownership, the average monthly principal reduction is $573 a month which builds your equity in the home.
If we estimate a 3 percent appreciation, your home will increase in value at a rate of $875 a month over the first year building your equity in the home.
We will add in your responsibility for repairs and maybe homeowner’s association fees, your net monthly cost of housing is $1,122 or less than half the monthly payment. The difference builds your equity which a tenant does not benefit from.
If you were paying $2,750 monthly rent, you would be paying $1,628 more each month to rent than to own. After one year, you would lose $19,500 of equity by paying rent. The down payment in my example is only $12,250 which leaves you $7,000 to pay your closing costs.
|Total Monthly Payment (PITI + MIP)||$2,420|
|Less Monthly Principal Reduction (average first year)||$573|
|Less Monthly Appreciation (average first year at 3% annually)||$875|
|Plus, Estimated Maintenance & HOA||$175|
|Net Cost of Housing||$1,122|
At the end of seven years, your equity would be almost $140,000 based on the 3 percent appreciation and the amortization of your mortgage. Whether you rent or buy, you pay for the house you occupy.
Use my Rent vs. Own calculator to plug in your own numbers for the price home you would like to buy. If you need help with it, contact me and we can do it over the phone at (703) 303-4010 or in an online meeting.
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