Wednesday, February 3, 2010

Renting vs. Buying

Is it smarter to rent or buy?  There are a lot of different opinions on this.  Let's look at our numbers. (NOTE: These are OUR numbers.  Your's will vary accordingly)

We would probably spend $1500/month on rent.  As for our $200k mortgage, we are currently paying $1100 for rent, of that $850 is interest and $250 is principal, $300 for tax, insurance, and PMI.  We also pay about $55 for HOA, $100/month for maintenance other stuff.  We also pay extra principal payment of $400 to pay down the mortgage.

CATEGORY
Mortgage(s)/Rent
Extra Principal
Taxes
HOA Fees
Utilities (non cable)
Insurance+PMI
Maintenance
------------------
TOTAL:
Owning
$1,100
$400
$160
$55
$200
$150
$100?
---------
$2,165
Renting
$1,500
$0
$0
$0
$200
$50
$0
---------
$1,750

By buying a smaller house we were able to pay pretty much the same amount as if we were renting.  The extra principal payments reduces interest and allows for faster ownership.  So our principal is being reduced by about $650 each month ($250+additional payments $400).  The insurance, tax, maintenance, HOA fees, and interest are stuff we won't get back which adds up to about: $1300 a month or about $16,000 a year compared to $18,000 a year if we rented.

Had we bought a bigger and more expensive house, we would have paid more in interest payments and it would have cost much more to buy than rent.  But in our case we are actually saving almost $300 a month because we are buying instead of renting, after counting in tax writeoff and stuff..

So the advantages of buying our house:

We are paying down the principal by about $650 a month.
We can deduct $10500 in interest payments from our income probably saving us $1500 in income tax (at 15% tax rate)
We have assets in our name.

Disadvantages of buying the house:

It has huge upfront costs.  We paid $21k down payment and $30k for renovations.  That's like giving up 50% of everything we own for this house.
If anything goes wrong, it's up to us to fix.
It's in our name... so if we can't pay, it will be our credit that is shot.

Note: This is not the same for everyone.  It depends on the cost of the house, HOA/Condo fees, insurance, PMI, etc.  Cost of real estate and rental property in your area.  You do the calculations for yourself and see which one is better.

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