Rent Versus Buy

Over the weekend I ran across a friend of my son’s who had recently been able to settle on some of his student loans and so he was thinking about finally buying a property.  Until now he had been renting since college, at first very affordably but now was entered into the new rental price range of $2000+.  Our discussion led to the extremely high cost to rent these days, as well as, the housing costs and the increase in interest rates in the high 6% to low 7% range.  He felt discouraged as to how to get ahead and be able to buy a townhouse or small single family home.  “It was like being on an endless treadmill of high rent and not being able to get ahead of it and save to buy a house” he said.  How could he pay $2000 for a 2 bedroom apartment and save for a 20% down payment on a home?

My “Realtor hat” went on at that point and I explained to him that he didn’t need to save 20% for a down payment.  3 to 5% and decent credit could get him into his own place.  I thought some of this information might be helpful to share.  When you rent your entire rent goes to support the bank account of your landlord.  Why support your landlord when you can support yourself?  When you make a mortgage payment part of that payment pays down your principal and you gain equity in your home.  Eventually that will pay off your home, but along the way it allows you to reduce your income taxes each year. If the need arises, you can even take a loan against your equity to improve your home or maybe make another large purchase. You can’t do that with rent!

The simple scenario* might be:

• Rent of $2188 for 2 bedroom, 2 bath apartment 991 sq ft, no garage and no pets allowed.
• Purchase a townhouse with 2 bedrooms, 1 bath and a garage a mile away for $200,000 with a homeowner’s association fee of $259 and taxes of $3172 a year for housing payment of just $1585 (with $6000 down).
• Comparison: A monthly savings of $600 if you were to pay the same as the rental you could have 3 bedroom, 1.1 bath townhouse with a basement and attached garage. Or a comparable single family home with 3 bedrooms 2 baths and a one car garage $1862 a month.

Today there are first time buyer programs that help with down payment and closing costs.  The key thing to work on while you are renting is to pay your debts on time and to pay down all the credit cards possible.  A credit score in the high 700s or 800s will get you the best rate, and that is the key factor in having a lower payment.

There are many resources available to help with planning. PowerPay.org has a wonderful array of tools that can assist your journey. Their service requires you sign up so you can refer back to your plan, yet it is free and very educational.

Waiting for “another year” to get a better price on a home, better rate on a home or to save more money is not the best choice if you have good credit.  In the course of one year you will potentially pay your landlord $24,000.  Money is gone forever and the cycle continues.

With minimal savings and a good lender and maybe a little help from the family you can buy a first place and break the cycle of lining your landlord’s pockets instead of your own. Whether you’re ready to make your move now or are getting started on your journey, don’t forget to align yourself with an experienced and patient Realtor.

Cyndi DuMontelle is a real estate broker with Coldwell Banker Realty who is known for her educating, patient, and knowledgeable approach to all her clients’ real estate needs. Cyndi works with first time home buyers, first time sellers, long term owners, executives relocating, and is also certified as a Senior Real Estate Specialist for those long term owners who are ready to downsize or right-size for the next chapter in their lives.

* Scenario is strictly for illustrative purposes. Contact your financial advisor or lending institution for rates and payments that apply to your personal situation.