First Time Buyers: Rent or Buy?
Since you’ve hit upon this page, chances are you are contemplating your first home purchase. Good for you! It’s both an exciting time and a frightening one, isn’t it? If we meet, be sure to ask me about the story about the first home purchase I was involved with. It’s actually pretty funny. But I digress. This is about YOU and your dream.
The first piece of good news I have is to tell you that we are presently living in a time that offers unequalled opportunities to realize the dream of home ownership because interest rates are low. While the price of a house is of course important, interest rates are, in my opinion, more important. After all, they dictate what amount of money will come out of your pocket in real dollars every month. More on this in a moment.
Have you ever compared the costs of renting to the costs of owning? In many situations, renting a family dwelling can actually be more expensive than buying. If you consider a $150,000 mortgage at 6 per cent for a 5-year term, 25 year amortization, the monthly payments would be less than $1,000 per month. Compare this to renting a suitable three bedroom apartment or townhouse in many areas, and it’s easy to see that buying a home can become an attractive alternative. If you take a $100,000 mortgage at the same rate and term, the payments shrink to less than $650 per month. Ownership does add other costs though such as property taxes, insurance and home maintenance that you may not incur when renting. Establishing a realistic budget against your financial goals is very important.
There is another significant benefit to home ownership that often gets overlooked. Over the course of 25 years (the usual amortization period for mortgages), the total amount of money paid by many renters can actually exceed the amount paid by a home owner. This is due not only to the fact that mortgage payments can be cheaper than rent, but because rental fees generally increase over the long term. Of course, interest rates may also rise, but so probably will the value of the property. Therefore, additional equity will be gained. Chances are that if you buy a home now, you will live in a fully paid for home by the time you retire. If not, what do you expect rents to be at that same point? Will you be able to afford them? After a mortgage is paid off, homeowners will no longer make monthly payments while renters will continue to bear the burden for the rest of their lives. This savings can greatly impact your quality of life upon retirement.
Now back to interest rates. Here’s a true story that illustrates my point that often the interest rate matters more than the house prices:
In 1981, my husband and I purchased our second home. Believe it or not, prices at that time allowed us to buy a 3 bedroom home in good condition for only 47,000! The bad news is that interest rates were very high and we carried a mortgage of $40,000 at 20%. That meant we had a monthly payment of about $650.00 a month (which, trust me, was a great deal of money way back then.) After three full years, we had only paid off a grand total of $265.00 of the principal balance of the mortgage and the other $23,000 of the money we paid over those three years just serviced the interest payment. So, cheap house = good; and high interest rates =bad. Today, that same $650.00 a month would give us a mortgage of about $100,000 because of the low interest rates. And there’s more good news. In three years, we would have paid off about $5700.00 off the principal of the mortgage loan which means equity in our pockets. See what I mean? If you expect to have a mortgage, then interest rates are a critical factor as to when you should buy a home.
Regardless of the number crunching, the bottom line is that owning a house is the best way to assure the happiness and well-being of you and your family in the long term. A home is also an investment that you can live in.