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Dan Chase's Blog

By Dan Chase | Home Buyer in Texas City, TX

Does it make more sense to buy, or to rent? Here is the way to find out for sure.

Does it make more sense to buy, or to rent? 
Here is the way to find out for sure.
Look at the numbers and decide for yourself.

There is no way I or anyone else can write a blog and honestly tell you to only rent or to only buy today. There are too many local variables to enable that to happen. I am going to try to cover some basic ideas to help you make the right decision for you.  
First, I am a strong believer in buying only when you have a decent down payment and would still have enough money after buying to cover unexpected expenses you could have arise. If you lost a transmission the day after you buy a house could you afford it? 

Here comes the worthwhile part people hopefully will be looking for. How do I rationally decide to rent or to buy from a purely financial perspective?

Do you mind being responsible for anything that could go wrong with a house? Are you prepared to fix the plumbing, furnace, roof, water pump, siding, electrical wires, light bulbs and everything else that could happen? If that scares you rent. If you are ok with that still consider buying.

The first question to ask is how long are you going to live in your new place? The answer to buy or rent varies greatly based on the time frame. 

How much does it cost a month to rent (including utilities)? How much does it cost a month to buy (including taxes, insurance, heat, and all utilities)? Always add in extra for repairs when buying.

You now have some numbers to work with. You have your monthly payment for a roof. Does it make more sense to rent or to buy that roof?

As an example you will save $500 a month renting over buying. You will be there for 2 years. That means you put $12,000 into your wallet renting over buying. Does it mean that is better? Maybe. We are only part way  to the answer. 


The real answer is expense, verses equity with expenses and selling costs.
To sell a $100,000 house will cost you 6% commission or $6,000. When buying you had to pay a lot of closing costs. Those included house inspection, appraisal, loan origination fees and more. It is very likely to be very expensive. More than I would like to think about. Find out the real numbers for your property. Whatever you sell the house for you have to figure on losing that amount of money. 

I am not assuming any price appreciation or depreciation in my calculations. This is an assessment of straight numbers not gambling on the future. If prices go up you may have missed out on some possible profit. BUT if prices go down, you would lose money when reselling. If you are not buying to ever resell that part of the equation goes out the window. 
 
There could be some tax advantages when buying a house. Depending on your income it could be significant or you might be better using the standard deduction. Ask your C.P.A. about this aspect.
 
Below is a 5% 30 year mortgage. (higher interest rates will result in less paid off in the same time frame) Look at the ending balance for each year you plan on being there. At the end of year 1 you have paid off $1,475. Year 3 closes with $4,656 paid off. (realtors fee of $6,000) Short term buying does not work. Long term buying, it could. Run your numbers, multiply the $100k number by your actual purchase price and see how it works. Rent or buy, you decide. This whole blog was to give a way for you to make an informed decision.

Loan Amortization

YearsBeginning BalanceInterestPaymentEnding Balance
1$100,000$4,966.00$6,442.00$98,525
2$98,525$4,891.00$6,442.00$96,974
3$96,974$4,812.00$6,442.00$95,344
4$95,344$4,728.00$6,442.00$93,630
5$93,630$4,641.00$6,442.00$91,829
6$91,829$4,548.00$6,442.00$89,935
7$89,935$4,452.00$6,442.00$87,945
8$87,945$4,350.00$6,442.00$85,853
9$85,853$4,243.00$6,442.00$83,654
10$83,654$4,130.00$6,442.00$81,342
11$81,342$4,012.00$6,442.00$78,912
12$78,912$3,888.00$6,442.00$76,358
13$76,358$3,757.00$6,442.00$73,673
14$73,673$3,620.00$6,442.00$70,851
15$70,851$3,475.00$6,442.00$67,884
16$67,884$3,323.00$6,442.00$64,765
17$64,765$3,164.00$6,442.00$61,487
18$61,487$2,996.00$6,442.00$58,042
19$58,042$2,820.00$6,442.00$54,420
20$54,420$2,635.00$6,442.00$50,612
21$50,612$2,440.00$6,442.00$46,610
22$46,610$2,235.00$6,442.00$42,403
23$42,403$2,020.00$6,442.00$37,981
24$37,981$1,793.00$6,442.00$33,333
25$33,333$1,556.00$6,442.00$28,447
26$28,447$1,306.00$6,442.00$23,310
27$23,310$1,043.00$6,442.00$17,911
28$17,911$767.00$6,442.00$12,236
29$12,236$476.00$6,442.00$6,271
30$6,271$171.00$6,442.00$0
(courtesy of)  
http://www.trulia.com/mortgage-calculators/03/mortgage-payments/

 

Comments

By Dan Chase,  Mon Jan 18 2010, 20:13
If this is helpful in making your decision please let me know. You have to do a lot of figuring to see if it makes sense to go one way or another.

I gave the formula to help make that decision.

Even if renting is cheaper than buying you may choose to buy. Buying is not always about being ahead financially.
By Newbuyer2008,  Wed Jan 20 2010, 13:17
not sure how do i fit in this equation, my rent expenses are $1300, mortgage is $3000, does it means i should rent? loan of 400-500k results in principal being paid only 5%
By Dan Chase,  Wed Jan 20 2010, 14:17
At that rate you are losing $1,700 a month by buying.
In one year you would spend an extra $20,400 a year buying a house compared to renting.

My pay off calculations are NOT piti. They are simple house price.
Insurance and taxes PMI also are extra costs for these calculations. If those are included in your mortgage they need to be removed to get the right mortgage price.

I am ignoring any tax consequences from buying a house. You could find they make a big difference. That requires a talk to an accountant or someone who understands that aspect well. I do not.

The calculations assume one thing we know is not true. Prices remaining stable. We will have inflation in the future. I know of no way to know if it will affect rent more or less than the price of buying a house. Rents will go up. Insurance and taxes will go up. House prices will go down and up.

In the shorter term we can see how the numbers work. 10+ years from now no one knows what the economy or prices will look like. Since I was not sure of the amount of your loan I ran the numbers for both paying off a $400k & $500k price for your payment at 5% interest rates. If interest rates go up the amount paid off each year will go down.

In 5 years paying off a mortgage (at 5% interest rate) you would have paid off $32,864 ($400k mortgage)
In 5 years paying off a mortgage (at 5% interest rate) you would have paid off $41,080 ($500k mortgage)
In 5 years you would have saved (not including interest from the bank account) $102,000 by renting. (do not spend the extra $1,700 each month please)

That is almost $70k more in your pocket renting over buying. Did you include insurance, taxes, and possible repairs in your mortgage payment? If not they could add even more cost=less paid off.
Are the costs of heat, a/c, electricity, water, and sewer included in your rent? They are not in a mortgage.
If applicable HOA fees add more costs also.
If you were to sell. This also leaves out realtor fees usually 6% (24,000 per $400k house) ($30k per $500k house) when you sell.

In 10 years you would have saved $204,000 by renting.
in 10 years you would have paid off $74,632. ($129k more by renting)
in 10 years you would have paid off $93,290

in 20 years you would have saved $408,000 by renting.
in 20 years you would have paid off $197,552 (Over $210k more by renting)
in 20 years you would have paid off $246,940

in 30 years renting you would have saved $612,000
in 30 years you would have paid off the whole house. ($400k) ($500k?) You never have to make another payment except for taxes, insurance, and maintenance again.

Check your numbers out every 3-6 months. House prices could drop, interest rates could rise. The combination could make buying more attractive at some point than renting. Maybe it never will, maybe it already has. Given time and you saving the difference each month you may one day be able to buy a house with a very small monthly payment.

Again, inflation will be a problem in the future. Lending standards will get tougher. But as I see it, in 5 years you would have a fantastic down payment if you save the difference. In Florida and California prices are likely to drop even more. Rent or buy, you decide. I can only give the numbers from the amortization chart for what would be paid off. I do know that paying almost 2 times buying compared to renting would make me think renting looked good, at least for awhile.

I will also say that for some people the financial impact of buying a house does not matter. They want their own place. The above numbers give you a way to decide if financially it is better to buy now or to wait.
By Dan Chase,  Thu Jan 21 2010, 11:00
At the end of year 5 $91,829(last column on right, left from original $100k owed)
subtract from $100,000

you get $8,171. Multiply by 4 or 5 ($400k or $500k) and you get the answers above.

The same applies for every other time frame during the 30 year mortgage.

You could use the amortization calculator to figure out other time frames or interest rates.
http://www.trulia.com/mortgage-calculators/03/mortgage-payments/
By Linda S. Cefalu,  Wed Apr 14 2010, 18:35
Dan,

You are great with numbers. Perhaps you are a mathematician? I have to say that I am impressed with your research. However, it seems you are leaving something out of your equations. Feelings!!!

How does it feel when you have to ask you landlord if you can hang a picture?
How would you feel about keeping your garbage in the basement for a week until 12 hours prior to garbage pickup, because those are the apartment rules
How would you feel about your landlord telling you that you cannot type after 6:00 pm because it annoys your lower level neighbor.

The list goes on.

Home ownership is about much more than statistics. For some, owning a home is a burden that interrupts their lifestyle. For some it is their dream. And for those who have that dream I would say the following.

If you can buy a home for the same amount that you are paying in rent, you are far ahead of the game. Regardless of whether or not you have repairs. And in this present day, most buyers are getting new homes for used home prices. They expect newer roof, appliances, furnace, water heater, carpeting, granite counter tops, updated everything. And in many cases they get it. After their inspection, they ask for even more and in most cases they get it. Then there is the home warranty. For $425.00 a year the above and more are covered!

So.........with a good real estate agent and lender that truly cares about their client, I must respectfully disagree with you synopsis. The average person will not save the money that they would be spending on that home, so it's kind of a secret savings account. The market will not always be in the state it is in presently. And there is much more to gain as a homeowner than a renter at present.

My last closing was a week ago. My client increased his square footage by 2 and 1/2 times. He gained a basement and a fenced in yard with a side drive. He gained his privacy, his dignity and something to go to work for. His house payment including the principal, interest, insurance, pmi and taxes is less than what he was paying for his apartment. With a lot of cleaning, little paint and some elbow grease, he could virtually turn around and sell this property for a minimum of 30% more than he paid for it.

So even if he had to pay closing costs, realtor fees etc., he would still be money ahead.

The time is coming in the near future when interest rates will be on the rise. When that happens many first-time buyers will be priced out the housing market. So if your dream of being a home owner is important, my advice is to move forward now!

Just my thoughts.

Linda
By Dan Chase,  Wed Apr 14 2010, 21:13
Linda, My sister and her husband bought and sold 5 houses before the bubble occurred. They lost money on 4 of the 5 houses. If they had they sold one house a year earlier they would have been better off as prices fell during that year.

The house they have now they bought in 1998. They just had it appraised. It is worth just about 30% more than when they bought it. How much has inflation been since 1998 you ask: just about 30%.

As she said, a house is an expenditure, not an investment.

If you looked at my other blog of why renting could make more sense than buying at a cheaper monthly payment you would see one statement. Sometimes you choose what you want and pay a premium for that choice. When anyone chooses to rent or to buy it has to be right for them.

This blog was written totally and completely from an economic perspective. People can and will add in other factors to their personal equation. I saw to many people asking if they could buy a house for 2-3 years and sell it and make money. This was a response to that kind of question.

p.s. As interest rates rise prices will drop. The buying power drops and nothing sells unless it becomes affordable. Only higher wages (not likely with 10% unemployment) or lower prices will allow houses to sell at present prices. When we go from 5% to 7% interest rates buying power drops by 23.9%. Prices must drop as wages can not increase enough to make that up.
By Linda S. Cefalu,  Thu Apr 15 2010, 06:33
Dan,

Buying a home at this time with the idea that they will turn it over in 2-3 years and make money is not a good idea and I agree with you 100% that they will not - always exceptions to that. But in the article I was responding to you were projecting out 30 years.

As I was reading that, I thought, if I had never owned a home, I never would.

My background, not only personally but also with family, friends and clients has always produced a positive result in homeownership. You have to know when to buy and sell and you have to be flexible. I agree that for some it is not the right decision for them. However, when I have people coming to me and saying, I'll never own a home for various reasons, it saddens me. And once I sit down with them and they realize that it is in fact a real possibility for them, that is what keeps me in this business.

My parents were big believers in home ownership and drummed that in our heads while we were growing up. I am very grateful for that. When I was 21 years old I bought a home for $14,000.00. It was an estate and the kids who were old at the time just wanted to get rid of it before winter. My husband and I bought it, painted, planted, cleaned, trimmed, filled a few cracks and moved in. We sold that house 9 months later for $23,900.00. We bought another home and did the same thing. Four years later we had bought and sold four homes and made a very hefty profit. I now live in my fifth home that I purchased for $43,000 in 1985 - another abandoned home that needed a facelift. Five years later it was worth $152,000.00. We now have a beautiful 3 bedroom home on an acre of land that is assessed at $275,000.00 and with a little work, I could push that to over $300,000. So even if we sold it today and paid a realtor a commission and closing costs etc., and even if you subtract the amount we have stuck into (and I have every receipt) $23,000.00, we would still have made a profit of somewhere in the area of $250,000.

So...................my point is this. Although I think you and I agree on one thing and that is home ownership is not right for everyone, for the people who would like to be home owners, we need to sit down with them and find out their long and short term goals and perhaps we can help another young couple not only realize their dream but create an investment that will pay them back three-fold.

p.s. As far as your sister and her husband, all I can say is this. If they bought and sold 5 houses and lost money on four of them, economically that doesn't make any sense. There had to be extenuating circumstances involved.

Linda
By Antonio Worsham,  Thu Apr 15 2010, 06:50
Dan, I want to commend you for first talking about buying responsibly. During the bubble many people were buying simply because they could, with dreams of making thousands of dollars in profit if they didn't like and decided to sell in a year or two. There are many benefits to buying a home, but they don't apply to everyone. Thank you for pointing out some of the things to consider.
By Dan Chase,  Sat Apr 17 2010, 13:31
Linda, I showed the 30 year amortization table so people could figure out how long they planned on living in a place before moving. It is possible to buy and repair a fixer upper and come out even or ahead in a short time.

I am not trying to include any changes in value or repair costs in this. This is a basic formula to live for a short time frame (under 10 years) and move away figuring out the amortization and realtor costs with the monthly difference to see which makes more sense.

To many times people have to sell a house and lose money. Sometimes it is avoidable if they looked at the numbers. This was written to try to show the problem before it becomes costly.
By Linda S. Cefalu,  Wed Apr 21 2010, 08:59
Dan,

I have gone back and re-read your article and I've come to the conclusion that perhaps I was too hard on you. I do understand what you are trying to do. The reason I am so passionate about this issue is that there are so many people out there who would love to be home owners -and can more than afford - but have no idea how to go about the process. I wish they would teach this in school.

Again, I know that home ownership is not right for everyone, but for those that would consider it, they might be scared off by some of the figures. It is amazing to me at how little the average person knows about the home buying process. I want to help, not hinder their endeavor. Many of the people I have worked with -whether they are college grads or high school grads or neither - simply don't understand the details of purchasing a home. The day that I wrote my answer to your article I had been dealing with a lot of misinformation which ultimately hurt one of my clients. I may have been a little hastey in my answer to your article. My apologies.

On a final note, you stated in your last response that "many times people have to sell a house and lose money." This has been going on since the beginning of time. I always caution my buyers to search for the best value so that they have a little wiggle room, and I also spend a lot of time with them to make sure that they are not going in over their head. I was there when the greed took over the industry and many people are now suffering as a direct result, but I can assure you that I cautioned against the types of loans that got us all into this mess to begin with.

And hopefully, the market will continue to improve and have some semblance of order in the near future. I would hate to think that people would stop buying out of fear that they may lose their home.

Thank you for your comments.

Linda S. Cefalu
By Dan Chase,  Wed May 19 2010, 12:30
Linda, I too have seen things which raise my ire. There has never been a better time to buy comes to mind (along with many others). In this blog I purposefully left out price changes. I expect to see more price drops however, that is speculation as is expecting price appreciation.

When I write a blog I do my best to remove any bias or expectations I have and just give facts. I did post a blog on foreclosures that pointed to articles showing what is reasonable to expect in the not to distant future based on actual information and statistics. I do not expect everyone to agree. I only ask people to consider and then make a decision after looking at many sources.
By Allison Fellenz,  Mon Jun 14 2010, 15:02
Dan, thank you for your information. As a realtor, Linda C. is most certainly biased. We sold our house in 2008 to move for a job and have been renting a house since. After looking at your numbers, I am convinced that my husband is right and that we are making a good financial decision. We don't know how long we will be here. While buying a house is fun, selling is hard and real estate commissions are expensive.
Unfortunately, homeowners seem to be prejudiced against renters. Homeowners should be glad that the house where we live and others like it are occupied and not still sitting vacant waiting to sell at an unrealistic price.
By Jessica Hood, Realtor & ASP,  Mon Jun 14 2010, 15:15
Good article written from a potential buyer/seller perspective to help you begin the decision process. Much depends on the local market. As a Realtor myself and working in the Fort Meade housing market for the past 11 years many of our clients are military and here on a three year assignment. Many times I have recommended against buying when it did not appear to be in the families best interest. I've had the fun of sending a family on a modest income off to their new duty station with a six figure check in their hand from the sale of their home and the not so fun job of informing clients that they will need to bring checks to settlement to sell their home. I love that you've given people a practical starting point but would like to say that markets are so localized it's always best to check with a trusted pro in the area.
By Dan Chase,  Sat Jul 3 2010, 09:36
I simply tried to post a reasonable way to consider what costs really are when buying and whether it makes sense to consider that option or not.

I purposefully left out price changes. There is no way known to man as of this date to say for 100% fact that prices will change at all. It is equally impossible to say how much in which direction prices will change. I expect lower prices ahead. Others expect higher prices ahead. Some think prices will remain flat. No one knows for sure who is correct until those price changes happen.
By Mary Ann Russell,  Sat Mar 19 2011, 11:31
if you lost money on your home but bought another house that has lost even more money, and is a much better house, also in the price range of your sold home, is it a good deal?
By Scrappy,  Tue Mar 29 2011, 08:34
ive never seen a $6,442 monthly payment on a 30y 100k loan. Maybe i should get in the mortgage business
By Dan Chase,  Thu May 12 2011, 15:39
Scrappy, that $6,442 is a yearly payment.
By aks_482002,  Sun Oct 7 2012, 00:16
Dan...good post to get some thought process running in my mind...thanks for sharing.

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