Cutting Your Housing Costs in Half

At first glance, renting may seem like the better option rather than buying a home. However, some renters could easily cut their monthly cost of housing in half or more by purchasing a home, along with many other financial benefits.

In today’s market, one’s mortgage payment could be less than the monthly payment to rent. With mortgage rates hovering around 3%, this is a major factor of the savings.

Two other financial benefits of owning are appreciation and amortization of the mortgage. One day, your house will likely be worth more than you paid for it and you can move on at a profit. According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020.  There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.

With every mortgage payment a homeowner makes, a portion goes towards reducing the principal amount owed. This lowers the unpaid balance and increases equity. The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.

A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium. If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month to own a home.

The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing.  The other major item to consider would be the appreciation.  Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.

Rent $2,400

Total House Payment $2,013

Less Monthly Principal Reduction $513

Less Monthly Appreciation $750

Plus Estimated Monthly Maintenance $200

Net Cost of Housing $950

In this example, it would cost over $1,400 per month more to rent than to own.

A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction.  If the same person continues to rent, there would be no equity build-up.

For more information, contact an A2S agent now.