More and more of my friends are finally looking into buying their first homes. I congratulate them for putting themselves in a position to be able to afford to buy a house now. I think they’re being smart for even at the minimum, considering to make that big purchase, even if they end up not doing so. Many people try to stay away and don’t even gawk at the opportunity even if it seems too good to be true. Although there are many additional costs of home ownership that potential home buyers don’t account for when shopping around for their new home, there are ways to amend their budget so they can afford to buy their homes.
One friend recently asked me if their financial situation justifies buying a house. Here’s their scenario:
- Current rent = $1400 + utilities
- $30,000 cash available
- Home price range their looking at = up to $250,000
- Credit = excellent
At around 4.00% mortgage rate, this is what I calculate for their monthly housing expenses:
- Principal and interest = $1050 per month.
- PMI (Primary Mortgage Insurance) = $99 per month (for a 12% equity to loan ratio)
- Home Insurance = $50 per month
- HOA Fee = $50 per month
- Property Tax = $210 per month
Total monthly payment will add up to around $1459, slightly more than their current rental payment. Given that the housing market seem to be turning around, I would say go for it, if they find a house they fall in love with. If they cannot find a home they love, I would say pass. However, there are a few other things to consider:
- Rent only goes up. I’ve never witnessed where an apartment complex lowers the monthly rental amount. In fact, it’s the other way around. Every year, they raise the price by 2-5%. My friend’s $1400 rent today could be $1500 next year.
- Mortgage interest is tax deductible. You will get a lot of money back when you file taxes the following year. Of $1050 they pay for principal and interest, $730 is interest and that amount is deductible. $210 they pay for property tax is also deductible. That’s $940 every month that they pay is tax deductible. At the end, if they belong to the 25% percentile, they will get back $2820! If you change your withholding allowance, you can get all of it back before you file your taxes.
- When making mortgage payments, you build equity. If almost 3/4 of your mortgage goes to interest, the rest goes into your equity. In that sense, you get some of the money back in assets as opposed to renting where you get nothing in return.
- Houses are typically larger than a 2-bedroom apartment. With larger living space, you’ll pay more in utilities. But there are still ways to keep your utility costs down.
In terms of total monthly cost commitment involved, it seems like a tossup. But when it’s a tossup between buying and renting, buying always wins as it offers slightly more overall value.
Readers: Do you think my friend should go ahead and become a homeowner or keep the cash they have and keep building their emergency fund?
Photo: Empty Living Room, Charles
