It’s Cheaper for Me to Rent!
Assume that you are currently paying $1,500 per month rent. You would like to buy a $300,000 property with $30,000 down and a $270,000 loan for 30 years at 6¼ percent. You are in the 28 percent tax bracket and will own the property for 8 years. Appreciation only keeps pace with inflation at 2.54 percent per year. The estimated cost of renting is $142,015 vs. the estimated cost of buying which is $117,754. You save $24,261 by purchasing rather than renting. (You can use any of the online rent vs. buy calculators to make this determination for your situation.)
Another challenge with renting is that you are paying off your landlord’s mortgage, not your own. Even if your house doesn’t increase in value, each month you make a payment, you accumulate wealth by paying down the principle. This is the equivalent of putting money in the bank each month. In contrast, renters lose additional wealth as their rental payments increase over time. Homeowners with a fixed rate loan have locked in their mortgage amount for the next 30 years. If there is inflation, the homeowners pay off their loan with inflated dollars. Rents, in contrast, keep pace with inflation.
Thus, if you elect to wait to purchase, you may be leaving money on the table in two different ways. First, if the interest rates increase, you will end up paying more over the term of their loan. Second, by waiting to take action, you will accumulate less wealth and experience less appreciation. Furthermore, the longer you wait to start paying down a mortgage, the later the date will be that you retire that debt.