Here’s why buying is a better long-term financial option than renting.
Did you know that the average homeowner has $40,000 more in equity than the average renter?
The primary cause of this disparity is the fact that a home is a forced savings plan. If you rented a home for five years at $1,500 per month, you’d pay a total of $90,000 (or $18,000 per year) that goes straight toward your landlord’s mortgage.
Granted, buying a home isn’t the easiest thing to do because, if you’re like most buyers, you have to get a mortgage to do so, and that requires a down payment. However, if you used a conventional mortgage with a down payment of just 3%, you could afford a $225,000 home. That 3% down payment only amounts to $7,000 if you ask the seller to cover closing costs.
Furthermore, your monthly mortgage payment would be similar to the $1,500 you’d otherwise be paying in rent. Over the course of five years, if that home appreciated at an annual rate of 4%—the standard in our Des Moines market—it could be worth $273,000, and about $23,000 of your principal would be paid down. What this means, essentially, is that you’d have $73,000 worth of equity in your new home if you stayed there for just five years. Not only do you get the $23,000 worth of forced savings, but you’d enjoy $50,000 worth of appreciation. All the while, your home is worth more money than what you would’ve paid in rent. I’m not a mortgage loan officer or CPA, but I know how real estate works. The mortgage you pay down as a homeowner and the appreciation you receive create legitimate wealth. Additionally, if you talked to a CPA, you’d be able to figure out what your deductions would be on your income tax based on your mortgage interest deduction.
The bottom line is that owning a home creates much more wealth than renting, and it’s something that can prepare you for your future.
If you have questions about this topic or would like to make the leap to homeownership, feel free to reach out to me. I’d be happy to assist you.