You can use a mortgage calculator to figure out your borrowing power with the bank and they’ll tell you exactly what you can afford. The bank uses a formula that you might have heard of called your debt to income ratio. They basically take all you bills and match them to your income to come up with a percentage of how much you spend and how much more you can afford. This is good to know whether you want to rent or buy because it tells you how much you can afford for a monthly payment. Renting and buying are fairly close when it comes to the size of your monthly payment. The difference is the down payment, harder credit check and real estate fees when you sell. Renting is definitely a little cheaper, easier, and quicker in most cases so if you need something right away and you know it’s going to be short term then renting is for you.
There’s a couple of key points to figure out that will help you realize whether you should be renting or buying. First, how long are you going to be there? If you say anything less than 3 years you probably shouldn’t buy. Either that or plan on keeping it and renting it to someone else. You can have a management company do it for you if you need. They only charge about 10% of the rent each month. The only differences between buying and renting is Principal and Appreciation. The appreciation is similar to gambling in the stock market because they’re both good for long term as history has shown. Buying and selling for the short term may work, and there may be skill involved but you never know what might happen at any given time.
Principal is very easy to figure out by using a mortgage calculator that shows an amortization schedule. It shows you how much principal and interest are in each monthly payment. Notice that the principal is very low in the beginning because you still owe so much money. As you owe less you pay less interest which is why it’s so important to pay down principal. If you decide to buy, try to add a little bit to the principal each month so that you don’t have to pay as much interest.
Let’s assume you can rent for $1,000/mo or buy a $150,000 condo and pay $1,350/mo. The 1,300 includes:
Monthly Mortgage Payment – $850.00
Taxes/Insurance – $300.00
Condo Fee – $200.00
Everything there is basically the same as a rent payment, except you didn’t need a down payment or 2 months worth of work trying to buy the home in the first place. If you take a look at an amortization schedule you’ll see that the principal during the first year is about $165/mo. That’s your only savings compared to renting. So in this 3 year case you will have spend an extra $185/mo by buying instead of renting. In 3 years that equals $6,660.00 PLUS you would need to sell the condo with real estate fees and transfer of ownership fees.
However, buying in the long term is MUCH better. Extend that same circumstance out over 15 years and you’ll see a big difference for a few reasons. Look at the amortization schedule again and see that during the 12th year the principal is now $325.00, PLUS you bought the condo and no longer have to deal with inflation (as long as you get the fixed rate mortgage instead of the ARM Rate!). If you were renting over those 15 years your rent would have gone up close to 10% a year and you will have missed out on all that appreciation. Now take a look at how much you owe after those 15 years, $104,000! You already paid down $46,000 in principal and now the principal is much higher in each payment.
Everyone has a different situation and they always call for different avenues. There’s no best or worst idea, just simply make the best out of what you want or need to do. Also make good use out of the mortgage calculator because it can tell you a lot!
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