When comparing homeownership with renting a home, the first thing that comes to my mind is stability. How many times have we heard about a happy tenant being displaced at the whims of the landlord? Or, how often does a landlord raise the rent unexpectedly? On the other hand, being a tenant definitely has its benefits, too. From a simple cash flow basis, renting a home is generally cheaper. Also, how nice is it to be able to call the landlord and tell him or her to come fix a problem and not have to worry about paying for it?
Of course there is the age old question about whether buying a home provides financial benefits or not. For those who lost their home during the recession of 2008, renting may sound like a good way to go.
While unemployment and medical issues are probably the leading causes of foreclosure in a normal economy, the mortgage industry made borrowing money and buying a home all too easy during the first seven years of this century. As a result, many people ended up owning a home who would never have qualified for a mortgage with the standards in place in the 1980s or with today's standards. When their rates adjusted up or when they experienced even temporary unemployment, they were unable to keep up with their payments. Furthermore, when rates dropped, many homeowners were left out in the cold with either not enough equity or not enough income to qualify to refinance.
If we were to look at buying a home in the most basic sense: buying beats renting. For example, if we assume an appreciation rate of 5 percent per year, a home purchased for $500,000 with $50,000 down will increase in value $25,000 during the first year and will increase in value a little more each year. If that home increases in value at that rate for 10 years, the home will be worth over $800,000 in 10 years. Investing $50,000 and then gaining $300,000 in equity over 10 years would be a good investment in anybody's opinion.
From a monthly cash flow standpoint, this home will require a monthly payment of $3,284 for PITI (Principal, Interest, Taxes, Insurance and mortgage insurance); however, a homeowner in the 25 percent income tax bracket will enjoy a tax break of about $650 per month due to the deductibility of mortgage interest and property taxes (even mortgage insurance is deductible for families making less than $100,000 per year), which makes the effective house payment $2,634 per month. When compared to renting a home for $2,000-$3,000, owning a home doesn't sound too bad. By the way, if you have tried to rent a home lately, you will discover that we are in a landlord market here in Santa Cruz County. Good homes are scarce and rents are going up.
Of course, owning a home is not for everybody and should only be considered as a long term (five to 10 years) investment. One needs solid and stable employment and at least fair credit with little existing debt and some cash to buy a home. Coming up with the down payment is probably the biggest obstacle to home ownership; however, it is still possible to buy a home with as little as 3 percent down. Rates are still low and home prices are far below their previous highs making affordability a key reason why buying a home now and not waiting is ideal. Check in with a mortgage professional to explore your options.
Local mortgage consultant Peter Boutell has been writing a weekly column for the Sentinel since 1995. Send questions to 'Lending a Hand,' 1535 Seabright Ave., Santa Cruz, CA 95062, fax them to 425-1044 or email them to email@example.com. Archived columns are available at www.peterboutell.com.