This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.
“If you qualify to close on a new home with the increased interest rates, there isn’t a better time to purchase. Rates are temporary, but homes are forever. Take advantage of this buyer’s market to negotiate the price and get the seller to pay some or all of the closing costs.”
- Chris Senterfitt, Mortgage Originator
Cost to Rent vs. Buy
Below is an illustration of the cost of renting vs. purchasing over 5 years based on an initial home purchase of $400,000. We will also assume closing costs are a flat 5% on the purchase to simplify the math.
SCENARIO 1:
Continue renting at $3000 per month with a rental increase of 3% per year.
Total Cost: 1 year: $36,000 | 2 year: $73,080 | 3 year: $111,272 |4 year: $150,610 | 5 year: $191,000
Cost to rent after 5 years: $191,000 | Equity built: $0
Same home that you wanted to purchase at $400,000 before renting is now worth $450,000 because it has appreciated in value by 3% per year while renting.
SCENARIO 2:
$400,000 purchase, seller gives $12,000 concession. $12,000 down payment plus a balance of closing costs not covered by the seller of $8,000. So total of $20,000 out of pocket to purchase home.
Estimated monthly payment including taxes, insurance and mortgage insurance: $3600 per month based on 7.500% 30 year fixed rate.
1 year: $63,200 | 2 year: $106,400 | 3 year: $149,600 | 4 year: $192,800 | 5 year: $236,000
Cost to purchase after 5 years: $236,000 | Equity built based on value of home after 5 years: $50,000 |Equity based on the principal pay-down from minimum monthly payments: $37k
Total net positive: $42,000 after 5 years
Based on the scenarios above, the cost to buy over 5 years is roughly about $45,000 more than renting. However, owning real estate builds equity based on the annual appreciation of the home and paying down the loan balance with monthly payments. Using a low estimate of 3% appreciation per year in the scenario above, you would be at a net positive of $42,000 after 5 years, assuming that you stay in the high-interest rate loan you closed on at the beginning. At any point during the loan scenario above, you could refinance when rates drop, which would build even more wealth over the renting option.
In conclusion, the rent vs. buying comparison remains invaluable for prospective homeowners, even in the current inflated rate environment. While interest rates may fluctuate, the value of homes tends to appreciate over time, making homeownership a sound long-term investment.
Let us help you achieve the dream of homeownership! Visit any MIDFLORIDA branch or call to speak with a mortgage originator to discuss your options.
