I know that men and women my age feel more comfortable renting. It’s easy, little commitment, and a lease is less stressful to read than a real estate contract. What you may not know is owning a house is usually always cheaper than renting. If renting was cheaper, then how would so many landlords make money off you month after month?
Here are some facts about renting versus owning:
- Renting is a dead investment, you’re paying the landlords mortgage every month so he/she can eventually sell it and make even more money on their house.
- Renting offers no equity, you don’t own anything.
- Renting offers no tax benefit, while Interest on your mortgage is tax deductible.
- Houses, when taken care of and properly maintained, appreciate. A great mindset to have is that every mortgage payment will eventually be repaid to you, plus some extra.
Here is payment plan based on a $100,000 house with a 30-year fixed rate loan with 5% interest rate and a $90,000 loan balance.* Typical rent for this price would be about $1,000.
Rent vs. Own
|Monthly Payment||$1,000||Monthly Payment||$ 483|
|Insurance||$ 30||Insurance||$ 50|
|Taxes||$ 0||Taxes||$ 60|
|Total Payment||$1,030||Total Payment||$593|
|Interest Deduction||$ 0||Interest Deduction||$ 100|
|Tax Deduction||$ 0||Tax Deduction||$ 60|
|Net Monthly Payment||$1,030||Net Monthly Payment||$ 433|
*Determining how much of your tax and interest is deductible is a very complex process that is different for everyone. Some factors include the amount of your loan, how long you have owned your house, and how much you make, but there are many more factors to determine your deduction.
A Shared Appreciation Mortgage (SAM) is a rare type of mortgage. Check with you local lender to see if they are willing to participate. a SAM allows you to have a lower interest rate on your loan and payments, but once you sell your house, the bank splits the profit you make off your house, thus the appreciation is shared between you and the bank. This is a rare loan, because not all houses qualify for a SAM. This loan is mostly for NEW houses, because it allows for appropriate appreciation. If your house is too old, it may not appreciate in value if costly repairs are needed in the end. Also, not all neighborhoods appreciate due to a number of variables such as high crime or an unattractive area.
A Reverse Annuity Mortgage (RAM) is an interesting type of mortgage that can be obtained once you pay off your original mortgage. This mortgage allows the bank to pay you monthly payments! Sounds interesting (and a bit confusing). Let me clear somethings up. If you pay off your mortgage, you are said to be “free & clear”. You know have a tangible asset (your house) that you are free to sell or hold. The bank realizes you have that ability to liquidate your assets (sell your house) and retreive that money at a later date, so they give you money up front. Once you sell your house, you own them that amount off your house.
Here’s an example:
Your house is worth $100,000.
Your house is free & clear, which means you havepaid off your mortgage.
You decide you get a RAM, allowing the bank to pay YOU.
The bank pays you $300 a month.
After five years, you decide to sell your home.
The amount the bank paid you over those five years was $18,000.
But over those 5 years, your house appreciated to being worth $120,000!
Once you sell your house for $120,000. you pay the bank the $18,000 that they gave you, and your off your way!
Adjustable Rate Mortgage (ARM): Also known as a floating rate mortgage, or variable rate mortgage
ARM’s are a great marketing scheme, because the interest rates look attractive in the beginning but soon increase, making you stuck with payments you may not be able to afford. Sound familiar? This is how so many people got hurt recently and are now in foreclosure. Once the interest rates went up on the market index, the banks were able to raise the rates on home loans to a rate most people coun’t afford. This is a loan a lot of banks try to pass off, but are never worth it, Read the fine print! The interest rates start at an attractive rate that is lower than the fixed rate mortgages, but can be raised without your approval (because you already accepted their terms when you signed with them). They also usually have pre-payment penalties if you decide to pay off your loan and get out before they raise the rates too much. Ask your lender if there is a maximum percentage change allowed on the loan, and how much it is. This way you know how large your interest rate can get for the duration of the loan.
Fixed Rate Mortgage (FRM):
This is the safest type of mortgage you can get. The rate may appear higher than an ARM, but its a fixed rate, and you know how much there charging you for the entire duration of the loan. Fixed rate mortgages are great to get when the market is depressed and interest rates are low. If you can lock in a great interest rate, take advantage of the market! Check with your lender to find out average fixed rate loans depending on your credit score and how long you want your term to be (typically 30 years, but can get 15 or 20 years instead).