Meanwhile, with mortgage rates still lingering at historic lows, buying a home can be surprisingly affordable. Here’s how to crunch the numbers on your own situation to figure out whether buying makes sense for you.
How a rent vs. buy calculator can help
One smart place to start is an online rent vs. buy calculator. Just plug in your desired neighborhood and other variables (e.g., how much you pay in rent), and this calculator will run the numbers and tell you, in plain old dollars and cents, when buying becomes cheaper than renting.
Let’s say you’re currently paying $3,000 a month in rent, and you’ve seen that buying a similar-size apartment in your area will run you around $500,000. Assuming you can get a mortgage with a 5% interest rate and swing a 20% down payment (which is the gold standard—more on that later), getting a mortgage on that $500,000 home will cost you only $2,721 a month.
So far, so good—a $2,721 monthly mortgage is cheaper than $3,000 in rent already! But keep in mind that the 20% down payment you coughed up ($100,000) means the upfront costs of home buying are steep. So, at the outset at least, buying a home is more expensive than renting.
But over time, the balance shifts in favor of homeownership. Based on the above numbers, buying would become cheaper than renting after five years. In other words, as long as you stay put for that length of time, you’d break even—and if you stay longer, you stand to make a sweet profit.
What is home equity?
Home equity is basically the value of homeownership, and you build it two ways. One is that rather than “throwing away” rent to a landlord, you pay back your mortgage and, in doing so, own a little bit of your home. So at the outset of a mortgage, had you put down 20% on a $500,000 home, you’d have $100,000 in home equity, which would creep up as you continue to make those mortgage payments.
The second way you build equity is by seeing the value of your home go up over time. If you bought an apartment for $500,000 and, three years later, it can be sold for $550,000, that’s $50,000 in equity you built just by kicking back in your digs.
In general, in a stable economy, a home’s value will increase 3% to 4% a year. And in New York, home prices are famous for going way up—for instance, these 10 neighborhoods shot up 70% to 150% in value in a single year!
Generally the longer you stay in a home, the more financial sense it makes to buy rather than rent—and the benefits don’t end with home equity alone. Here are some other advantages of buying over renting:
- Your housing payments remain stable. Instead of biting your nails at lease renewal time, hoping your landlord won’t hike your rent beyond what you can afford, your mortgage payment can remain steady.
- You can’t get evicted. Landlords can kick tenants out of apartments pretty much as soon as their lease is up. That’s not something that can happen in a place you own, and that peace of mind is priceless.
- You can decorate and renovate to your heart’s content. With a home you own, you can do what you like with it. No more asking your landlord for permission to paint the walls, no more watching HGTV makeover shows with a faraway look in your eye. You want those marble countertops? You can make it happen.
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