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Should you buy or rent?

Posted on June 17, 2016 by Deana Manzanares (NMLS #1286808).

Most of the calls we receive are renters who have just been notified of their pending rent increase and they are realizing it may make more financial sense to buy rather than continue renting. Or folks moving to Denver from another city. As they put it, they don’t want to be “throwing our money away on rent”.  So a great debate is “should you buy or rent in Denver?”.  Both sides of this topic have many options, so let me break this down, keep in mind I’m doing this on the fly, but check this out:

Let’s say you make $75K a year, and pay $1,500 a month in rent. Your concern may be, “Can I buy a house when I don’t have a large down payment saved?”. Let’s break it apart and look at the factors or renting vs. buying. The short answer is YES, but check it.

Say you are saving at least $500 a month to go towards your home purchase, and your goal is to get to 10% down for the home ($30,000). The rent you are paying will continue to likely go up 3-5% in the next year, and again, for a few years. So while you are saving your rent goes from $1,500 to $1,550, and then to $1,625 to $1,705 in 4 years. You could move to something less expensive, but where is that and what does that place look like? So maybe for 12 months you were saving $500 a month, then $450, and then $375, and then $285 a month. You have amassed just under $20K for a down payment, great job!

The housing market (those who think buy a home). So the desired purchase price you were intending on was $300,000 in the beginning of this timeline. If the conservative estimates are right, the house will cost 3-5% more per year for the next 5 years. (See this link as actual increases in Denver have been 10% in the last 12 months). That means in this example (4 years) it is now 12-20% more expensive. So the house now costs $336-$360K to buy. And you have just under $20k saved.  Your goal of 10% down has now changed to just over 5% down.

The tax equation. While you own the house you will get an interest deduction, potentially can write off the PMI (yes, ask your CPA), property taxes as well. But for simplicity sake, let’s say you are in the 25% effective tax bracket. So that would mean just under $3K of mortgage interest tax credit every year (without regard to PMI, or property taxes). That averages $250 a month if you were to forego the bump in your tax return, and change your W4 to take the credit through the year. You just gave yourself a raise! Simple disclaimer, consult your CPA for tax advice.

The equity game. So after 4 years you would owe about $265K on that mortgage, which is $20K less than you borrowed. And remember your house appreciated at 3-5% during this time, so it would be worth $336-$360K after four years. That is equity between $70-$95K in the home.

So in short, if you chose to continue to pay rent (for an additional 4 more years) in order to save for that extra $20K to buy. You paid about $76K in rent over this time (poof, money gone). You will now buy a house for between $336-$360K, which we don’t know the actual cost (rates?). But lets’ say they went up only 1% (unlikely) that means your payment will be between $2,025-$2,165 with 10% down.

You bought instead (yes even with the crazy market, you did it!!!!) You would have about $70-$95K in equity (off of a 5% down payment), received about $10K in tax credit from owning the home as well. Oh yeah, and you have a fixed mortgage payment that is around $1,800 a month!

I am just a numbers geek, but I do own 4 houses with plans to have them paid off when I retire and have a net (yes net) rental income of over $10K a month to supplement my retirement. We have to pay someone to live somewhere, so pay yourself!

Ray Willliams, Branch Manager, Mortgage Maestro Group @ Summit Mortgage

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