Establishing a Budget Can Help Renters Buy

If you are currently living in an apartment but tired of throwing rent money away every month, perhaps you are starting to think about buying your own home. With today's low mortgage rates, more and more home buyers are seizing the opportunity to enter the housing market.

The question of whether to buy a home or rent an apartment though, is a major financial decision, and you will want to consider many factors. After all, depending on your lifestyle, owning a home may not be fore you.

From a financial point of view though, buying a home is still, traditionally, a sound investment, and perhaps the best one available for the average person. Over the long run, homes almost always appreciate in value.

Financial freedom however does not happen over night. It starts with establishing a goal to own your own home and saving enough money for the initial down payment.


Buying Versus Renting

Let's first compare the cost and return of buying versus renting over the long run. Assume your choice is buying a $140,000 home or renting a two bedroom apartment for $900 a month. You have $35,000 in your savings account which means you will be able to put down a 25 percent down payment. If you assume a $105,000 mortgage at eight percent amortized over 25 years, your monthly payment will be $810.41. (We will also estimate taxes, maintenance and insurance costs at $1,900 a year with costs increasing three percent a year).

After 25 years, you will have paid $243,122 in mortgage principal and interest and $50,000 in taxes, maintenance and insurance. You will also have tied up your $35,000 for the down payment in your home. Overall, you will have paid $328,122. Over the 25 years, but you now own your home outright. With a projected current market value of $474,089 using a conservative five percent yearly appreciation, your net gain would be $145,967.

Now let's suppose you had rented (and assume you did not face any rent increased in excess of three percent a year which is particularly difficult in areas with a low vacancy rate). Your initial $35,000 in savings is securely invested at 10 percent a year, less income tax of $30 percent on the investment income portion. After 25 years, you will have paid $393,760 in rent. In the meantime, your $35,000 will have grown to $189,960. This leaves you with a net expenditure of $203,8900.

The bottom line is that it will have cost you $349,767 more to rent!

Furthermore, after the mortgage is paid in year 26, your only cost will be for energy and taxes while, if you had rented you would still be paying $21,954 a year in rent. Overall, when you own your own home, your equity appreciates at a rate that has almost always outpaced inflation. Home ownership also offers you protection from arbitrary rent increases, more flexibility to make alterations to your new home and grounds, usually more living space and more privacy and Pride in Owning your Own Home.