If you are renting a house because you believe you cannot afford to buy, you might be surprised to discover that owning a home is within your reach.
An entry-level home in the Ukiah Valley can run as low as $350,000. Let’s assume, for the moment, that you haven’t been able to save anything for a down payment. That’s okay. Many first-time homebuyer loan programs require a low down payment.
With today’s interest rates, your monthly mortgage payment would run about $2400, plus property taxes of about $350 and homeowner’s insurance of about $200, with a total cost of $2950 per month. By comparison, renting that same house would run about $2000 per month. If you want to buy and you have a household income of about $80,000 (that’s two people working full-time at McDonalds), you’ll need good credit and no other debt.
To be clear, in the short run it is absolutely cheaper to rent. However, if you buy property with a fixed-interest-rate loan, your housing cost will mostly stay the same over time. Although your property tax will increase about 2% a year and your insurance will go up periodically, your mortgage payment (about 80% of your monthly housing cost) will remain fixed. This is a big deal because while the value of your home is likely to increase, your mortgage payments will not. In essence, you’ll be getting more for less.
In addition to the monthly principal, interest, tax, and insurance (PITI), home ownership requires maintenance. Even if you can save money doing your own repairs, you’ll still have to buy materials. And if you’re like me—not sure which end of the hammer to use—you’ll need to pay someone else to do the work. The cost of maintaining your property will go up over time, so you need to plan accordingly.
In my opinion, the total cost of home ownership can be estimated based on the mortgage payment plus 3% per year of the value of the property. Using the example above, you’d need an additional $875 per month to take care of the things that will inevitably need attention. It’s impossible to know exactly when you’ll need a new roof, carpet, water heater, or paint job, but all of these will be necessary at some point. You need to set aside funds, so you don’t get caught with a big bill and no cash.
Of your total monthly home-ownership cost, roughly $2500 will be tax deductible (i.e., taxes and mortgage interest). Depending on your income level, your tax deduction will vary. If you pay 20% of your income, state and federal combined, your tax deduction will be about $500 per month. So, when dust settles on everything, you’ll need about $3250 per month, including maintenance costs.
As your earning capacity matures, your tax rate will go up and your tax savings for home ownership will also increase. But, starting on day one, your monthly home-ownership costs after taxes will be about $3250 on a $350,000 loan. Including the tax benefit, this pencils out to cost about $1250 more per month than renting that same home at $2000 per month
While financial considerations are often the biggest factor in home ownership, there are many non-quantifiable benefits. When you own your own home, you get to create your own, personal sanctuary. You don’t have to ask permission to hang photos and art wherever you like, paint the walls any color, replace the carpet, or plant trees.
Assuming home values increase over time as they have historically, it won’t take all that long to offset that additional $1250 monthly cost. Considering increases in insurance and maintenance costs, at end of ten years, your home-ownership cost in the scenario above will probably be about $4000 after taxes. If rents go up as expected, your rent payment for that same house would likely be about $3950 per month. In ten years, realistically, rents will be about the same as the total cost of ownership.
Even though rent is clearly cheaper in today’s world, if you can afford to buy a home, the financial cost of owning a home versus the cost of renting it over the same period will equalize. And the non-financial benefits of home ownership far exceed the benefits of being a renter.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.