Friday, June 4, 2010

Buy for less than you pay in rent?

The conventional wisdom (and a lot of mortgage companies’ advertising) currently says that you can buy a house for cheaper than you can rent an apartment in the Greater Phoenix area.  Is it true? Mmmmm…  Yes and no.



Case in point:


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First time home buyer, starter home in the south end of the 85016 ZIP code. House is in good repair but cosmetically it’s stuck in the mid-1950s. Three bedrooms,  1 bathroom, 1 carport, average sized yard, 1100 square feet.


Current rent on 900 square foot, 2-bedroom apartment about 5 miles away from the home noted above = $615. Expected mortgage payment on the new house noted above = $505.


So, yes! You can buy for cheaper than you can rent! Except…



It’s a PITI


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When you’re a renter, you pay the rent and then you’re done. But home ownership means extras.







  • P = principle: repaying the mortgage money you borrowed


  • I = interest: the convenience fee for borrowing said money


  • T = taxes: specifically property taxes on the house you buy


  • I = insurance: the lender who lent you the mortgage money will require you to have homeowners' insurance on the property


Back to our Case in Point buyer from above paying $615 in rent and expecting to pay $505 for her new mortgage. The $505 is only PI, and doesn’t include TI or anything else involved in home ownership. Taxes & insurance add another $150 monthly. So rent, $615. PITI home ownership costs, $505+ $150 = $655.


But don’t forget the WUST and the MAINT, two acronyms I made up.



WUST:


Water, utilities, sewer, trash. Your new house is probably bigger than your old apartment, so you’ll spend more heating & cooling it. What about HOA fees (Home Owners Association)? Factor those in.



MAINT:


Homeowners also face maintenance costs that renters don’t.





  • what if the roof if it leaks? (smallish new roof, ballpark $6,000)


  • A/C and heater systems don’t last forever (ballpark cost $5,000)


  • the cost of keeping up the landscaping. Even Xeriscape yards require a bit of upkeep


  • replacing the faucets when they leak, the toilet flapper if it goes, the appliances when they go, the patio roof when it leaks… you get the idea


Home ownership is a lot more than paying rent. Yes, your new mortgage payment may be less than your old rent. But there are other costs it’s easy to forget about when dreaming about becoming a homeowner.


On the other hand, there’s a big fat tax advantage to being a homeowner: you can deduct mortgage interest paid from your federal taxes. And in your first few years, nearly your entire mortgage payment goes towards the interest you owe, so you can plan to deduct nearly all your mortgage payments from your taxes!


Thinking about becoming a homeowner? Call or email me. I’ve got the coolest little spreadsheet that lets you estimate all your home ownership expenses – PITI, WUST, MAINT and even your negotiables like cell phones, movies & entertainment and groceries -- so you can make a wise decision.



Heather Barr, Thompson’s Realty
602-999-8831 or Heather@ThePhoenixAgents.com