Buying a home is not a poor thing if you’re prepared to be a homeowner and you know what you’re getting into. But if you justify buying with the well-worn: “I just want to stop throwing away lease cash,” you’re about to embark on a stupid move of cash that only sounds intelligent because no one has worked out the math. How could I question this age-old wisdom’s straightforward logic? After all, in a house you create equity. By renting, you’re not building equity, right? Absolutely. But let’s look at the figures to inject a small bit of truth into this questionable wisdom.
Let’s say you purchased a $240,000 house from top miami realtors to make the comparison easy, placing $40,000 into a down payment. That leaves you at 4.5 percent with a $200,000 loan (assuming you have excellent loans and interest rates are not rising). Your mortgage payment would be $1,014 for that loan. Again, just to make this easy, we’re going to suppose that you’re paying about the same sum in rent. (If your rent is smaller or greater, adjust the figures obviously.) But you’d have to pay “closing costs” to get the mortgage loan— these are a variety of fees that are paid for appraisals, title insurance, escrow services, and the lender to handle your loan. Bankrate.com estimates that in these costs an average of $3,754 will be paid by a homeowner who borrows $200,000. (You can get “no-fee” loans, but generally you pay a greater interest rate to get them, so you pay one way or the other.) In other words, if your lease and mortgage were precisely the same, you would begin by purchasing $3,754 in the hole.
Your mortgage balance decreased to just $196,498 at the end of the first year, according to the Bankrate.com amortization calculator. In other words, the complete equity that you have constructed up is $250 shy to pay on your loan the closing costs. It’ll be better for the second year, you believe? Not so quickly, Mr. Happy. You may have forgotten about property taxes, right? If you’re in a district that doesn’t have any unique assessments (and they’re uncommon), you’ll be charged property taxes around $2,400 a year— about 1 percent of the estimated value. You’re likely to pay more realistically— somewhere in the $3,000 neighborhood.
Great move? Well, let’s compare your net profit to your twin renter’s. He has not received your tax deductions, which we are estimating at $100 a month. But he didn’t have to put $40,000 into the house down payment and had more spendable income because he didn’t have to pay property taxes, insurance, extra utilities and maintenance. Assuming he placed that $40,000 plus $350 a month in a mutual fund earning an average of 7 percent over the same five years (that’s the $450 a month more you spent minus the $100 monthly tax advantage), he would have $81,762-about $7,000 more than you.
Am I saying that ownership of the house from top real estate companies in Miami is dumb? Not at all. If you want a house, spending your cash is a wonderful way. There are few areas where you’re going to spend more time or enjoy more than your own kitchen, living room or garden. But don’t think it’s a wonderful “investment” from best realtors in Miami to yourself.