Vail Daily column: To rent or to buy?
January 6, 2017
I have all sorts of useful and neat features in my loan origination software. I can run an amortization schedule while factoring in one additional mortgage payment made per year; I can analyze various interest rate scenarios with and without origination points side by side for easy comparison, and I can quickly calculate the total amount of interest and total payments made over the life of a loan on any given loan structure. Honestly, the software has so many features that I don't know how to use them all. But one feature that the software does have that I have begun to use more recently is a comparison of renting vs. owning a home.
The feature within the software breaks down and analyses the financial benefits of owning a home compared to renting a home. Factors such as potential appreciation of the home, the borrowers given tax bracket, closing costs from the specific transaction and other various transaction and borrower specific details are calculated and then analyzed in comparison with the borrowers current monthly rent. The software then produces a financial analysis of the pros and cons of renting vs. owning. While the tool is meant to be specific to each borrower and each individual transaction, using the feature so much lately has made me think more about renting compared to buying in the current environment.
By looking through the rental section in the Vail Daily classified ads, it appears as if the going rent per bedroom in Eagle County is around $1,000. That number, of course, varies upon many factors, but on average that appears to be more or less accurate.
Next, let's analyze borrowing $300,000. For sake of these numbers, I am going to assume the borrower is qualified with sufficient income and good credit. I am also going to assume the mortgage structure has a monthly mortgage insurance premium in lieu of a 20 percent down payment. I am going to assume that the mortgage insurance is factored in to the interest rate and that there is not a separate monthly mortgage insurance premium.
For purposes of this illustration, let's factor an interest rate of 4.25 percent on a 30 year fixed rate mortgage which encompasses the mortgage insurance, $50 per month for personal insurance on the home, $125 per month in real estate taxes and $250 per month in home owner's association dues. Rates and exact figures noted are dependent upon the borrower's specific qualification and the specific property, but they will suffice to illustrate the point. Total overhead on the hypothetical scenario would break down to $1,900.82 per month: $1,475.82 mortgage, $50 insurance, $125 real estate taxes, and $250 home owner's association dues.
Borrowing $300,000 to buy a home could realistically cost a qualified borrower less than $2,000 per month. One must also factor in the tax deductions received with having a mortgage and owning a home. Mortgage interest and real estate taxes are still tax deductible. For the first five years of the referenced loan, the mortgage interest is roughly $12,000 per year. Real estate taxes are assumed to be $1,500 per year. Those two figures add up to significant tax deductions on an annual basis. Assuming the home has more than one bedroom, there could be potential rental income used to offset the overhead.
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Buying a home is a financial commitment not to be taken lightly or entered in to haphazardly. But by purely looking at the example of these numbers, I think we are a point a rare point in history when owing a home could be less expensive than renting.
William A. DesPortes of Central Rockies Mortgage Corp. can be reached at 970-845-7000, ext. 103, and email@example.com.