Let’s Talk Real Estate – October 2017

Rental prices have been increasing since the real estate crash in 2007, but home prices didn’t begin to rebound until 2013. Rental prices are now running at an average of $1 a square foot for a suburban home in Medford and higher in Ashland and Jacksonville and for rural and view homes. With rental prices so high, it is not unusual for tenants to pay $1800 a month or more. The question is, at what point does it becomes cheaper to buy your home instead of renting it? The answer depends on your tax rate, loan rate, current rent you’re paying and the price of the house you want to buy. What follows are the actual numbers showing the cost to rent vs. buy on a home in Medford located in Hampton Place.

The tenants are married and they make a little over $50,000 year combined. They rent a home that is a newer 1680 square foot home with a two car garage and their rent is $1660 a month or $19,920 a year.

Cost to rent their home for the next 5 years:

  • $99,600 to rent their house for the next 5 years ($1660 month). This assumes their rent will not go up, but they don’t have to pay for any maintenance or pay any property taxes. They are paying for renters insurance.

Cost to buy their rental home or one similar and live there for 5 years:

  • $285,000 is the value of the home. They are pre-approved to put 3% down which is $8,550 down, Borrow $276,450 and have been quoted 4% interest rate.
  • $81,000: 5 years of mortgage payments ($1317.67 month)
  • $16,000: Cost of property taxes and home insurance over 5 years. We are assuming they will go up 3% a year
  • $10,020: Maintenance costs over 5 years ($167 month). This is a national average for maintenance costs but can vary drastically based upon the year of the home.
  • +$19,440: Tax savings over five years (15% Fed / 9% State). They get to deduct the interest on their mortgage from their gross income, so this is based on their combined earnings of $50,000 and filing a join return.
  • +$26,815: Debt Reduction or the amount of the principal being paid off in 5 years and the reduction in the mortgage owed.
  • So it will cost $60,765 to buy the home over 5 years without factoring in appreciation.

Appreciation on the home in 5 years:

  • +$51,026 at 5% appreciation. Currently we are experiencing about 10% appreciation but let’s be conservative and do the numbers based on 5% appreciation and 7% appreciation
  • +$77,370 at 7% appreciation

Is it more to rent or to buy?—These renters will spend $99,600 over 5 years if they continue to rent, but if they buy, they will spend $60,765 for a savings of $38,835! If you factor in appreciation, they will save $89,861 if there is 5% appreciation and $116,205 if there is 7% appreciation. This is quite a difference and a huge advantage to buying because you’re paying off the home as you go and paying fewer taxes as you go!

Other financial factors—We are assuming if they continue renting that their rental rate will not go up in the next 5 years which may be unlikely, so we may have underestimated their cost if they continue to rent. This is also a scenario for a couple making $50,000 a year combined income. Keep in mind, the more you make the less your home will cost you because the higher your tax bracket, the more you save from the mortgage deduction. If your Federal and State tax rate adds up to 40%, then each $1000 of deductions you have saves you $400 in tax dollars. The great thing about appreciation is that it compounds, so if you leave your appreciation in the house the next year, you have appreciation on the original cost of the house plus last year’s appreciation. The longer you live in the home, the faster your equity builds up as you pay more principal and less interest as time goes on. We see this as a silent savings plan, and have dealt with countless retirees who have retired with the help of the equity in their home.

How do you save your down payment to buy your first home?—Most renters know it’s cheaper to buy the home in the long run, but they don’t know how to save the down payment to get started. It’s never easy to save, and it takes a long time, especially when you’re young, but there are some great loans out there to help home buyers. Here is a recap of the major loans available—two loans require zero down and three loans require 1%-3.5% down.

USDA Loan

  • No down payment – 100% Financing
  • Stable 30 year fixed loan
  • FICO credit score: 620 or greater
  • Debt to Income ratio: About 28% available for house payment
  • Closing costs can be included in the loan amount
  • No manufactured homes

VA Loan

  • No down payment – 100% Financing
  • No mortgage insurance
  • FICO credit score: 600 or greater. Manufactured home 620 or greater
  • Debt to Income ratio: Really based on “residual income” but have seen Up to 68% based on size of family

Guild 1% down – 2% gifted to you loan

  • 1% down payment required
  • Guild Mortgage will gift you 2% down
  • FICO credit score: 680 or higher
  • Debt to Income: up to 50%
  • Must make less than the Median Income in your County:
    ◦$53,500 Jackson County
    ◦$47,800 Josephine County

FHA Loan

  • 3.5% down payment required
  • FICO credit score: 580 or greater
  • Use this loan for a single family home or up to a 4-plex
  • Debt to Income ratio: Up to 57%

Conventional Loan

  • 3% down payment required
  • FICO credit score: 620 or greater
  • Debt to Income ratio up to 50%

Medical Doctors and Dentists Loan

  • 5% down required
  • FICO credit score: 720
  • Student loan must be in deferment or forbearance
  • Debt to Income ratio 45%

Most of our clients are surprised when they find out how much they qualify for, how many different types of loans are out there, and how much renting may be costing them vs. buying! So it may be time to stop reading this article and see what renting is costing you.