Buying a home is probably the biggest financial decision most of us will make. While many variables factor into that decision, one key element is whether it makes more financial sense to buy a home rather than renting one.
According to industry experts, it depends on how long you plan on staying in a home.
“Given certain parameters, I can tell you that if you intend to be in a home for three to five years, it is almost always better to buy,” noted Matt Brady, a loan officer at Skyline Home Loans.
That’s because even though there is sizeable upfront expenditure when buying a home, you’ll be seeing the benefits after a few years.
“One of the biggest advantages to owning that people overlook is the principal reduction that is made by owners,” Brady said. “This is not something that is overlooked by landlords, because you’re making their principal reduction.”
Principal reduction is the amount paid on the cost of the home itself and not the interest. The idea is that by the time you plan on selling the home, you’ll have paid some of the cost of the house and will get more for it than you paid for, resulting in spending less over time than you would have renting a similar place.
Although home prices are high in San Diego — the median price is $535,000 for a home, $400,000 for a condo and $623,750 for new construction — area rent is also high and increasing. The median rent for a one-bedroom is currently $1,560; for a two-bedroom, it’s $2,020, according to the latest figures released by Apartment List, a national rental marketplace. That’s a 4.6 percent increase over last year.
Brady calculates the financial benefits of owning a home this way:
According to the National Association of Realtors, most people own a home for approximately nine years before selling. If a renter initially pays $2,200 for a two-bedroom home, after nine years, the rent will have increased to $3,000 at a 4 percent increase per year.
While the renter will have paid around $40,000 less in rent over those nine years than a buyer who purchased a $400,000 home, the owner’s home will have appreciated by about $200,000 in those nine years, Brady said. (And while no one can predict the future, most analysts assume that home prices will continue to rise and that San Diego will stay apace with the national average of a 4 percent annual increase).
The homeowner also will have paid down the mortgage by about $73,000 and had the added tax benefits of owning a home, which according to Brady would be about $40,000. In nine years, a buyer is ahead more than $225,000 from someone continuing to rent.
“The bottom line is unless you can rent the $400,000 house for $1,500, it makes much more sense to purchase it,” Brady said.
Buying a home is not for everyone. Renting is often less stressful and more flexible. But if you’re ready to settle into one place for a while, go over the numbers to see what works best for you.