Sooner or later every person faces the question of finding a place to live. Moving to a new state or city, starting your own family, having a baby. In any case, you need separate living space. There are two ways to solve the problem: buying your own house with a mortgage and renting. Each option comes with its own advantages and disadvantages. Assuming you have some savings lying around, which option makes the most sense?
According to Zillow data, the median home value in California is $548,000 and the average rent is just under $2,600. With rent being marginally lower and the local market facing a down period, renting would seem to be the preferable option. But it is not quite that simple.
Assuming you decide to buy and pay a conventional down payment of 20% or $110,000 on an average California home of $548,000, plus, property tax and homeowners insurance what accounts for a total monthly payment of $2,640 for a 30-year fixed mortgage at 3.5% interest rate.
It turns out that the cost of rent is equal to the monthly mortgage payment. But, that is not all, there are details.
Unlike a tenant who gives 100% of the rent to “someone else’s uncle”, the owner has the right to deduct some of the cost of the house from his taxes.
First, the owner can deduct the property tax. Second – the interest on the bank loan. And in the first few years, the interest is about 70% of the bank payment.
If you are still wondering what is more profitable to rent or buy, then here are a few questions to answer yourself.
Who do you pay?
In the case of a lease, all 100% goes to the landlord. If you own the house and pay the mortgage, you are essentially paying back into your own pocket. And you can get that money back if you sell the house.
Is the rent going up?
As a tenant, you will probably pay more and more each year. But if you buy a house on a mortgage, you can lock in a payment to the bank for 30 years.
And most importantly, is the value of the property increasing?
It is going up, that is a fact. If you are a tenant, you do not get anything out of it. If you are an owner, the entire price increase is your honestly earned money. And more importantly, you will not pay tax on it when sold, if it was your primary residence.
Thus, if you are considering whether to take out a mortgage or a lease, it is important to understand what is more meaningful to you: mobility or getting real long-term benefits. You can rent a house or take out a mortgage for about the same money. But you will need to look for a new place to live at the end of your lease, or you will own the property outright once you have paid off your mortgage.
The sooner you take out a mortgage, the sooner you will own your own property. LBC Mortgage is here to support you in choosing a loan program.