Buy or Rent?

Save Money and Buy a Home

Recently Business Insider published a story regarding "tipping points" of interest rates that would cause renting to becoming cheaper than buying. Nationally the tipping point of interest rates is 10.5%, so in other words interest rates would have to hit 10.5% for renting to be cheaper than buying. I'm not so sure we'll be seeing 10.5% interest rates any time soon.

Whether you realize it or not, it's more affordable to buy than rent. Granted you're going to have to save up some money first for a down payment if you do not want to pay PMI (private mortgage insurance which is typical 1% of the remaining principal balance of the loan paid every year until you reach 20% equity). However, if you are willing to pay PMI and make up for the cost of PMI in speculative appreciation (anticipation of the house gaining in value)  you can buy a house with as little as 3.5%.

Why is it more affordable to rent than buy? First and foremost, monthly payments. Generation Y (people in their 20's and 30's) has been slower to buy than their parents. Studies show that they like their flexibility and like to move around like gypsies. This increases demand for rental units which in turn leads to higher and higher rents which exceed the cost of a mortgage.

But don't you have to pay property taxes and get insurance when you buy a home? Yes, you do. Even taking into consideration a mortgage which includes PITI (principal, interest, taxes, and insurance) monthly mortgage payments still are typical cheaper on a comparable property. Here's the kicker, not only are monthly payments cheaper, you can also write-off your property tax expense and mortgage interest expense. Say for example you were in the 25% tax bracket, if you have yearly property taxes of $7,500 and a mortgage interest expense of $10,000 (yes interest is a lot in the beginning years of the loan), that's $17,500 in write-offs. Again, assuming a 25% tax bracket, that means you pay $4,375 less to uncle sam simply because you own a home.

To summarize, let the gypsies rent. If you have enough money saved up where you're comfortable to lay out a down payment of 20%, do it.