This is the age old question many people face; do they rent or do they commit to buying a home? Most people do a financial analysis to see if this makes sense. Will the mortgage payment be less than the rent payment?
Whether yes or no, they should consider that the principal portion of the mortgage payment is used to build equity in the home, while the rent payment will go to the landlord and will not be used to build any equity for themselves. Over time, hopefully, they will build equity in their home so that they can either sell and make a profit, or use the equity as a down payment for a bigger home.
If you are going to purchase a home, you will typically need a down payment. There are down payment assistance programs where you do not need a down payment, but the rate and costs are higher on those loans than if you were able to make a down payment(exception is VA and USDA loans where no down payment is required and the rate and terms are competitive).
There are programs where you can put as little as 1% down and obtain good terms on the loan, and the 1% can be a gift.
Example, let’s take look at a $200,000 home. If you were to apply for the 1% down payment loan today, the estimated mortgage payment would be $1,300 including principal, interest, taxes, insurance, and mortgage insurance. This requires only a $2,000 down payment.
You would compare this to the monthly rent you would pay on a $200,000 home, if the rent is more, then it makes sense to buy, if the rent is less, you would have to consider the lost opportunity to build equity in the home.
With a mortgage, approximately $3,000 of your mortgage payments will go to paying down the principal in the first year in this scenario, so, you would gain $3,000 of equity in your home.
If you need help analyzing your rent v. buy scenario, contact us and we can help you!
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