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Rent vs mortgage

SkinnyGoomba

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depends on your situation, right now is a great time to buy, and a terrible time to try and take out a loan unless you have perfect credit.
 

randallr

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You need to be more specific and give us some situational information. What you are providing right now is all relative.
 

SkinnyGoomba

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if you are considered sub-prime, unlikely that you'll find a lender to work with.

Or if you are in a situation where you expect your salary may change, you may lose you job, or you do temp work, something like that.
 

Roikins

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Originally Posted by merkur
At what level of rent cost does it become more financially prudent to stop renting and buy a property and start spending the amount of money you were previously paying on rent on paying off your own mortgage?

Being single and having a home, I'm thinking of ditching it and going back to an apartment or smaller digs in the future. You have to consider mortgage, higher fire/flood/etc. insurance, property tax, landscaping (if you don't do it yourself), and other random costs for maintenance, which is less if the house you buy is new, more if it's an older house. Of course you get the tax break, but that's also why you need to provide more information and why that choice will vary from person to person.
 

Journeyman

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I don't think that it makes financial sense, but one reason that a lot of younger people choose to rent is that they can afford to rent much nicer (and better located) places than they could afford to buy.

As an example, I live in an apartment block where the average price is probably around $350k to $450k per apartment. Rent on the apartments are typically around $400 to $600 per apartment, and the apartments are two or three-bedroom. There are plenty of young people who can afford to pay $200 a week rent (if they are sharing an apartment) to live in a reasonably trendy area that is close to shops, restaurants, public transport, university etc, but there aren't many young people who can afford a $400 000 loan.

Frankly, I think that the sooner that you purchase a property, the better.
Of course, there are various factors to consider, such as whether you are purchasing at the peak of the market and if you should therefore wait, where it is best for you to buy, whether you should get an apartment or a house, and so on and so forth.
Some people opine that you shouldn't "waste" money on property and that such money is far better spent on investing in shares or mutual funds. Personally, I don't agree - the benefits to owning your own home are more than merely financial - it is good to have a place to call your own, that you feel secure in and where you know you are not subject to the landlord's whim. Further, you can renovate or redecorate to your heart's content (or your wallet's capacity).

One last thing - always repay more than the minimum amount, otherwise you will be absolutely raped on interest in the first few years. It's very depressing to see the graphs that loan calculators generate, showing that of the $20 000 you repaid in the first year of the loan, only about $2000 came off the capital and the rest went in interest.
 

jase12

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Originally Posted by Journeyman
One last thing - always repay more than the minimum amount, otherwise you will be absolutely raped on interest in the first few years. It's very depressing to see the graphs that loan calculators generate, showing that of the $20 000 you repaid in the first year of the loan, only about $2000 came off the capital and the rest went in interest.


man banks would love you. why do u think it is that banks push the idea that you should make extra repayments? not because it helps you, but them. i understand what you are saying about interest, but you also have to remember that inflation decreases your loan amount over time. by paying the loan off quicker than you have to, you are saving interest, but paying the bank back with dollars that have been less affected by inflation. this allows them to lend out that money again to someone else quicker than they could if you used up your entire lending time frame.

one other option that im going to throw out there. as the previous poster explained, you can live in a much nicer standard of accomodation if you rent rather than buy. taking this into account, work out what you could afford on a mortgage, $1600 per month using your figures, and then take out of that what you will be spending on rent, lets say $1000 per month. thats $600 per month you've got left per month to invest, why not take advantage of the rock bottom stock market? the end result is that you live somewher nicer than you can afford to buy, and you have an investment that could serve on a deposit in the next few years in a nicer plce
 

Milhouse

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There is also a concept called being "house poor". This happened to tons of people because they kept hearing how great it is to buy a house but never thought about everything surrounding home ownership, they stretched to make a mortgage and had no savings, and basically ended up living paycheck to paycheck because of their home.

So, what I would say is that you need to ask yourself if you pay a mortgage, do you have money to save still? What happens if your water heater or oven stops working, are you totally screwed and have to put it on a credit card, or do you have savings to cover such things?

You'll also have regular bills for other things too that you didn't have to pay for when you rented. For example, homeowners' association dues, lawn care (if you have a lawn), general upkeep of the house or condo, etc.

Once you buy, suddenly a whole lot becomes your problem. If you rent, you get to call up the landlord and say "fix it" and then stop worrying.

Something to think about.
 

dirk diggler

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The standard calculation is 5% for prevailing rents vs. housing. So if you are paying $1000/month on rent or $12,000 per year, than that works out to $240,000. If you can find somewhere nice to buy for les than $240k that is more than equivalent to what you are renting, it makes sense o purchase. If you cannot, continue to rent.

Another thing to consider is your tax situation. If you rent, you don't get to itemize. If that is not an issue, ok. However, if you find yourself owing taxes every year by more than say $1500-2000, it may be another plus to buying. That's why I bought my first house after law school. I made too much relative to my deductions. However, buying also means maintenance. Fortunately, growing up, my father taught me how to work with tools so I was able to handle all of the basic stuff. Unfortunately, this also means there is not a landlord to call when the toilet breaks at 2 am (been there), to shovel the record 15 in of snow (been there) or to purcahse new appliances when your fridge dies (been there).

Personally, I like to own because it is mine. I like to sit in my backyard smoking a cigar with my feet in my grass. I relocated for work and am in an apartment for a few more weeks. I hate it. I can't smoke inside. I hear dumbasses running on the stairs at 6 am. People arguing at all hours. Not enough space. On and on and on and on. This is a very exclusive suburb but it still is someone else's property.


My .02
 

Journeyman

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Originally Posted by jase12
man banks would love you. why do u think it is that banks push the idea that you should make extra repayments? not because it helps you, but them. i understand what you are saying about interest, but you also have to remember that inflation decreases your loan amount over time. by paying the loan off quicker than you have to, you are saving interest, but paying the bank back with dollars that have been less affected by inflation. this allows them to lend out that money again to someone else quicker than they could if you used up your entire lending time frame.

one other option that im going to throw out there. as the previous poster explained, you can live in a much nicer standard of accomodation if you rent rather than buy. taking this into account, work out what you could afford on a mortgage, $1600 per month using your figures, and then take out of that what you will be spending on rent, lets say $1000 per month. thats $600 per month you've got left per month to invest, why not take advantage of the rock bottom stock market? the end result is that you live somewher nicer than you can afford to buy, and you have an investment that could serve on a deposit in the next few years in a nicer plce


Jase,

I understand what you mean perfectly, but I would far, far rather pay off my loan quickly and thus save myself tens, if not a hundred thousand dollars in interest, than I would take 25 years to pay off the loan at minimum repayment rates. Any "saving" that I would make via inflation would be more than eroded by the additional interest that I would pay. Further, the more quickly I pay off the house, the more quickly I can start to use my money for other things - like my children's school fees, for example!


In actual fact, by purchasing your own home, you are beating inflation as once you are in your home, you are insulated from rent rises. The last time I paid rent - five years ago - I was paying $250/wk for a three-bedroom apt with city views, five minutes drive from the city centre. The rent on that apartment is now $500/wk. Had I not purchased a place, I'd be paying double what I used to and would have nothing to show for it.

The idea of using the "saving" between rent repayments and potential mortgage repayments is a good one, but it ignores a few salient points:
- Most people lack the discipline to use the "saved" money like that;
- Any short-term savings will more than likely be overtaken by rent increases in the future; and
- Owning your own home can have many advantages, including security of tenure, the ability to shape the house to your own tastes, and as a hedge against inflation.

I find the idea of being old and not owning my own home to be quite scary - in my line of work I've met quite a few old people who are attempting to survive on a govt pension whilst having to deal with rent increases and a decided lack of housing. The situation is even worse if you are infirm - can you imagine trying to find a rental property that is configured to deal with someone in a wheelchair??
 

jase12

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Originally Posted by Journeyman
Jase,

I understand what you mean perfectly, but I would far, far rather pay off my loan quickly and thus save myself tens, if not a hundred thousand dollars in interest, than I would take 25 years to pay off the loan at minimum repayment rates. Any "saving" that I would make via inflation would be more than eroded by the additional interest that I would pay. Further, the more quickly I pay off the house, the more quickly I can start to use my money for other things - like my children's school fees, for example!


In actual fact, by purchasing your own home, you are beating inflation as once you are in your home, you are insulated from rent rises. The last time I paid rent - five years ago - I was paying $250/wk for a three-bedroom apt with city views, five minutes drive from the city centre. The rent on that apartment is now $500/wk. Had I not purchased a place, I'd be paying double what I used to and would have nothing to show for it.

The idea of using the "saving" between rent repayments and potential mortgage repayments is a good one, but it ignores a few salient points:
- Most people lack the discipline to use the "saved" money like that;
- Any short-term savings will more than likely be overtaken by rent increases in the future; and
- Owning your own home can have many advantages, including security of tenure, the ability to shape the house to your own tastes, and as a hedge against inflation.

I find the idea of being old and not owning my own home to be quite scary - in my line of work I've met quite a few old people who are attempting to survive on a govt pension whilst having to deal with rent increases and a decided lack of housing. The situation is even worse if you are infirm - can you imagine trying to find a rental property that is configured to deal with someone in a wheelchair??


you raise a couple of very good points and i guess it just shows that there are different solutions to people in different situations. personally as a younger person i would rather rent a place that i could not afford to buy for the lifestyle etc, and use the extra money for investment, which is what i am doing now. but as you say, discipline is an issue. i can well see though that this argument wont fly when im a little older and have a wife complaining that she can't paint the walls and put in a new kitchen! but hopefully by that time i will have built up a reasonable stock portfolio to use as a deposit or collateral.

an interesting argument that has many solutions
 

dopey

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We recently rented out our apartment, relocated and our renting our current home. The disparity between what we are paying in rent and the what we could buy with that same money is astounding. I estimated the purchase price of our apartment as about three times the price implicit from our rental charge. (Put another way, if we bought our apartment with 20% down, the monthly carrying costs of the mortgage plus maintenance charge would be around three times our current rent). The NY RE market still has a long way to fall before it makes any sense.
 

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