Knowing When To Buy Or Rent
By on Apr 22, 2008
By Jeff Hui
Deciding whether to rent or buy a home is a major decision that requires careful consideration. Certainly there are numerous responsibilities associated with home ownership, and tenants often find that renting offers them the advantage of freedom of movement. But the rewards of home ownership are great, and purchasing real estate is an extremely wise investment. It is an achievement that offers a sense of pride, financial stability, and potential tax advantages.
To get a sense of the financial differences between renting and owning, consider the following scenario: If you are paying $1,500 per month for an apartment and you know your rent will increase five per cent every year, you will end up paying your landlord $99,461 over the next five years. If you are currently renting a house, you may be paying much more than that each month. Furthermore, any costs you spend on improving the property will be lost. By paying this monthly expense in rent, you lose out on building equity and you won't gain much should the property value increase.
However, if you were to purchase your own home or condominium, you would be well on your way towards building equity within that same five-year period. Assuming you take a $300,000 mortgage loan at a fixed rate of 4.50 per cent for five years, your monthly payments will be $1,660.42 per month based on a 25 year amortization. By the end of the five years, your mortgage balance will have declined to $263,390. After accounting for the annual home value appreciation of five per cent, your home would be worth $382,884 at the end of five years. After five years, the mortgage balance decline would be $36,610 and the home value appreciation $82,884, resulting in a total net worth increase of $119,465!
In addition to building equity, there are tax advantages that come into play with home ownership. When you also consider that the capital appreciation on your principal residence is tax-free, the numbers are truly staggering.
To help you determine which mortgage is right for you, your mortgage consultant will need to evaluate your monthly household income, current assets, and savings, as well as any other monthly obligations you may have, such as credit card payments, car payments, or child support. These pre-qualification factors, along with the report of your credit score, will determine how much you can afford and what interest rate you will pay for financing.
Housing is an expense that takes a big bite out of the monthly budget. If you are a renter and feel that home is more than just a place to hang your hat, consider the benefits of purchasing real estate. It may be time to take the next step to building your personal net worth as a homeowner.
Jeff Hui is a mortgage consultant with Mercury Mortgages. Contact him via jeff@mercurymortgages.com or at 905-273-4234.
