Rent vs Buy

Here's our calculation: Rent is currently at $2150/month (that $50/month is for our dog). We could probably get $1750/month if we sign up for a lease.

The home we're buying is $320,000. The downpayment of 20% equals $64,000. Plus closing cost of about 3% which would total $73,600. Which, if we were earning 3.77% interest (5 yr CD according to bankrate), it would generate $231 per month.

So, renting is about $1,519/month.

With 256K mortgage at 5.62% the payments would be about $1473 per month. Taxes $290, insurance $60. Total of $1823. With about $350/month of tax savings the first few years.

That's $1,473/month. About $46 per month cheaper.

However, things aren't so simple since there is the issue of maintenance (adds to the monthly cost) and expected inflation (lowers the worth of savings and increases the worth of a home) and price change of the home itself (which, if in the normal economy, things will rise with inflation). Unfortunately, we are not in a normal economy, we are in Great Depression 2 (GD2) and we're already 1 year into it: we probably have another 5-15 years to go (depending on how badly the government intervenes, so the more intervention, the worse things will get -- if Japan is any indicator, we may even be down 20+ years). We will lose money on our home if we have to sell in the next 20-30 years (or more). Try to put that into monthy equation!

Note that since we'll be leveraged 4:1 (i.e., 20% downpayment), it won't take much to wipe out our downpayment (i.e., 20% decline = zero equity for us). If I ever get unemployed, maybe I too can get a bail out!

Copyright 2008, DannyHSDad, All Rights Reserved.

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