Rent or Buy?

January 2, 2010

It can be very tempting to buy a home before you are ready.  Why pay rent when you can pay a mortgage instead, and own your home? 

When you buy, you have to pay the mortgage, and property taxes, and pay for repairs that become necessary.   When you rent, you only have to make the agreed-upon rent payment.  Most repairs are not your responsibility.  You can move easily when your lease is up if your life changes.

If you borrow $300,000 to buy a home, and the interest rate is 5%, you must make a payment of at least $1250 a month just to cover the interest that is accumulating.  If you want to pay down the principal of $300,000, then in the first year, for example, to reduce the principal by $12,000, your mortgage payment would be $2250 per month.   If you only pay the interest, you are just renting from the bank, and you are still responsible for repairs and property taxes. If interest rates go up, which will happen eventually, as they have been at or near historic lows for many years, then either your payments must increase, or it will take longer to pay off the mortgage.

There are many mortgage calculators on the internet. The calculator on the Coast Capital website, https://www.coastcapitalsavings.com/Tools_Calculators/RentvsBuy  provides a good comparison between renting and buying.  Create a few scenarios, and pay close attention to the amount of interest you pay.  The numbers may shock you. 

Take the time to accumulate a good down payment, and funds for property taxes, closing costs, and unexpected repairs.

Buy when the time is right for you, not because your family or friends or news reports say that now is the time to buy.