I couldn't stop myself from writing about this subject after reading a recent article on MSN Real Estate entitled, "Buying beats renting until interest rates hit 10.5%". The article notes an analysis done by real-estate portal Trulia that shows, "…interest rates could rise to 10.5% nationally before renting would become a cheaper option than buying."
My fear is that people will look at headlines like this and accept them as fact, which could lead them down the wrong real estate decision-making path. Having recently downsized and purchased a home without a mortgage, I can see scenarios where buying could certainly beat renting. However, it's not a blanket generalization that should be made since so many factors can come into play.
While that Trulia article mentioned a 10.5 percent interest rate still allows buyers to beat renters, I would be wary of such all-encompassing statements. Using a simple mortgage interest calculator, we can see that such a rate on a $200,000, 30-year fixed loan would result in a total payment amount over the term of the loan of $658,612.29, of which $458,612.29 would be interest, versus the same loan at a 4.5 percent rate, where the total payment amount would equal $364,813.42, of which only $164,813.42 would be interest, a difference of $293,798.87.
In our Chicagoland condo now, we pay just under $3,000 a year in property taxes. In our previous single-family home (also in the Chicago area) though, this amount was closer to $5,000 a year. Rates in many larger homes in the area are even higher -- sometimes reaching close to the $20,000 a year mark. But in places like rural Indiana, property tax rates could range closer to $1,000 to $2,000 a year. So factoring property tax rates into the equation could make a significant different in whether buying beats renting.
Unlike our current condominium, all the apartments I've ever lived in never had an association fee or HOA dues. Our association fee runs $300 a month, and while it incorporates things like water, sewer and trash services, landscaping, and certain other amenities, so have most of the rents we've paid over the years. In fact, sometimes we even had our heat paid for in certain rentals.
Rental rates and home appreciation levels
There are all sorts of other factors that can come into play in the "buy versus rent" argument. Geographic and regional factors -- even things in the same city or suburban area -- like weather, school districts, annual income averages, crime levels, available public transportation, infrastructure, available housing or rental inventories, and related items can make a huge difference in what living situation is best.
Here in the Chicagoland area, we can often find suitable two-bedroom rental apartments in safer and even affluent neighborhoods often ranging between $800 and $1,200; however, such rates can be much higher in certain parts of downtown Chicago. In parts of Florida, a 3-bedroom apartment might rent for just $800 though, and in rural Indiana, only $500 or $600.
Therefore, before just accepting certain blanket generalizations about whether it's better to rent or buy, consider doing your own research on the area in which you'd like to live as there are many area-specific factors that can swing the decision one way or the other.
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The author is not a licensed financial or real estate professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Calculations have not been verified by a professional. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
- Real Estate