Buying vs. Renting
After certain considerations I am coming back to review whether it worth buying a house or keep on renting.
Here is our current assumptions:
Desired house price – $ 450 K, current rental price for the home we live in - $ 16.8 K ($ 1,400 a month).
Available saving for closing cost and down payment - $ 100 K, net annual money available to pay mortgage $36 K.
Mortgage – 6% interest rate, annual real estate price inflation (appreciation) – 4%.
Cost of buying (closing cost) will include – mortgage arrangement fee, moving in cost, property buying tax, structural survey of the house – all together $ 20 K
We have accumulated deposit of $ 100 K, so after cost of buying (closing cost) the house we could pay $ 80 K, as downpayment or 18%.
One of the most important things to understand it how much you could afford to spend net (after tax) towards your mortgage. This will determine how much could borrow, comfortably. Of course, there is rule of thumb, when buying a property – to have 20% as downpayment and amount of money a bank lend you is 3 times of your gross income (before tax). We have been tracking our family budget for last 5 years, so do have pretty good idea how much do we spend and where the money are going to.
In our case we could comfortable put a side $3 K a month for mortgage (principal and interest) and some additional $ 200-250 a month to cover house and life insurance.
Another factor to consider : depreciation and re-decoration. People frequently focus on how home prices are appreciating, but they forgot that those prices are for well maintained hoses.
Same as with the original example on the property owning, we set up periods:
- Redecorating house - every 10 years, this would cost about $ 40 K (new kitchen, equipment, central heating, windows, doors, etc…) or $4 K a year.
- Replacing house – every 60 years . My estimate that out of $ 450 K , half of it is the prices of the house.
$240 K for 60 years - $ 4.2 K .