How do you decide whether to buy a home or rent? One
important consideration is the rent to buy ratio.
Compare two homes of approximately the same value in the
same area, one a rental and the other either for sale or recently
sold. If R = the price of rent for a year, and P = the cost to
purchase the comparable home, and A = the anticipated annual
rate of appreciation, then (R/P) + A should be greater than the
expected mortgage interest rate for the house to be considered a
good financial investment. Take for example two homes in the
same neighborhood that could be expected to sell for $200,000.
The rental house rents for $1000 per month, or $12,000
annually. 12,000 / 200,000 = .06, or 6%. Having studied the
local real estate market, you expect that the house will
appreciate at 3% per year. You estimate that you can get a
mortgage loan with an APR around about 7%. 9 > 7, which tells
us that the house should be a sound investment at that price,
and with the given values.
On the other hand, if rental price to purchase price ratios are too
low (generally under 2%) in a given area, it could be an early
warning sign of inflation in the real estate market. In the case of
our example $200,000 homes, what if the rental home was
bringing only $4000 a year in rental income? This puts the R/P
ratio at 2%, or the point at which red flags start to go up.
Chances are this real estate market is overbought, and to
purchase this house for $200,000 might not make financial
sense. With monthly rent of about $330, you could work on
paying down debt or saving for a larger down payment for a
future real estate purchase.
A slightly less tangible factor in the choice to buy or rent a home
is your desired lifestyle. A home purchase is an investment in a
certain lifestyle which you just cannot quite have renting
someone else's house. You can add on to your home or
remodel, decorate as you choose, and don't have to be
dependent on a landlord to keep up with maintenance. You will
also build valuable equity in the property, with which you could
obtain a home equity loan or home equity line of credit.
You will want to know what kind of interest rates are currently
available to you before deciding whether to rent or buy a home.
To compare online mortgage lenders and get free mortgage
quotes visit www.onlinemoneysources.net/mortgage.html.
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