By Sarah Tanno, CPA
Last year I moved from New Orleans to DC. With the move came a small salary increase, but a much higher cost of living. My monthly rent increased from $950 to a whopping $1950! To top it off, my new salary had me owing money to Uncle Sam.
As a CPA, I understand the tax benefits of savings and follow the usual financial recommendations, contributing to a 401K and an IRA. Yet here I am at 27, earning a decent salary, with few financial obligations (unmarried, no kids or student loans), and still unable to afford the good life. What more could I do?
The term “Buyers Market” hadn’t meant much to me since buying is something I planned to do after I was married, but with historically low interest rates and lower housing prices, I realized that investing in a house may be the solution I was looking for.
Using an online rent vs. buy calculator (ginniemae.gov has a good one), buying made sense for me. In the example below, I save more than $150K by buying!
The calculator is easy. Simply, inputting rent, house price, and tax bracket gives you a good estimate on which option would be more beneficial. Information such as interest rates, home prices and even property taxes is available online. Most importantly, as long as you can put down 3.5% of the home value, you will most likely be able to begin the process.
However, the calculator doesn’t show several factors which will help you determine if buying is right for you:
- Can you afford it? After putting down 10% from savings my estimated monthly payments (mortgage + taxes) will be around $2600, a lot more than my current rent. For me, deducting mortgage interest and property taxes will lower my tax burden, resulting in a refund at the end of the year in part making up for the increased monthly payments. Because of the tax benefit, over ten years the average monthly payment for owning a house comes out to $901 compared to $2K for rent.
- You get what you pay for. A house gives me more space and a yard, two things I don’t mind paying more for.
- Equity. Unlike rent which is “thrown away” each month, the money you pay into the house is yours. In the example above after 10 years I will have more than $250K in equity. Meaning the next time I want to buy a house, I would technically have this amount to put down on the house. Sure beats 3.5% or in my case 10%.
What to do if the Calculator Says Buy:
• Get a realtor- they save you time and money.
• Talk to your bank about getting preapproved.
• Attend a first time homebuyer class/Read more.
• Get excited- buying can be fun!