Homeowners still have considerable advantages from the amortization of the mortgage and the appreciation enjoyed by most homes even with taking the standard deduction instead of itemizing to take the interest and property tax deduction.
There is an adage: “Rent or buy, you pay for the house you occupy.” You either pay for it yourself or for your landlord. The people who have job security, sufficient income, good credit and the funds for the down payment and closing costs can enjoy the many financial and emotional benefits of homeownership.
Looking at a $350,000 home purchased with an FHA mortgage with 3.5 percent down payment at 3.25 percent interest for 30 years, the total payment would be $2,420 a month. During the first year, the average monthly principal reduction is $573 a month, which build the owner’s equity in the home.
At an estimated 3 percent appreciation, this home would increase in value at the rate of $875 a month during the first year, which again builds the owner’s equity in the home.
Even if you consider the buyer will now be responsible for repairs and possibly homeowner’s association fees, the monthly net cost of housing in this example is $1,122, or less than half the monthly payment. The difference goes to equity, which a tenant does not benefit from.
If the buyer were paying $2,750 monthly rent, they would be paying $1,628 more each month to rent than to own. In a year’s time, they would lose $19,500 of equity by continuing to rent. The down payment in this example is only $12,250, which would leave $7,000 to pay for buyer’s closing costs.
Purchase Price $350,000
Down Payment $12,250
Total Monthly Payment (PITI + MIP) $2,420
Less Monthly Principal Reduction (average first year) $573
Less Monthly Appreciation (average first year at 3 percent annually) $875
Plus Estimated Maintenance & HOA $175
Net Cost of Housing $1,122
The equity for the homeowner in this example at the end of seven years would be almost $140,000 based on the appreciation and amortization of the mortgage. Whether you rent or buy, you pay for the house you occupy.