Many of my friends in their 20s and 30s are considering buying their first home instead of renting. I decided to break down and compare the costs of owning vs renting in the North Phoenix zip code of 85024. Buying isn’t always the best option for everyone but could it be cheaper than renting?
The most common reasons why people decide to purchase instead of rent:
- sense of responsibility and freedom
- long term investment and tax credits
- pride of working for something that they can actually call theirs
Renting Vs Owning
Let’s take a look at 2 homes in the same neighborhood (1 is a rental and the other is a home I sold last month) and calculate what it would cost to rent vs. own:
This 3 bedroom/1.75 bath home under 1,100 square feet rented for $1050/month in April of this year.
The average 3 bedroom rental in this North Phoenix neighborhood under 1,400 squre feet is $1050/monthly or around $350 per bedroom. So this is actually a reasonable price for renters in Deer Valley.
How much would it cost to purchase a similar home?
Let’s compare that with a 3 bedroom/1.75 home at 1,311 sq ft that I recently sold in 85024:
For the Conventional Buyer
My clients locked in a conventional fixed interest rate of 4.875% for 30 years with a 10% down payment. My preferred lender was able to guide my first-time homebuyers through the entire process and even helped them shop around to find home insurance for $400/year.
$151,000 Purchase Price
– $15,100 Down Payment (10%)
= $135,900 Loan Amount for 30 years
Here is the breakdown of the monthly mortgage payment:
$ 718 Principal plus Interest
+$65 Private Mortgage Insurance (.5% x loan amount / 12)
+$77 Property Taxes ($926/12)
+$33 Homeowner’s Insurance ($400/annual)
= $893 Monthly Payment
The total mortgage payment including everything (principal, interest, property taxes ($926/year), mortgage insurance and homeowner’s insurance) is $893/monthly. Remember: This monthly payment could get reduced once the homeowners have enough equity in their home to remove the monthly mortgage insurance of $65/monthly from the loan.
For the FHA Buyer
Not everyone has 10% to put down on a home, so let’s calculate the monthly mortgage payment with an FHA loan at the minimum 3.5% down. Remember, with an FHA loan you can typically get a better interest rate compared to a conventional rate but your MI (mortgage insurance) will go up (and MI can never be removed for the life of the FHA loan). Let’s say the buyer was able to lock in at 4.5% interest.
$151,000 Purchase Price
– $ 5,285 Down Payment (3.5%)
+$ 2,642 Up Front MIP (1.75%)
= $148,357 Loan Amount for 30 years
Here is the estimated monthly payment calculation:
$ 751 Principal plus interest
+ $ 170 MI Premium monthly (1.35% x loan amount / 12 months)
+ $ 77 Property Taxes ($926/12 months)
+ $ 33 Homeowner’s Insurance ($400/annual)
= $ 1031 Monthly Payment
When you look closely, renting a home is a lot like owning as far as expenses go. Most of the time, even renters still have to cover the trash, water, and sewer bills as well as landscaping and pest control services. As for the AC breaking down? Yes, the tenant will save money by not having to shell out for this repair. However, for many homeowners that is an expense they are willing to pay to live the American dream.
If you are interested in learning more about your home purchasing options, please contact me with any questions. I work alongside a great lender who offers free credit repair and advises potential buyers on how much home they can afford. Once qualified, I can assist you in your search for a home within your budget.
You can search the MLS just like a Realtor to get an idea of what is currently on the market.