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My House Is My Castle!
or (Why I recommend buying a house instead of
renting). By Boris Romanov
Buying a house in Sullivan County is presently a great idea, because mortgage
interest rates are about 6.5% despite the fact that home prices in the area
increased by more then 30% in the last two years. Based on the calculations
featured below, you will see that it is more reasonable to buy a house, rather than
rent.
Approach 1 - Renting a house: The current cost of renting a
2-3 bedroom house, approximately 1,000 square feet, in the Monticello
area is about $900 per month. In addition, the cost of utilities is
about $270 per month. Subsequently, the total expenses amount to $1170.
($900 + $270 = $1170)
Approach 2 - Buying a house (with a 5% down payment and with a 20%
down payment): The average cost of a house approximately 1,000
square feet in size in the Monticello area is about $125,000. Assuming
the current 6.5% mortgage rate (for a 30-year fixed rate loan) and $3000
in annual property and school taxes, the total monthly payment will be
$751 with a 5% down payment or $632 with a 20% down payment. These
calculations were determined using a standard mortgage calculator.
In addition, loans borrowed with less than 20% down payment must add PMI
(Private Mortgage Insurance) and $33 per month ($400 / 12 month) home
insurance fee for both scenarios.
Calculation:
1) $751 (monthly payment with 5% down payment) + $250 (property and school
taxes/per month) + $75 (PMI) + $33 (home insurance) + $270 (cost of utilities)
= $1379; or 2) $632 (monthly payment with 20% down payment) + $250 (property
and school taxes/per month) + $33 (home insurance) + $270 (utilities cost)
=$1185.
Now, let’s calculate the loan amount, which a bank would approve for an
average family living in Sullivan County. Usually lenders have certain
qualifying ratios that will be applied to each borrower. A typical ratio for
a conventional loan is 28/36; the borrower will be allowed to spend up to 28
percent of gross monthly income for housing expenses (PITI - Principal,
Interest, Taxes, and Insurance) and up to 36 percent of income for both
housing expenses and other payments on long-term debts.
Let’s assume that the total income for a young family in Sullivan County is
$35,000 per year and the family does not have other long-term debts.
Calculation: $45,000.00 x 0.28 (PITI) / 12 (months) = $1050 per month.
(This is the amount the lending bank will assume is a feasible amount for a
borrower to pay per month).
In this case, the chance of securing a loan with a 5% down payment is
slightly lower than with a 20% down payment, due to the fact that as
described above, the bank assumes that your financial resources allow you
to repay your loan at a rate of $1050 per month.
The comparison of rental cost versus the cost of buying a house thus
demonstrates that you will be paying approximately the same amount per month,
with one critical difference. If you are paying rent, your money is simply
spent. However, if you are making payments on a purchased house, your monthly
contribution will become an investment and will continuously earn you greater
equity on your house.
Other Points to Remember:
1. The borrower can deduct mortgage interest and real estate taxes on the annual
tax return, because home ownership is one of the last remaining tax shelters.
The "STAR" program also allows a monthly payment reduction of about $50 in the
above presented example.
2. On the other hand, the buyer of a house will pay about $8,000 in closing costs
and should reserve at least 1% of the house purchase price for annual repairs and
maintenance.
Calculation: $125,000 x 0.01=$1250 / 12 month= $104.16 per month.
3. When you purchase a house, you not only buy a place where you can live as you
wish, but you also accumulate your money. If your house was bought at the right
price, at the right place, and in good condition, you should be able to resell your
house with some profit.
ATTENTION: Please check your own calculation with your financial adviser!
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