Home ownership has, for decades, been the “American Dream.” It gave people a financial goal to work towards, saving their money for a downpayment and trying to get their credit up to a point where they could qualify for a mortgage. In many ways, it has also become a bit of a status symbol.
But lately, the Millennial Generation has been questioning the wisdom of this and saying it is better to rent, rather than own, and tie up your money in a downpayment. But are they right? Is it better (and financially smarter) to rent these days rather than own? To get a realtor’s perspective on this I spoke with frequent guest Lynn Stambaugh of Cardinal Real Estate Services here in Woodbury, NJ, on her thoughts as to which is better and why.
The math discussed in this episode goes by rather fast, so here are the numbers we discussed:
A home is purchased for $500,000, and then sold 9 years later (the average time people stay in a home). The presumption made is that it will appreciate by 6% over that time to $844,739 in 9 years for total gain of $344,739. The authors of Quit Like a Millionaire assume the following costs of ownership to be spent over that time:
- Homeowners Insurance 0.5% of value/yr: $22,500
- Property Taxes 1% of value/yr (nat. ave.): $45,000
- Maintenance on Home (1-3%): $45,000 at 1%
Then there are the costs of the mortgage that are paid, assuming a 10% downpayment of $50,000, and a $450,000 loan. The authors doo not give an interest rate in their calculations, just a total of $162,033 paid out over 9 years. Deducting the interest from the $171,418 gain would leave only $9,385 in appreciation of the property over 9 years (down from the original $344,739)
The authors deal with national averages, so let's see what the numbers would be here in southern New Jersey.
- Average mortgage interest in NJ is 4%, which would come to $147,903.51 in interest paid over 9 years.
- Deducting the interest from the $171,418 gain would leave $23,514.49, up $14,129.49 from the authors' numbers.
- Taxes in NJ are higher than the national average, but vary per community, and are based on assessed real estate values, not the original purchase price
However, there would be a credit back for the reduction in the principal balance on the mortgage over that time of $84,120.33, as the monthly payments pay more towards principal. Added to the $23,514.49 in net appreciation, this comes to $107,634.82 plus the original $50,000 downpayment to put into a new home.