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Should you buy or rent a home? It depends on the math


By Jeff Lazerson



What I think: Sellers have been showing their swagger, demanding lofty prices for a good six years. Buyers bit.

And I was euphoric each time one of my clients won a bidding war and struck what was at the time, housing gold.

Not anymore.

Now, armed with sales slowdown news, more and more bold buyers are ruling the roost, dictating the deal terms.

Holy momentum shift!

But wait. Where are we headed?

Mortgage rates are rocketing up. Three-percent mortgage rates are long gone. Even the four-percent mortgage is starting to fade, making the cost to carry a house payment much more expensive.

Conventional chatter is pointing to a recession in perhaps a year or two. How deep? How long? How far will home prices fall?

Is renting a better move than buying? Is staying put a better move than selling your residence to buy that McMansion you’ve been eyeing?

Here are some rent-vs.-buy comparisons at three different price points, based in part on property pricing and rents from Lance Siegel, president of HVCC Appraisal Ordering Service in Lake Forest:

1) A two-bedroom, 1,150-square-foot Rancho Santa Margarita condo will rent for about $2,300. This same property will sell for about $425,000. Assuming a well-qualified buyer putting 5 percent down on a conventional, 30-year fixed-rate at 4.5 percent and a $275 homeowners association fee, the total house payment is $2,946.

The buyer will pay $646 more per month than the renter. And, the buyer will likely need to come up with more than $25,000 for a down payment and closing costs. Renting this condo will be cheaper than buying — unless the buyer has thousands of dollars in tax write-offs to begin with.

A married couple that rents automatically gets a $24,000 standard deduction. But buyers with sufficient tax-write-offs sometimes can beat that standard deduction by including mortgage interest and property tax deductions.

2) A three-bedroom, 2.5-bath, 2,000-square-foot house in Placentia will rent for $3,300. This same property will sell for about $735,000. The house payment will be $3,980 a month, assuming a well-qualified buyer is putting 20 percent down on a 30-year agency high-balance fixed at 4.75 percent and there are no HOA fees.

Owning that house will cost $680 more per month. The mortgage interest deduction will be $3,700 more than the $24,000 standard deduction. Borrowers also receive a $9,180 property tax deduction. Again, if the buyers have enough in additional tax write-offs to offset that $680 per month in added house payments, then buying can be cheaper than renting. Otherwise, it’s better to rent.

3) A four-bedroom, three-bath, 3,000-square-foot house in Laguna Niguel will rent for about $5,200 per month. That same property will sell for $1.25 million. Assuming a 25 percent down payment on a 30-year jumbo fixed rate at 4.875 percent and a $160 HOA fee, the total house payment is $4,808.

Owning will cost $391 less per month. In addition, the mortgage interest deduction will be $36,312 compared with the $24,000 standard deduction, plus up to $10,000 in state income and local property taxes. Buying in this case definitely is cheaper than renting.

Please be mindful that costs vary per property, per buyer and per individual tax rate. These calculations also don’t take maintenance costs into consideration. And you should factor income you might otherwise earn from funds used for the down payment and closing costs. Consult with your tax advisor.

My advice to you is to buy only if you are going to hold at least five years. Otherwise, rent.

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Jeff Lazerson - Mortgage Columnist since 2011