So, you're renting. Rent is $1500/mo for a decent place. Maybe more, maybe less. But, it doesn't really matter. The math will work no matter what the price is.
$1500 x 12 months/year = $18,000/yr in rent.
Now, let's assume your home loan is about the same. It's probably a bit more, but it also comes with a tax credit. So, after that credit is applied, and we adjust things, it'll be about the same. But, let's say it's still $100/mo MORE to own. I mean, why make this one-sided.
So, $1600 x 12 = $19,200.
You're SAVING $1,200/yr to rent. Good job! Over 10 years, you've saved $12,000. You've also paid a total of $180,000 in 10 years.
Now, let's figure out that bad home loan that's costing you an extra $1,200/yr! It's cost you $192,000 to own over 10 years.
A $1600/mo payment would be on a home priced around $250,000. Again, I'm using generic numbers just to prove the point — this isn't an affordability discussion. I'm also assuming that the payment is PITI. (For the purposes of this example, and for those following along from home, I assume $400 for PMI and taxes).
So, after paying for 10 years, on your rental, assuming your rent never went up in all those 10 years, you move out. Your landlord thanks you, and returns your $3000 security deposit. Great job! You left the home clean.
After paying for 10 years on your LOAN, your loan balance is now $198,026.23.
Now, you need to sell. We can safely assume that your home as appreciated about 4% per year. Your tax savings on a $1600/mo payment is $176 (if you're in the 25% tax bracket). Your home, after 10 years is now worth about $370,000.
Let's assume that it isn't as good.. It's only worth $325,000.
You NEED TO SELL!! So you, sell it at $325,000.
You'll receive a check for about $100,000 after all fees, commissions, and costs have been paid for.
You PAID $192,000 to own, but you got back $100,000 when you sold it. So, it actually cost you $92,000 to own the home for 10 years. That's $9,200/yr. That's $767/mo. Pretty good deal, no?
Now, let's compare it to the rent.. You paid $180,000 to live there for 10 years. When you moved you got $3000 back. That's a net LOSS of $177,000.
Now, I might be rusty here, but I'm pretty sure $177,000 is a whole heck more money than $92,000.
It gets even better. After 30 years, you pay $0/mo. Well, actually, you pay tax still.. That's about $200/mo. Renting? You pay market rent. But, in just 10 years, owning would have saved you $85,000. Enough to buy a brand new luxury car — cash, and still have money left over for the gas, and a holiday.
BTW, if the house appreciated at 4% a year, which is pretty common, the calculation becomes even more one sided. There's an additional $50,000 in profit. That check you receive isn't $100,000, it's $150,000. Meaning the actual cost of ownership was only $42,000 over 10 years. $4200/yr. Only $350/mo. That means, you would be better off to the tune of $135,000. You'd be keeping $13,500 MORE per year in your pocket. That's $1125/mo MORE that you're able to save.
You're giving away $1125/mo that could be used to pay for college. Could be used to pay bills. Could be used to do anything — other than make a landlord wealthy.
Every year, you're throwing away $13,500. In a decade, $135,000. In 30 years? You don't even want to know..
But, here's where it gets REALLY depressing. Year 31? Your rent is now $2000/mo. Your loan? $0. You're paying an additional $24,000/yr. That much money could buy you a new car, cash, per year, every year.
$24,000/yr is also enough to pay for college.
Instead, you're giving it to your landlord.
So, if you would rather buy, I can help you!