Cutting the price will generally bring buyers of anything out of the woodwork that were not serious before. Some renters could easily lower their monthly cost of housing by half or more by purchasing a home with all the financial benefits that come with it.
The most obvious thing in today’s market is that the mortgage payment could be less than the rent the tenants are paying. With mortgage rates hovering around 3%, this is a major factor of the savings.
The two other major contributing factors are appreciation and amortization of the mortgage, neither of which benefit tenants continuing to pay rent. According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020. There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.
With each payment a homeowner makes on their mortgage, a portion is used to reduce the principal amount owed. This is like a savings account for the owner because it lowers their unpaid balance and increases their equity.
The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.
A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium. If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.
The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing. The other major item to consider would be the appreciation. Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.
|Total House Payment||$2,013|
|Less Monthly Principal Reduction||$513|
|Less Monthly Appreciation||$750|
|Plus Estimated Monthly Maintenance||$200|
|Net Cost of Housing||$950|
In this example, it would cost over $1,400 per month more to rent than to own.
A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction. If the same person continues to rent, there would be no equity build-up.
If you’re curious as to how much you could cut your housing cost, go to the Rent vs. Own or contact a real estate professional.