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Rent or buy? First, mortgage 101

Posted by Rona Fischman May 12, 2011 02:38 PM

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This entry comes to you in response to an email from CatB. Real estate questions are always welcome. Send to Rona Fischman.

Cat B asked:

I’d like to see a post about what it means to "have to buy now." What are the factors that (should) go into this calculation? Is there a better way people can find adequate rental housing that will alleviate the “need” to buy now?

I hear regularly from wanna-be homeowners that the only way to get decent housing for their family is to buy a house. They tell me that anyone trying to rent with children will face a wave of discrimination and rejection after rejection. They tell me that trying to find an apartment for one person that can be supported by one income, near the T, is like trying to win the lottery. They tell me that they are sick of living like students.

The other thing I hear is that friends and family are telling you that any renting is second-rate when you are happy renting? Tell us! Has your Aunt Margaret said something ignorant like, “Well, darling, you graduated from BU five years ago, we expected you’d buy a house by now. When are you going to grow up?”

Renters, how hard is it? Really? Tell your story. Is it true that all rental property for families and singles is either second-rate or costs an arm and a leg? What does it really cost to live in a nice place? Renters, what are you paying? Tell us how many bedrooms, house or apartment, what town, what shape.

So, do you need to buy? Is it because rental housing is the pits? Or is there more to it?


The second part of the question was about the calculation.
As you all know, I think starter housing is a waste of money. So anyone asking about whether to buy for a couple of years, the answer is “rent.”

If you are buying to hold onto it, the clump of blog entries are for you. I’ll be writing about the money issues you need to be looking at. But, before you get to that, figure out what it will cost to get a rental that you can live in, for the long haul. Depending on where you are living, this could be $1200 and it could be $3200 a month. Once you know that, compare it to the real cost of owning, which I will be going over for the next week or so.

Now calculate:
Mortgage rates are really low. At the lower interest rates, it is not the debt interest that is making housing expensive. (I added some higher rates, so you can see what a more normal rate environment looks like.)

Amount Borrowed//5 percent//5.5 percent//6 percent//7 percent//8 percent
$100,000//$537//$568//$600//$665//$774
$200,000//$1074//$1136//$1199//$1331//$1468
$300,000//$1610//$1703//$1799//$1996//$2201

The rule of thumb about interest rates is that for each 1 percent that interest rates go up or down, the principal cost needs to go down or up 10 percent to make the same monthly payment price.

Home owners, when did you buy, and at what rate? I bought with an adjustable, which started at 7.5 percent and went up to 8.5 percent. I refinanced to a fixed rate of 7.5 percent and thought I was sitting pretty. Each time I refinanced after that, I’d say to myself, “this is never going to be lower.” I’ve been wrong.

Did interest rates come into play when you bought? If so, what year was that?

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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