Spring is traditionally a time of year when the real estate market begins to heat up and people look to move homes. In the Charlottesville area, we have the benefit of a robust economy, stunning natural resources and excellent entertainment. But with our high quality of life comes our seemingly ever-increasing cost of housing.
According to the 2017 Nest Realty Annual Market Report, housing prices in the Charlottesville area have risen each of the last five years to a median value of $295,000 and an average price of $369,551 for 2017. That is compared to a median price of $275,000 and average of $341,534 for 2016. With costs rising across the area, could it actually make more sense to rent, rather than buy? Some argue that renting is tantamount to throwing money away. Others point out that renting a home and investing in other assets, such as stocks, is a more lucrative alternative, with greater liquidity and very little overhead requirements.
Ultimately, the answer to the question of whether to rent or buy a home depends on the needs and circumstances of an individual, or family, and several other complex factors: your level of current retirement savings, how long you intend to own or rent the home and the stability of your job and lifestyle. But, there are other important things to consider.
One oversight people make when deciding if they should rent or purchase a home is in understanding the structure of a mortgage payment. The biggest misunderstanding: Much of the overall interest on a mortgage is paid in the beginning of the contract.
Using the average Charlottesville-area sales price of $369,551, let’s look at the numbers. With a 10 percent down payment and a 4.5 percent annual interest rate for a 30-year loan, the mortgage would cost $1,685.21 per month. No shock there, but dig a little deeper to learn that, for nearly the first 10 years, over $1,000 per month is going directly to interest. For the first month one would pay $1,247.23 in interest and $437.98 in principal. After three years you would still be looking at $1,184.06 in interest and only $501.16 in principal payment. It then takes until November 2032 (more than a decade!) for the value of the equity payments to exceed the interest payments. Including taxes, insurance, closing costs and the other expenses associated with real estate (such as repairs and maintenance), these timelines greatly extend. All this is to say that the ideas of renting as a way of “throwing money away” and buying as “a way to build equity” are both drastic understatements.
David Posner is local investment executive specializing in utilizing socially responsible options for long-term financial goals.