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Realistic rent-or-buy assessment lastly surfaces

Posted 11-27-2013 at 01:58 by emmascott

From time to time, many people will notice an article on some site someplace about a “rent-or-buy” showdown. Generally, it's a crock of manure, as much of the press appears to have been bought off by the financial market, but occasionally, someone gets it right. Resource for this article: Rent or buy Comparison


Actually being honest about this



Almost the same thing is written over and over again on business news online websites. They keep writing articles about whether it is better to rent or to buy, but they are not always the best articles.



The comparisons leave out the truth that people normally do not live in one place for the 15- or 30-year mortgage that they sign up for; many people do not stay in the same place for 10 years. Also, closing expenses, insurance, taxes, maintenance, utilities and other extra costs are not integrated in the cost of owning a home usually.



Occasionally they are correct


CNN Cash recently posted an article titled “Buy or Rent? 10 Major Cities,” which purports to show the “break-even point” in 10 large cities with astronomically high rent. Real estate website Zillow.com has calculated said point based on average rent and average home price and factored in cost of maintenance, property taxes, closing costs, expenses of utilities, and so forth, which the company calls the “break even horizon,” according to its blog.



For instance, in the 10 cities in CNN's article, one where it's recommended a person buy is Chicago. Median home price is $209,300, median rent is $1,430 and the break-even horizon is 2.8 years. Put simply, after roughly 34 mortgage payments, buying is better than renting.



Without considering taxes, insurance or anything else, it makes sense that a person can get a 30-year fixed mortgage on a $200,000 house at 3.55 percent APR and $4,070 down. That means the payment would be $945.70 a month with a savings of $484 each month. That could be made up in 9.5 months. With that math, it makes ideal sense.



Price-to-rent ratio not similar




Many rent-or-buy comparisons, as Zillow highlights, use what's called the price-to-rent ratio, or in other words, the ratio of price to annual rent. Any person suggesting the price-to-rent ratio as a significant rubric should most likely have their head examined; other fees of homeownership, such as closing costs, taxes, insurance, higher cost of utilities and so forth, are too large to ignore.



There are other numbers that could be considered with a more serious assessment. There is a calculator on the New York Times that allows you to get a more practical estimate.



Sources

CNN

Zillow

Kiplinger
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Nov 11, 2013 at 11:42