Buying A Home
This is a question that we gets asked daily, my answer is always the same; absolutely yes! Based on what I do for a living some may think it’s self-serving, and they would be correct, but that wouldn’t change my answer. As the founder of Rock Mortgage Services my existence depends on home buyers choosing us to provide their mortgage loans, so that should cover the self-serving portion of this blog. As a consumer who has owned 7 homes in my 56 years of existence, I can personally say that it’s contributed close to 50% of my current net worth. As a father of 3 adult daughters who are now married with kids of their own, I can tell you that is the advice I’ve given to each of them. Admittedly this was a much easier question to answer when mortgage rates were at or even below 3% , but even at 6.875% (APR 7.308%) for a conventional 30 year fixed, you’ll still be over $100,000 richer at the end of 5 years vs. renting something similar in size and location.
According to an article written by Forbes in May of 2022 the average homeowner has a net worth 40 times higher than that of their renting counterparts. Net worth is the difference between what you own (real estate assets, savings, retirement etc.) and what you owe. According to them Americans who own have an average net worth of $255,000 vs a paltry $6300 for renters. In every other way these two consumers are the same (Income, education etc.), the only delineation is home ownership. The example we like to use comes from MBS highway; they are a premier real estate consultant that employ some of the brightest minds in our industry. They have given us access to their rent vs. own algorithm and the results surprised me. Even with a mortgage rate of 6.875% (7.308 APR), and a loan amount of $323,000 (sales price is $340K with 5% down), our borrower is $101,386 better off at the end of 5 years vs. renting. They are using an average appreciation of 6% annually on the purchased home and they’ve included the cost of property taxes, homeowners’ insurance, maintenance & repairs, they’ve even included the real estate commission in their math after 5 years to be conservative. They have compared the total monthly cost of your mortgage to a similar size rental in the same neighborhood. In our example the total monthly expense of the mortgage is $3252 (this even contains a monthly maintenance expense of $125, that is over and beyond the principle, interest, taxes and insurance that you’ll be paying monthly to your mortgage company.
The rental in this scenario is $2763 (includes renters’ insurance) per month and they are comparing it to a total monthly ownership expense of $3252. From the get-go you can see that the monthly expense for renting is $489 less than owning. This is the preverbal bottom line and where most people stop thinking logically, you can’t compare your monthly rent amount to your monthly mortgage expense. Your monthly mortgage expense should be thought of in the same vein as your 401K or retirement savings. If you can afford the difference in monthly cash flow, you’ll reap $101,386 in profits in as little as 60 months. If you divide that number by 60 months and subtract the $1689.76 in profit from your monthly mortgage expense of $3252 your true monthly housing expense drops to an astounding $1562.24. Let’s say the average appreciation isn’t 6% and we go back to the days of 3% annual appreciation, you’re still saving $844.50 per month and that still puts your total monthly mortgage expense at $2407.50 per month which way below market rent.
With the wealth gap continuing to leave middle class families behind, home ownership is one of the few ways that we can still create generational wealth. Since the start of the pandemic, Wall Street firms and big corporations have purchased almost 30% of all of the single-family homes in America; why are they doing this? Because they know that real estate is the safest investment in good times and bad and they always follow the money.