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Though everyone deserves a place to live, in our society one must pay for it. Because housing is not at all inexpensive, as such, it is a good idea for everyone to look at their housing expenses in terms of costs per day. When one is able to break costs down to such a miniscule level of detail, it’s easy to see where the best bang for the buck may be.
A good real estate professional will have tools that will help you compare the cost of living between leasing and purchasing in whatever market you’re in. This is particularly helpful for deciding future moves or simple day to day budgeting.
Once you factor in variables such as purchase/lease prices, closing/rental fees, insurance, taxes, amortized interest/rental increases, there are simple rules that emerge.
Rule Number One: Daily housing costs will generally only go down when you purchase a home. In the first few years of owning, your costs are the highest. Your down payment, mortgage origination fees, pre-paid taxes and other mortgage costs are not the only expenses. You’ll also pay the most interest on any mortgage you take out in the first few years. But as you pay down the loan principal, the interest will also decrease.
Rule Number Two: In the first two years, total housing costs to buy a home is roughly half as expensive as renting. This is assuming a 5% down payment. But even with a larger down payment, though the expenses will be higher, you’re trading that for instant equity in the home and a decrease in mortgage interest expenses.
Rule Number Three: Equity in a home is a way to build personal wealth, renting a home builds the landlord’s wealth.
Even as there are advantages in leasing, such as the ease of transitioning to the next home (useful for those in the military or contract workers), even though the maintenance and insurance costs are lower, the difference isn’t even close to the economic benefits of home ownership.
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