Last week, I explained how you can easily beat the stock market when you become a homeowner. You benefit from higher returns because you leverage your down payment with low interest bank financing.
Today, I will show you why mortgage payments are typically lower than rent, and how you “secretly” save money when you pay your mortgage.
How Rents Have Increased Over 10 Years
Data from the Census Bureau show how rents have increased over the past 10 years.
Let’s take the Fair Market Rent set by the Department of Housing and Urban Development (HUD) as a reference. For a 4-bedroom house in Franklin County it has increased from $1,025 in 2010 to $1,449 in 2020.
That’s a 41.4% increase (3.5% annually).
Falling Interest Rates Lower Your Mortgage Payment
While renting has become more expensive, your mortgage payments have fallen due to lower interest rates.
Back in 2010 the average interest rate on a 30-year mortgage was 4.7%. In October 2020 is was only 2.8%.
If you had refinanced your original mortgage (loan amount: $128,016) you could have reduced your monthly payment (principal & interest) by $138 – from $664 to $526 a month.
Who Pays More – Renter or Owner?
Over the past 10 years a renter would have paid $123,000 for the average house ($1,025 x 12 x 10). That’s without the rent increases mentioned above.
During the same time your mortgage payments (interest, taxes and insurance) would have added up to: $122,362.
- Principal: $25,242
- Interest: $54,120
- Property Taxes: $35,000
- Insurance: $8,000
For simplicity, we assume that the owner did not refinance to lower monthly payments.
Based on these calculations, both homeowner and renter paid roughly the same over a 10-year period.
Note: In real life the renter would have incurred rent increases, while homeowners could have lowered their payments by refinancing.
Principal Pay Down – Your Secret Savings Account
When you pay a mortgage a portion of your monthly payment is applied to principal, which reduces the amount you owe to the bank.
On a 30-year mortgage with an original balance of $128,016 and 4.7% interest, you would have reduced your loan balance by $25,242 in 10 years.
That’s money you own. It’s like a secret savings account.
Note: On a 15-year mortgage you would have paid off $75,247, more than half of what you owed to the bank.
How Much Wealth Could You Gain as a Homeowner?
Let’s summarize … if you purchased an average home in Central Ohio in 2010 for $160,200, paid 20% down on a 30-year mortgage at 4.7% interest, your net worth would have increased by $129,713.
- Home value appreciation: $104,291
- Principal pay-down: $25,242
Best of all, your gain is tax free if you lived in the house for at least 2 years.
As a tenant you would have paid roughly the same amount each month, with zero gain after 10 years.
Are you ready to become a homeowner and stop paying your landlord’s mortgage?
Call or Text me TODAY at (614) 975-9650! Let me help you buy a home and increase your net worth!
Susanne Novak has been a Realtor since 2007. She is the broker and owner of RE/MAX 24/7 in the Dublin Historic District. Susanne typically helps 50-60 families each year with their real estate needs. She's your trusted advisor when you search for your dream home, and a skilled negotiator when she lists your property to get top dollar when you sell.