The coronavirus crisis has led to a significant drop in mortgage interest rates, which stands at around 3.33% for a 30-year fixed rate loan as of April 2, 2020. If you’ve been planning to buy a house in Beverly Hills or any other high end LA community, this offers a great opportunity for you to finally make that move.
Before taking the plunge, however, it’s best to take a look at your personal situation and see which between buying and renting makes better sense for you.
Here are some pointers to consider:
- Compare the costs of renting vs. owning
When you finance a home with a fixed rate mortgage, you’ll pay the same amount in amortization over the term of the loan. When you rent a home, however, you can expect rental fees to increase year over year. In Los Angeles, landlords are allowed to increase rent at a maximum of 4% every year.
This table from the National Association of Realtors shows a simple example of how you can get savings from buying a home vs. renting – savings that build up and increase over the years.
However, how much you can actually save – if any – depends on a number of factors, including the price of the home you’re buying and the rent you’re paying. In addition to mortgage payments, you should also factor in the “hidden costs” of homeownership, such as repair and maintenance costs, property taxes, and home insurance.
- Consider long term investment growth
One of the strongest arguments for buying a home is that the mortgage payments you make go into building your equity. On the other hand, the rent you pay is essentially money down the drain in the long run.
With every mortgage payment, your share of your home’s value increases, which also increases your net worth. At the same time, your mortgage balance goes down, leaving you with less debt. Homeownership is how most Americans build their wealth, especially with the historical trend of increasing real estate values over the years. In Los Angeles County, home prices have appreciated at an average of 11% a year from 1996 to 2020.
When it comes time to sell your home, you could potentially see a profit from your share in the value of the home and reduced mortgage balance. Financial experts say, however, that it takes five years to gain enough equity to allow you to sell at a profit. If you plan to move to another city before five years, renting is probably the better option for you.
- How much down payment can you afford?
The standard down payment for homes today is 20%. Ask yourself if you have built enough savings to pay this amount upfront.
You may buy a house with a lower down payment, but this often means higher interest rates and mortgage amortizations, including a private mortgage insurance that you have to pay until you’ve built a 20% equity. With lower initial equity, it may take you longer to break even on the cost of buying versus renting.
To get a general idea on whether buying or renting is right for you, try using online calculators such as those provided by Zillow or NerdWallet.
If you want an in-depth look at your particular situation, we at Sasha Rahban will be happy to provide the guidance you need or connect you with a financial expert. Give us a call today at 310.963.9680 or send us a message.
