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Posted in: Buying a home, First time homebuyer tips

By the numbers: Should you rent or buy?

should you rent or buy

Many renters wonder if they would lose money buying a home or come out even. The answer can seem complicated as it involves your own personal finances, as well as rental costs that are out of your control. Below, we offer insights and some local trends and numbers that you can keep in mind as you decide if it’s time to buy a home in Minnesota or western Wisconsin.

Monthly payments

When talking about renting versus buying, it makes sense that the first comparison should be the average monthly expense of renters and homebuyers. According to Zumper, the median rent of a two-bedroom Minneapolis apartment as of June 2015 was $1,530.

Now let’s look at what it would cost to buy a median-priced home in the metro area, which in June 2015 was priced at $229,900. Assuming a homebuyer had a 10 percent down payment and good credit that would allow them to secure a 4.5 percent interest rate and a 30-year fixed rate mortgage, the homebuyer would pay $1,020 per month for mortgage and interest.

In this example, the Minnesota homebuyer would save $510 a month over renters, which adds up to $6,120 annually. That money could be used toward other homeowner expenses like property taxes, homeowners insurance and renovations. And, there are also tax benefits to owning a home.

Net worth

When monthly expenses are essentially a wash, it can be easy to put off buying a home, but when you look at the effects over the long-term, buying comes out ahead by a long shot.

A person’s home is usually their biggest investment and their greatest asset. According to the Federal Reserve’s Survey of Consumer Finances, which was last conducted in 2013, the net worth of typical homeowners is 36 times that of the net worth of the typical renter. Specifically, the average homeowner in 2013 had a net worth of nearly $200,000 while the average renter’s net worth was just over $5,000. (For reference, the median value of the homes owned was $170,000.)

How does this happen? When you pay rent, you are contributing to your landlord’s mortgage (or if they own the property outright, it goes directly into their pocket). Meanwhile, as a homeowner, you are essentially paying into a long-term savings account that you can cash when you sell your home.

Payment increases

Another benefit to being a homeowner is that your monthly mortgage payment will not increase if you secure a fixed-rate mortgage. Meanwhile, renters are at the mercy of their landlords, who can typically raise the rent annually based on demand in the market.

According to Marquette Advisors, rent increased 10 percent in the Twin Cities metro area in 2014. The average rent for the metro in 2013 was $966, a number that rose to $1,000 in 2014. This is a pretty drastic increase, and it adds up to an annual increase of $408 per renter on average.

While a large influx of renters can mean that your rental payment may increase from year to year, the monthly payment on a fixed rate mortgage won’t increase — even if you pay it off over 30 years.

Rising trend

After years of spending thousands of dollars annually on rent, the millennial generation is finally entering the home buying market. This age group, generally agreed to be between the ages of 18 and 35, makes up nearly 29 percent of the U.S. population and came of age during the Great Recession.

As the economy improves and low interest rates hold, many millennials are entering the home buying market. According to a recent survey by TD Bank, 50 percent of millennials say they are “likely or extremely likely” to buy a home in the next year.

While you shouldn’t do something simply because your peers are, it’s worth noting that the next generation of Americans hasn’t lost its interest in owning a home. Homeownership rates are expected to grow in the next decade as millennials purchase their first properties.

100 percent freedom

Of course, not every pro and con can be weighed in objective terms. If you’ve ever looked around a rental and wished you could rip up the dingy carpet or put in a new light fixture, you know that homeownership comes with the freedom to decorate and renovate to your heart’s content. In the era of “upcycling” and Pinterest, it seems unusual not to have a home bucket list that includes everything from painting doors to adding retaining walls.

Getting started

If you ran the numbers and you’re ready to enter the home buying market, call, email or chat today. We offer insights and guidance to homebuyers across Minnesota and western Wisconsin every day, and we’d love to start helping you.

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