Making the leap from renter to homeowner takes forethought, strategic planning and serious personal reflection. Purchasing a home is by no means a sporadic decision. Fortunately, there are certain tools intended to alleviate common first-time home buyer woes. One is the rent vs. buy calculation, helping provide an overview on which route makes more financial sense.
In most major U.S. metros, favorable interest rates allow for mortgage payments that are often less expensive than the going rent. In the Los Angeles metro, where the median home price is $576,634 and the median rent is $2,700, buying is 29.8 percent cheaper than renting, according to Trulia’s latest rent vs. buy calculations.
That being said, buying isn’t for everyone. Much of the rent vs. buy evaluation boils down variable specifics, such as the target home price, how long you plan to stay, mortgage details, taxes, potential home value growth and personal preference. Plenty of people who have the financial means to buy still opt to rent due to job uncertainties, fewer maintenance-related responsibilities and sheer wanderlust.
Consider the following rent vs. buy scenarios in Los Angeles to see just how different things play out depending on circumstance.
*For brevity, each scenario assumes 20 percent down and preapproval for a 30-year fixed jumbo loan mortgage with a 4.1 percent interest rate.
West Hollywood
Assume a young married couple, Maria and Joe, plan to purchase a home. They own a small marketing agency and currently rent a 2-bedroom, 2-bathroom apartment near their office at 1233 N Orange Grove Avenue for $3,500 per month. Their unit offers rent control, which essentially means that their landlord cannot charge more than the Maximum Allowable Rent set forth by city ordinance. The base can only be increased once per year by proper notice, totaling 75 percent of the Consumer Price Index for the area.
Buying a house in West Hollywood costs roughly $805,000 – the current median sales price in the neighborhood. Maria and Joe begin looking at homes online near this price point and find a 2-bedroom, 2-bathroom condo for sale at $899,000. They realize to put 20 percent down on their purchase and avoid private mortgage insurance (PMI), they would need $179,800 upfront. Combined with a 4.1 percent interest rate, their monthly payments would equal $4,136 per month – not including potential Homeowners Association dues.
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