Continuing to rent vs. low down payment mortgage

[Anonymous]

Hello! Looking for advice. (Theoretically, I could calculate the answer to my question...but so many factors are involved that I am not sure it would even be accurate. I think other's personal experience may be more helpful.) Current rent is 1K/mo. I was planning on continuing to rent another year or so until I can afford to buy a home. When I say afford, I mean buy a home with a 3-5% down payment, which would result in mortgage insurance, etc.  An amazing property is for rent in a desirable neighborhood for 2.2K/mo.  I would have to use my savings for the first/last/security. Also, since this rent is twice what I'm currently paying, I wouldn't be able to save as much as usual. (This is the kind of home I would love to purchase, comparable homes sell for 350-450K.) But, I figure that renting a home for 2-4 years would afford me the time to save the full 20% down payment for home ownership.  Time is really my problem. I can't continue renting my current space until I have 20% for a home because our family is growing. We have a 7 year old son, I want to grow our family as soon as possible because we are already looking at an 8 year gap between him and his future siblings. However, this rental property would allow us to start growing our family asap. Is it counter-intuitive to rent a more expensive property because we can't afford to buy a similar property? 

[Anonymous]

Something to keep in mind right off the bat is that rent typically goes up annually unless you are in a rent controlled market, you mortgage payment does not, the exception being tax/insurance adjustments. Our rent adjusted up 50.00 month annually for the 3 years we rented so from 1150.00 to 1300.00 which is quite a bit of buying power for a mortgage.

The owner may sell his rental at any time.

You will not be able to save as much and the housing rules can change at anytime, zero down payment loans are already on the chopping block per current conversation, will you be able to come up with the traditional 20% down with the higher rental costs?

Obviously my feeling is buy as soon as your able versus renting unless you are expecting to relocate shortly.

[Anonymous]

Very true about the rent increasing annually. I hadn't taken that into account but that could really add up after 2 - 4 years. Thanks for commenting!

[Anonymous]

So is there something in the middle that can get you by for 2 years, maybe something not so perfect but that allows for at least 5-800 to go into savings per month? A baby takes nearly a year to grow and then you could do 1 with either a shared room or very small room. Not perfect but not draining either.

[Anonymous]

I originally did not want to move to another rental to avoid moving/leasing costs and hassles. Although I am unhappy in my current rental, I think most other rentals would make me only a little less unhappy and I would still be wishing I could just buy. However, the property I am interested in is the nicest rental I have ever seen. It is a craftsman style 1925 property that meets many of my "dream home" needs. Right now I can save 1.5-2K a month. I would probably only save 1K a month with this rent increase.  But I would be happy in this home for years as a tenant (if the owner would allow) without yearning to buy immediately, like I am in my current place.  

[Anonymous]

Gotcha, that makes sense and yes if your still able to save that amount then at least you can progress with your family plans.

[VALoanMaster]

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@Anonymous wrote:

I originally did not want to move to another rental to avoid moving/leasing costs and hassles. Although I am unhappy in my current rental, I think most other rentals would make me only a little less unhappy and I would still be wishing I could just buy. However, the property I am interested in is the nicest rental I have ever seen. It is a craftsman style 1925 property that meets many of my "dream home" needs. Right now I can save 1.5-2K a month. I would probably only save 1K a month with this rent increase.  But I would be happy in this home for years as a tenant (if the owner would allow) without yearning to buy immediately, like I am in my current place.  

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Hi Ivy927,

If you can afford to pay $2,200 in rent while still putting $1,000 or more in savings, you should be able to buy right now.

The whole idea of not buying until you have 20% down is outdated for now for 1 simple reason.

The cost to borrow is substantially cheaper now than it's ever been so when you look at the cost benefit it just doesn't make sense.

Here's an example: Using a $300,000 purchase price & going with a conventional loan here is what you're looking at.

If you put 20% down (60K) you would have a principle & interest payment of $1,145.80.

Now let's say you only put 5% down (15K) you would have a principle & interest payment of $1,360.63 plus PMI of $140.13.

The difference between the 2 down payment options is $45,000 & the difference in the monthly payment is $354.96.

So let's look at your break even point: 

$45,000 divided by $354.96 = 126.77 months or 10.5 years! That means it will take you 10.5 years to recoup the extra $45,000 you put down based on saving $354.96 per month!

So now couple that knowledge with the fact that waiting to buy until you have 20% down will probably mean an increase in your purchase price & interest rate, it doesn't make sense to wait.