Renting Vs. Buying: The Numbers
Mortgage Payment vs. Rent Payment
Often times when considering whether to purchase a home, you might conduct an analysis of your prospective mortgage payment vs. your current rent payment. (Or at least you should!) When looking at the dollar to dollar comparison, you’ll probably come up with something along the lines of:
“I am paying $2400 in rent but my mortgage would be $2300”
However, you might not think about what makes up these payments, and therefore, will be comparing apples to oranges. Cats to puppies. Coffee to water. For so many reasons this will make your analysis inaccurate. It’s important to understand the components of each monthly payment. Why don’t we take a look?
Usually 2 parts:
The number you see on your apartment bill each month. This number is comprised of the monthly rent, plus any add-on’s (pet rent, parking space, valet trash). Don’t even get me started on required valet trash. I can take out my own trash, people!
Don’t forget your renters insurance. Often it’s required by your apartment building. You should build this cost into your total because your prospective homeowners insurance will be rolled into your mortgage payment. This will turn your orange closer to an apple, yes?
4 primary parts:
Principal-This is the portion of your mortgage that you are paying toward the principal balance of your loan. Principal is equal to the total sum of money you borrow to buy the house. Normally this is a small amount when you first start but increases over time as you make more payments.
Interest- This is the banks ‘cut’ for lending you the money to buy the home. In the beginning it is likely the largest portion but decreases over time as you make more payments. And it’s going to be a lot! Most homeowners will pay more in interest than the total price of their home over the course of the loan. *Tear*
*Clarifying note- Your principal and interest are lumped together in your statement, however, the portion of each changes over time as they are inverse to one another.
Taxes - Your mortgage also includes a portion each month allotted to pay your annual property taxes. Each state is different but in Colorado, your taxes are paid in arrears (in the past). Fancy real estate vocab. We’re learning so much today!
Insurance-Homeowners insurance is rolled into your total mortgage payment.
*Clarifying note # 2 : Although minimal, your taxes and insurance and are both factors of your payment that can change both positively or negatively based on market forces.
Other possible part of your mortgage payment (not as standard):
Property Mortgage Insurance-often referred to as PMI or MIP.
This might be a part of your monthly payment depending on your loan program and down payment.
I’m a visual learner so how about an example?
Mortgage Payment: $2,500
Rent Payment: $2245
Pet Rent: $50
Valet Trash: $30
Renters Insurance: $15
Now THAT’S Apples to Apples :)