Why Would You Buy A Home?

The question comes up often. Most people fall into the purchase column because that is what we do, right. We go to school, get a job, rent an apartment, save up some money, buy a house, buy another one, maybe one or four more, then we rent again, move into a "home", then we die. Life in Canada.

So does it make sense to buy a home? Their are plenty of people on either side of this argument. On the purchase side their are countless realtors, mortgage brokers, bankers, etc. Against the home purchase plenty of economists and investment people. The loudest voice against purchase seems to be Garth Turner. He is far from shy about exposing people "talking out their ass" about purchasing.

Let's look at the basic math as it sits today to see if Garth is right.
Here is a rental townhouse in the north end of Cambridge that is available for $1,350 per month. Cost to rent this home for the year would be $16,200. Lets look at this over the 25 years it would take to purchase a home because we know that you pay more interest at the front and less at the end. Assuming that rent will not go up (err on the side of caution) the cost of renting this home for 25 years would be $405,000. WOW. What would it cost you to purchase?

We recently had a comparable home in the same area sell. It sold for $240,000. Again erring on the side of caution let's assume your mortgage was at 6% over the 25 years (although it is 3.79% today I would think it will go up over the next 25 years). So calculating this with 5% down ($12,000) your mortgage would be $228,000. With monthly payments of $1,458.76 your annual costs are $17,505.12 (a little more than renting) and the total paid over the 25 years is $437,627.41. $32,627.41 more than rent, right? Wrong. You still have the equity in the home. When you take away the $240,000 in equity (again not looking at inflation) total cost of the home was $197,627.41.

The only other thing to consider is the $12,000 you put out as a deposit and the $100 or so a month you saved in the rent situation. Let's assume that money was invested to see if it evens out. Investing the $12,000 deposit plus $100 a month at 6% (equal to the mortgage amount to be fair) works out to $123,225.53. Subtract that from the cost of rent and your cost to rent was $281,774.47, or $84,147.06 more than buying a home over 25 years.

So I will leave it to you whether you will buy or rent. Whatever you do don't get pushed into anything you are not ready for. Specially if it seems like Dr. Suess is the one doing the pushing...


M