Should you buy or rent when you need a larger home in Madison?

Posted by Jolenta Averill on Tuesday, December 5th, 2017 at 11:30am

 

Young, growing families eventually get to the point where they outgrow their current digs. At this point they know they need to move up to a larger home but hesitate because of current market conditions.

Sure, it’ll be a snap to sell the current home; starter homes are in great demand right now. But, then what? Competition is keen in most price ranges in Madison, causing many would-be move-up buyers to hesitate.

The question of the season is: “Should we sell now while the market is hot and then rent until it cools off?”

The answer is: “Are you nuts? Have you any idea how much rents are increasing?”

Although rent prices are down on a year-to-year basis, they’re up on a month-to-month basis. In fact, the rent on a one-bedroom apartment increased nearly 2 percent last month. Two bedrooms? Rents increased almost 6 percent.

Madison, by the way, sits at number 24 when it comes to cities with the highest rents.

according to the Zumper National Rent Report.

But, those numbers are for apartments. A growing family needing to move to a larger home will most likely rent a single-family home. Those, by the way, come with rent prices that are comparable to a mortgage payment.

Let’s crunch some numbers

Yes, I’m a real estate broker and, yes, I’d much rather you buy a home than rent one. But, aside from my vested interest in your future, the numbers back up my assertions.

First, we’ll need to make some assumptions. Let’s assume the following:

  • Buyer has an average credit score. Right now, the average FICO score in the U.S. is 700.
  • The buyer will offer 20 percent of the price of the home as a down payment.
  • He or she is pursuing a fixed-rate, 30-year mortgage at today’s rates (interest rates fluctuate and may be different by the time you read this), so we’ll use 3.7 percent APR.

Conveniently, I am working with a family right now who is looking for a larger home. Let’s call them John and Jane Doe. I know, not very original.

John and Jane fell in love with a charming, northwest Madison home with 4-bedrooms, 2.5-bathrooms and 2,022 square feet of living space. It’s listed at $279,900. Although there are few comparably-sized homes for rent in Madison, based on square footage, the rent would be between $2,500 and $3,500 per month.  

Let’s break down what it will cost John and Jane should they decide to purchase the home:

  • Price: $279,900
  • Monthly principal and interest: $1,030.67
  • Monthly taxes: $449
  • Monthly homeowner’s insurance: $96

Estimated monthly cost if purchased: $1,575.67

Estimated monthly cost if rented: $2,500 to $3,500

As you can see, the Doe family will save a minimum of $900 per month on their monthly housing budget by buying instead of renting.

The home for sale, by the way, features energy efficient windows, which will allow the family to save even more money with lower monthly power bills.

Now, add in the tax benefits (provided Congress doesn’t do away with them entirely) and the savings become even more attractive.

We aren’t mortgage professionals and the above figures are a rough estimate derived by using the mortgage calculator at Bankrate.com. But as long as mortgage rates remain low and rents continue rising, it makes far more sense to buy a home in Madison than to rent one.

 
 

 

 

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