Should you buy or stay on rent

However,it is not true in some cases. Sometimes it takes at least a few years for buying to become a better deal,than renting,as there are some big up-front costs with buying,and your monthly payments from buying are generally higher. However,those payments are building equity in your home you’re keeping some of what you’re paying. Also,while you’re making your payments,your home generally appreciates in value. After a few years,the equity you’ve paid into your home plus the appreciation will overcome the extra money you had to pay to get into the place.

Cash Spent: This is how much it costs you to either buy your home or to rent. For buying,it includes your down payment,your monthly payments,taxes,insurance,maintenance,and any other expenses. For renting,it includes just rent. You’ll almost always pay more to buy a home than to rent. What makes buying a better deal is that you build equity in your home.

Paid Equity And Appreciation: Equity is the amount of your home that you own. There are two kinds of equity – paid equity and appreciation. Paid equity is the portion of your loan payments that actually paid down the loan,ie,it’s the non-interest portion of your loan payments. Once you’ve made all your payments,this amount will equal the original purchase price of the home. Appreciation is how your house increases in value over time just by sitting there. So even though it usually costs more to buy than to rent,your costs are offset by this value you have in your home.

You might think,What good is equity? The money is locked in the house. I can’t eat my home. But,the equity does benefit you. Here are just two examples of how. First,once your home is paid off,your equity has earned you the right to stop making any more mortgage payments. No more writing a check to the bank every month,and no more paying a rent and filling the pockets of the landlords with your hard earned money. At any point you can take a loan against your property at 40 per cent of the market value.

Return on investment: Since it generally costs more to buy a house than to rent,at least in the early years,some people invest the money they save by renting instead of buying. For example,they put that money into mutual funds,which results in building an investment,just like a homeowner does. Also year on year the value of rent increases,thus making buying mostly better than renting.

Before reaching a bottom line,consider the following :

Relocation: Are you likely to be transferred to another city within the next two to three years? If you had to sell due to a job transfer,your property would need to appreciate at least 10 per cent to cover the cost of selling; otherwise,you would lose money on the sale. When you buy a home,you should plan to stay for a while.

Maintenance Issues: All homes require upkeep and maintenance. I suggest you set aside 5 per cent of the purchase price to cover maintenance and repairs when you buy a home.

However,if your mortgage payment would be triple the amount or more you would pay for rent,it might not make financial sense for you to buy. For example,if it would cost you Rs 20,000 a month to rent what would cost you Rs 60,000 per month to own,does it make sense to pay Rs 4,80,000 a year more to own a home?

If you are in a 30 per cent tax bracket,you might not come close to recouping the difference you paid.

Consider how much you will spend,less the appreciation value you earned on the property. Since this is the net amount,compare with your rent. This comparison should be done for atleast 5 years. Whichever side is lower – buying or renting,that is a better deal. Author is,MD,Bajaj Capital