Column: Running the numbers on real estate mortgages versus renting | Shakopee Opinion
I know of several young adults who are now in the workforce looking to move into an apartment. Some are signing leases on campus, others are living in their homes and wanting to move, and still others want a change of location. I’ve asked some of them if they are considering buying a house or a townhouse rather than renting it, and they always say they can’t afford a mortgage.
I ran into my friend Mike Ouverson last week and asked him how average mortgage loans compare to average apartment rents. Ouverson is branch manager of Luminate Home Loans and co-host of the popular Minnesota Home Talk radio show. He confirmed what I suspected and what I went through when I bought my first home, which is that mortgage payments are often comparable to monthly rents.
âWhen you compare the numbers, you have to compare apples to apples,â he told me. âIf we look at the median selling price of a home in the metro area and what that would cost on the mortgage side, we also need to look at what it would cost to rent that same home.â
Renting a $ 314,000 house would typically cost between $ 2,000 and $ 2,200 per month, he said. Buying this home with a 3% down payment would result in a loan of $ 304,580. At an interest rate of 3.0%, the monthly principal and interest mortgage would be $ 1,284, which is much less than the rent amount.
When Ouverson added other monthly costs of $ 275 for taxes, $ 150 for insurance and $ 102 for private mortgage insurance, or PMI, the total monthly cost of owning this home is $ 1,811. Typically, once the owner has paid off 20% of the loan or built the equity equivalent, the PMI is no longer needed, removing that cost from the monthly bill.
âNot only do you live for less buying the house, but you now have the asset valued,â he said. âPlus, you get side benefits of owning a home, like tax benefits, because the interest you pay on your mortgage is deductible.â
Most likely, people are looking to rent an apartment rather than renting a house, especially people in their twenties. The numbers still seem favorable to buying versus renting apartments.
The average rent in Minneapolis is $ 1,559 per month for a 782 square foot apartment, according to RENTCafÃ©. Average rents in Shakopee are under $ 1,375 for 897 square feet. For about the same price, people can buy a townhouse or a lower-than-average priced home that would likely have more square footage.
âThe rental situation may seem easier,â Ouverson said. âThere’s less money up front, but you have to pay a month’s rent and a deposit when you start the lease, so you have a few thousand dollars tied up. But at the end of the day, what do you have to show for it? Nothing.”
One of the barriers to buying a home for many home buyers, especially Gen Z, is scrapping enough money for the down payment. Three percent less than the average home price is $ 9,420. Ouverson said down payment assistance programs are available to help.
Another challenge is finding a home for sale. Anyone who follows real estate knows that the market is hot for sellers right now, homes often sell out within days and often for more than asking. The good news is that interest rates are low, which helps offset rising home prices.
“If we give an example on the $ 314,000 house, if the real estate price goes down 10%, it’s now $ 282,600 but the interest rates go up 1 to 4%, and all the rest. remains the same, the principle and interest instead of being $ 1,284 is now $ 1,349, âOuverson said.
Townhouses can also be good options. The lower prices compared to freestanding homes are attractive to first-time buyers.
âThe appreciation of townhouses has increased as much as that of single-family homes. It’s really a question of price, âOuverson said. âIf you look at townhouses or single-family homes bought four years ago, they sell for between $ 15,000 and $ 100,000 more today.â
For example, he points to a three bedroom, three bathroom townhouse in Apple Valley that was recently listed for $ 300,000. The real estate agent received 22 offers in 48 hours and sold for $ 340,000.
Each person’s situation will be different, which can affect credit scores and, in turn, affect interest rates. But for anyone renting or considering renting and curious about what they can afford for a home or townhouse, it’s worth talking to a credit professional to find out the options.
Brett Martin is a guest columnist who has resided in Shakopee for over 15 years.