Tuesday, March 14, 2017

Savings and Equity 101

As REALTORS®, we frequently are asked why we should buy vs. rent.

Oh, how many articles I can point you to that explain this over and over, but let’s break it down a little more for the Boise, Idaho area. In other words - let’s get down and dirty.

First and foremost, if you, as a Millennial, Gen-Xer, maybe Gen Z, who knows, had to tell me what you have in savings, could you do it and feel proud? Maybe you feel pretty good about putting away 10% of your monthly paycheck…you do right?

But let me ask the homeowner the same question. “What’s in savings?”. Here’s the beauty of that question, the homeowner may also be saving 10% each month out of her paycheck, but additionally, the homeowner is experiencing approximately 7% annually in increased equity right now in the Boise area. Let’s break it down:

Renter :

Monthly rent payment $1200/month - bye bye money. Good news, roof over your head! Woohoo!

Monthly mortgage payment $1200/month - Woohoo! I just paid myself to have a roof over my head!

But let’s REALLY break it down.

To get into a home with a $1200 payment this is what the homeowner had to do:

Qualify for a loan, typically for about 3.5% down, so let’s assume to get that $1200 payment:

(rule of thumb with interest rates where they are…for every $1000 you spend in house, it will cost you approximately $6.00)

So, $1200 mortgage payment


$207,000 home - your downpayment of 3.5% or $7,000

(now, if you have super credit and/or have served in the military, you may qualify for a ZERO down loan)

Assuming you don’t though, you now just bought a $207,000 home

You financed $200,000.

Monthly payment to include taxes and insurance : Approximately $1,200.

Here’s the good part:

Renter : $1200 to the landlord ($24,000/yr. GONE)

Homeowner : $1200 to her mortgage payment ($24,000/yr. to HERSELF)

Homeowner in Boise Area, house price increases 7%. $207,000 is worth $221,490 next year.

Profit : $14,490 that year or $1207.50 per month. (made more than she spent!)

So, not only did the homeowner put her mortgage payment of $24,000/yr into her “savings (equity), but she also made $14,490 on that investment for a grand total of :

drum roll please….


Renter : additional savings $0

Homeowner : additional savings $38,490

(I didn’t even begin to discuss the tax write off - yes, keep in mind that the tax write off for the interest she payed on her home loan is deductible, so even though there is interest paid on the loan, it’s TAX DEDUCTIBLE!!)

Time to invest in yourself and create your own wealth.

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