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Calculate Rent vs. Buy if you are nearing retirement and don't want the responsibilities associated with owning a home

Renting is sometimes a better option, even in today's market.

Example: In a certain neighborhood in Denver, the home prices average around $300,000. You see that rentals for a comparable 3 bedroom home are around $1,800 per month. You decide to compare this with buying a $300,000 home with an FHA loan that allows you to put only 3% down ($9,000). You qualify for a 5% rate on your 30-year loan. You think you will likely stay in the home 5 years.

Principal and interest add up to $1,562.00, so you are thinking you are ahead of the game! However, since you have less than 20% down, you may need private mortgage insurance (PMI). Thus you have to add about $55/month for every $100,000 financed for this insurance. This brings you up to $1,722/month. Then there are property taxes to add in, which you know are relatively low in Colorado. (You can determine the specific taxes for a specific property since these are based on the county). So you estimate about $200/month for taxes. This brings you up to $1,922/month.

You shop around and find that homeowner's insurance will cost you around $100/mo. You realize that this neighborhood has a homeowner's association, and expects dues of $70/month. Now you are at $2,092/month.

You have done your maintenance calculations, and set aside $200/month for maintenance. This puts you at roughly $2,300/month or about $500/month over what you could rent for.

You decide that in today's market, you probably cannot factor in a lot of appreciation. You are going to pick a real estate agent who does not try to sell you on that motivation for buying. Rather your seller agent will show you historical data and let you make that determination based on your own assessment of your unique economic viewpoint.

You assume you may be able to sell your house in 5 years for about $325,000. However, you realize that the sales and closing costs at that time are likely to run the average of around 8%, (minus $26,000) so you may be able to get $299,000 for your home. At year five, the balance on your loan is $267,222, so if you sold it at the full asking price of $325,000, you may realize a gain of $31,728. (Of course if there is a depreciation of home values as happened in 2008-09 and the early 80's, you may have to face foreclosure or come to the table with cash to sell the house).

You also keep in mind that if there is significant inflation over the next 5 years, that $31,728 will be worth less in purchasing power than when you purchased the home.

So you compare this to your net savings if instead you continue renting:

You have taken the $9,000 down payment money and invested it in a CD for 5 years @4%, giving you about $11,000 when the CD matures. (This presumes, of course that you have decided to trust banks again. CDs are just one sort of conservative investment.)

You have taken the $500/month savings on monthly payments times 60 months to equal $30,000. You like the idea of “CD laddering”, so you put your $500 into a CD every month for an investment that is considered save, relatively high return and liquid. Because you think rates are likely to increase, you keep your terms relatively short. If you invest ultra-conservatively, at the end of 5 years you have your $30,000 plus interest of say, around $3,000. Your total is $33,000.

In this scenario, your cash at the end of the rental plan is $33,000 plus $11,000, or $44,000. Your cash at the end of your home sale in 5 years is $31,728.

You are $12,272 ahead by renting.

Now the $13,504 you have paid over the past 5 years in interest IS currently tax deductible. Therefore, IF you are able to fully use this deduction on your tax return, and you are in a 20% bracket, you might save an additional $2,700. You also may be able to deduct some of your property taxes depending on your specific financial picture. Let's assume in this scenario saved roughly $3,000 on taxes for the 20% bracket or $4,800 if you are in a 33% bracket.

Even with a 33% tax savings counted in, in this scenario you are still $7,472 ahead by renting. The savings are even more dramatic if you do the calculations for million-dollar homes.

Intangible benefits:
You have the flexibility to pick up & move any time during those 5 years. You have cash on hand to do other things.

This analysis is based on assumptions only you can determine:
For example, you will need to make your own assumptions regarding::

* appreciation rate

* inflation rate

* maintenance costs

* how you might invest the savings.

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