How much can I afford to pay in rent?

[Cubswin]

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it's nothing compared to the complete butt-f*cking you would have gotten paying rent.

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This logic is no longer true in a good number of markets at this moment. Renting actually makes better sense given the all time high housing cost to rent ratios. Historically, this ratio has tended to be in the neighbourhood of 100/1 but in many markets it is now over 300/1.

The building I live in (Northern VA) is going from apartments to condos. Monthy rent is $1425 while we have first right to buy the new condo at $495000. The cost to rent ratio on my unit is a 347/1!!! On top of that, there would be a $500 a month association fee. Ok, lets do some math.

Assuming I wanted to buy my condo, and i had $50k to plunk down, lets just say i borrowed $450k at 5.5 for 30 years. My monthly mortgage + HOA fees would be $3055. Of course, this does not take into account property taxes, income tax breaks and insurnace costs that come with home ownership. $1805 of my monthy payments would be thrown out the window, lost to HOA fees and interest payments. $1250 of my monthly payments actually goes toward equity in my house.

Now, if i continue to rent at $1425 but save and invest the difference of my would-be mortgage if i bought, I would be in a better situation ($3055-1425= $1625 invested as opposed to $1250).

To make a long story short, the old adage that renting is throwing money away no longer holds true in many markets. In many cases, renting is actually a sounder financial option. To the OP... the housing market is cooling off quickly at the moment. Save some money while renting and try to shoot toward saving 20% toward a down payment and avoid mortgage insurance. When things finally cool down, and the real estate flippers see their profits margins shrink, then get ready to pull the trigger.

cubs

[StevieG]

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it's nothing compared to the complete butt-f*cking you would have gotten paying rent.

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This logic is no longer true in a good number of markets at this moment.

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High quality post, cubs.

<font color="white">I originally sent this as a PM, but cubs is over the limit</font>

[Cubswin]

Ive been meaning to clean out my PM box... its been full for quite some time. [img]/images/graemlins/crazy.gif[/img] Anyone know what is the max number of PMs you can have saved?

[jaydub]

dcasper,

Your arguments are naive except for #3.

Here are my arguments for why an ARM is not good right now.

1. Interest rates at a relative low and are likely to increase in the coming years. I will caveat that I have not looked at actual interest rates recently and if this has already occured, my argument sucks.

2. The housing market in many areas is due for a downward turn and this could devastate someone who took an ARM expecting to be out in a couple years. The choice of leave and take a big loss of equity vs pay a much higher, possibly too high, payment is an ugly one.

And no bold either.

J

[dcasper70]

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2. The housing market in many areas is due for a downward turn and this could devastate someone who took an ARM expecting to be out in a couple years. The choice of leave and take a big loss of equity vs pay a much higher, possibly too high, payment is an ugly one.


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I guess my view of ARM's are quite different. I happen to be 18 months into a 5/1, so there may be a little bit of me defending my decision wading into this...

If a person KNOWS they will only be in a home for say 2-4 years, how can an ARM be bad?
Are you saying that the market could take such a dive that the owner may not be able to sell at the end of that period?

Aside from that possibility, which IMO is remote, why so negative?

4 yr comparison (based on bankrate.com overnight averages):
200k mtg
30yr fixed, 5.7%, $1160.80/month, 48 months=$55718.40
5/1 ARM, 5.24%, $1103.17/month, 48 months=$52952.16

So $2766 difference in favor of the ARM

And 200k should get you a great condo in about 75% of the country.

Fill me in if I'm missing something major here... [img]/images/graemlins/confused.gif[/img]

Edit: Of course I stupidly forget the possibility of being forced to sell for less. Go ahead, kick me...
Another Edit: but since that could happen with a 30 yr fixed also, it's irrelevant. No kicking! Now I'm just confused and rambling....

[Cubswin]

You calculations assume interest rates dont move... correct?

[dcasper70]

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You calculations assume interest rates dont move... correct?

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Absolutely no assumption at all.
In a 4 year comparison, I GARANTEE interest rates don't move.

By definition, the rate in a 5/1 ARM doesn't move for 5 years.
Should I also define 30yr FIXED.....???