You probably don’t need reminding that housing prices are rising dramatically. As some home buyers are challenged with saving a down payment and qualifying as prices and mortgage rates increase, they are turning to rentals. According to Zumper.com, the average monthly rent in the Chicago area for a 1-bedroom apartment is $1,895, a 36% increase year on year. A two-bedroom apartment now averages $2,200 a month, requiring an income of $102,000 or more to qualify.
Buying a home comes with many benefits but is definitely a challenge for the first-time buyer. Aside from affordability is the fact that inventory is at historic lows. The question is, is it better to buy than rent?
To answer this question, you must start with your circumstances. If you are young and living the single life in the city, you may want to rent for a while. If you are recently married and thinking about starting a family it may make more sense to buy.
The biggest obstacle for first-time buyers is the down payment. But there are many loan programs out there that can help overcome this problem, such as FHA which allows for a home purchase with as little as 3.5% down. The median price of a single-family home in the Chicago area is $310,000 so, assuming your credit score is above 700, you could buy a home with as little as $10,850 down. If you were going to rent you would probably need the first month, last month’s rent, and a security deposit, or about $6,600.
It is always better to put as much down as possible. Putting a low amount down means that there is no cushion in the value of the home if values go down and you are forced to sell. However, homes appreciate at an average of 4% annually. This has been true according to records going back to the year 1900. In 5 years, the home would likely value at around $360,000 and you would no longer be underwater.
Let’s assume that you are able to put down 10% or $31,000. At the current interest rate of 5.375% on a conventional 30-year loan, your mortgage would be $1,562 and with mortgage insurance, taxes and insurance the total monthly payment would be $2,103. For about the same monthly cost of a two-bedroom apartment, you could own a 3–4-bedroom single-family home with a backyard. When you consider the tax write offs of up to $10,000 for property taxes and up to $750,000 for mortgage interest, the cost of owning versus renting becomes even more competitive.