Staying In Your Underwater House vs. Renting – What’s More Expensive?

I received a comment yesterday on my blog post, “Our House Isn’t Worth What We Paid: What Are Our Options?”

“What about comparing the cost of the mortgage to rent over a long time frame say 10 years? In this region you’re going to conservatively flush $20000/year in rent. The point being would staying in your currently underwater house for the next years lose $200,000 like renting would?” – Kevin

Consider this scenario to play out Kevin’s question.

Let’s say you bought a condo in 2005:
Sales Price: $375,000
Down Payment: 3.5%
Interest Rate: 6% on a 30-year fixed
Monthly Mortgage Payment including Taxes: $2,482
Condo Fee: $350

Total Monthly Payment: $2,832

Rent on a Similar Unit: $2,100

That’s a monthly loss of $732…over a year that’s $8,784

Now let’s say the condo is worth only $340,000 – a difference of $35,000 (not counting commissions, taxes, etc.)

If you’ve owned that condo for 5 years:

$2,832 * 12 = $33,984/year

$33,984 * 5 = $169,920 <–paid over 5 years

You paid 3% in closing costs + your 3.5% down-payment = $11,250 + $13,125 = $24,375

Total Cost to Buy and Own this condo for 5 years = $194,295 ($169,920 + $24,375)

Had you just paid rent at $2,100 for 5 years = $126,000

Things to consider: renting gives you NO, absolutely NO, tax deductions. So you’ve just totally flushed $126,000 down the toilet. There’s a saying that real estate is cyclical – you can expect your property to double in value over 10 years. Even current home owners back up the value in home ownership, according to the 2010 National Association of Realtors(R) Survey of Home Buyers and Sellers. People who bought their home 8 years ago, have a  median increase of 24% in their homes value, where people who bought 11 to 15 years ago, saw a median increase of 40%.

The take away: what goes BOOM, must go BUST. We can’t change the fact that the market crashed from the peak in 2005/2006, but you can control how to move forward. Every single property and personal situation will be different. Using a professional (and a very good CPA) will help you determine what the best strategy for YOU will be.