Is It Better To Buy Or Rent A Home Baton Rouge?
Let’s start off by saying, this is a loaded question. Buying and selling a home is complicated. There are so many factors that can go into each person’s decision to buy or rent such as credit score, liquid cash, career status, family composition, market rates and so much more.
But for our purposes, we’ll walk you through an example with the median figures in the Greater Baton Rouge area. These sample figures can be used as a guide to gauge your own decision. If you need help making your own decision, you may contact our financial literacy coordinator, Kim Chapman, at kchapman@neighborsfcu.org.
It’s pretty easy to determine the annual cost of an apartment rental. The 2018 average cost of rent in East Baton Rouge Parish is $1243 per month or $14,916 a year according to the U.S. Department of Housing and Urban Development. In this case, $14,916 would be considered your total net annual expense.
Your overall net rent expense is easy to calculate because it is considered an expense that you will never get back. Simply count up how much you have paid in rent and that is how much it cost you to rent.
When it comes to buying a house, calculating the cost of buying can be a bit trickier. The first thing to understand is that when you buy the house, you can eventually sell the house this means some of the money you pay to own the house should come back to you when you sell it.
Here are the 5 factors to account for when understanding the cost of buying and selling a house in Baton Rouge.
1. The Cost of the Mortgage Loan
When you take out a mortgage loan, your monthly payments are applied to both principal and interest. The principal is the amount you borrowed and interest is an amount charged by the lender for the use of their money. When you have paid off your principal balance, you no longer owe back the money you borrowed to buy the house. However, Interest is the expense you pay for borrowing the money.
The median selling price of homes in the Greater Baton Rouge area was $190,000 in 2017 according to the Greater Baton Rouge Association of Realtors.
A traditional mortgage loan would require a 20 percent down payment. Twenty percent of $190,000 would be a down payment of $38,000 dollars. While this is a lot of money, keep in mind that this takes away from the amount you owe on the loan and that you should get it back when and if you sell your home for at least what you paid for it.
If you don’t have the full down payment, you may want to look into other options like Neighbors Purchase Power Mortgage or an FHA loan.
For our example, we’ll assume you used a Neighbors Purchase Power Mortgage and you made no down payment and the loan did not require PMI (Private Mortgage Insurance). Based on our current rates, this gives you a monthly mortgage note of about $949 before escrows.
2. Home Insurance and Property Taxes
The escrows can vary drastically, but for our examples, we’ll use the average home insurance cost property taxes for East Baton Rouge Parish. These figures add up to around $197 a month on top of the $990 for loan payments giving you an $1187 house note.
3. Home Maintenance
When you chose to own a home rather than rent, homeownership comes with maintenance expenses. Again this is a variable that can vary dramatically based on your HOA (home owner association) fees, lawn care, home repairs, major appliance replacements and much more. But for simplicity, we’ll use the “1% rule” as our gauge. The 1% rule states that you should budget 1% of the home’s value in maintenance annually. One percent of $190,000 is $1,900 a year or $158 a month.
So after maintenance and the house note, your monthly cost of owning a median-priced home in Baton Rouge is roughly $1345 a month.
4. Buying and Selling Expenses
On top of the $1345 monthly cost of owning this home, there are also expenses to buy and sell the house. In Louisiana, the 2017 average closing costs to buy a home were $2,156 according to Bankrates.com. We’ll use this figure for our comparison.
Most home sellers need a real estate agent, and they usually charge 5-6% of the home’s value. For our purposes, we’ll split the difference and go with 5.5% of the home’s value
5. Increase in Home-Value
You have to account for the money you could make if you sell your home. Part of that house note goes toward paying off the loan you took out. And when you sell your home, you could receive what you sold it for minus what you owe on the loan and selling expenses.
And usually, well-maintained home values will increase over time as the dollar inflates. In the Greater Baton Rouge area since 2013, the average sale price has increased 16.25% and the median sale price has increased 13.77%, according to the Greater Baton Rouge Association of Realtors.
Using these figures, you can expect a 2-3% increase in the value of your home annually. Although, there is certainly a risk that your home can lose value based on market factors and home maintenance. For our example, we’ll apply a 2.5% annual increase in value.
So which is better?
Please understand, this is only based on the numbers and figures we used in the example. Your home-owning experience will almost certainly be different. This example is simply based on the average figures available for the Baton Rouge area.
That being said, usually the longer you own a home in Baton Rouge, the more money it saves you. In our example, buying and selling a home saves you money only after 2 years.
We think that is a pretty good rule of thumb to keep in mind when deciding to purchase a home or rent. If you plan on living somewhere for 2 years or more, it might be a good idea to consider buying a home. If you would like to be able to move out within 2 years, you may want to consider renting.
Year 1 Buying a home costs nearly $6,000
In our example home after one year, we sold our home for $7884 more than what was owed on the loan. However, the costs of buying, selling and owning the home were $28,501, which means a $20,617 net cost of buying and selling the home after a year. Meanwhile, the apartment cost was a simple $14,916. After one year, renting cost nearly $6,000 less.
Year 2 Buying a home saves you $1334
After two years, we were able to sell this example home for $15,907 more than we owed on the loan. Our total expenses increased to $44,405 leaving us with a net loss of $28,499. Notice the net loss only increased by less than $8,000 after another year. Meanwhile the expense of renting simply doubled because you rented it for twice as long. After two years, the total rent expense is now $29,832. This means buying turned out to cost $1,334 less than renting after two years. And that doesn’t account for an increase in rent when you have to renew your lease on the apartment.
After two years of owning a home in our example, you have saved money. Your savings increase with each passing year.
After 5 years, buying a home saves you $23,308 in our example.
After 10 years, buying a home saves you $63,403 in our example.
And, after 30 years, buying a home saves you $290,096 in our example.
If you complete a 30-year mortgage and sell your house, you will have a total net loss of $157,384. Meanwhile, that apartment, which rent has magically stayed the same for 30 years, has cost you $447,480. That’s right. It cost nearly half a million dollars to live in an apartment for thirty years.
Please remember, this just a guide. It is meant to help you understand the costs of buying or renting. If you would like a personal consultation to help you make your decision, give our financial literacy coordinator Kim Chapman. You may call her at 225-819-5748 or email her at KChapman@NeighborsFCU.org.