The cost of borrowing discourages a friend from buying

Joe and I have been disagreeing lately about home ownership.

It is his view that owning makes no sense because of the amount of money a borrower pays in interest, about which a bit more later.

Although I would never urge anyone to buy rather than rent, he and I disagree on the issue of monthly housing costs.

He doesn’t accept what I view as the benefits that most buyers realize from owning, among them:

  1. First, of course the continuing tax deduction for paying interest on up to a $1 million loan;
  2. Current and still low interest rates;
  3. Appreciation that results in “normal” times;
  4. Ability to improve one’s home through renovations and other expenses;
  5. Unavoidable cost of keeping a roof over one’s head either by renting or owning.

I got the strongest reaction from Joe when I contended that he was paying interest anyway–his landlord’s, assuming the landlord borrowed money to own the building.

The difference, I said, was that Joe, the tenant, got no loan subsidy from the government.  In addition, the landlord expects to make a profit; therefore, Joe’s net monthly housing costs may well be higher by paying rent every month than if he owned.

What Joe can’t stomach by buying is merely something he finds easy to swallow because it’s hidden in his rent.

True, buying may cost him more per month than renting because the apartment he could buy likely would represent at least a step up in his lifestyle.

As I often have written, buying or renting always is a personal decision, so I’m not trying to change Joe’s mind.  But everyone has to take into account the financial repercussions, long-term plans and lifestyle considerations that are fundamental to the decision.  And that decision has to be based on a clear understanding of all the differences between owning and being a tenant.

Regarding the amount of interest, mortgage broker David Bersak supplied me with some compelling numbers about the impact of rising interest rates.

For example, a $1 million loan at 4.25 percent would result in lifetime payments of $1.771 million.  At 5.25 percent, payments over the life of the loan grow to $1.988 million, a 22 percent increase.  Worse, a borrower would need 12 percent more income to qualify for the loan at a higher rate.  Should the rate go to 6.25 percent, payments would amount to $2.217 million, and minimum income would jump to 25 percent more than at the 4.25 percent rate.

According to Bersak, whose firm is Guaranteed Home Mortgage Co. in Manhattan, every 1 percent increase in interest rate will cost the borrower 22-23 percent more money and require 12 percent additional annual income to qualify.

Given what is happening with mortgage rates, I’d say this is as good a time as ever for Joe and the legion of others trying to decide what to do to. . . decide.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201
Web site

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