Renting vs. Buying: A Real-World Example

 Let’s examine the financial implications of renting versus buying. We’ll compare the cost of buying a $250,000 home using an FHA loan (with 3.5% down) to renting for $1,800 a month.

 

Scenario 1: Buying a Home

If you buy a $250,000 home with a 3.5% down payment using an FHA loan:

 

• Down Payment: 3.5% of $250,000 = $8,750.

 

• Loan Amount: $250,000 - $8,750 = $241,250.

 

• Mortgage Rate: 7% (fixed for 30 years).

 

• Monthly Payment (Principal and Interest):

 

Using a mortgage calculator:

 

P&I = \frac{Loan \times r \times (1 + r)^n}{(1 + r)^n - 1}

Where:

 

•  r = \frac{7}{100} \div 12 = 0.005833 

•  n = 30 \times 12 = 360 

 

Monthly payment = $1,606.98 (principal and interest only).

 

• Taxes and Insurance: Typically 1.25% of the home value per year:

 

Annual = $250,000 \times 0.0125 = $3,125

 

Monthly = $260.42.

 

Total Monthly Payment:

$1,606.98 (P&I) + $260.42 (taxes/insurance) = $1,867.40.

 

Equity Growth Over 5 Years

 

1.     Mortgage Payoff: After 5 years of payments, you’ll have paid off approximately $18,819 of the principal.

 

2.     Appreciation on Home Value: Let’s assume an average annual home appreciation rate of 3%.

Future Home Value = $250,000 \times (1 + 0.03)^5 = $289,818

 

Appreciation = $289,818 - $250,000 = $39,818.

 

Total Equity After 5 Years:

Principal paid off ($18,819) + Appreciation ($39,818) = $58,637.

 

Scenario 2: Renting a Home

If you rent for $1,800/month:

 

• Monthly Rent: $1,800.

 

• Annual Rent: $1,800 × 12 = $21,600.

 

• Total Rent Paid Over 5 Years:

 

$21,600 \times 5 = $108,000

 

Unlike buying, none of this money builds equity—you’re paying it to your landlord.

 

Renting vs. Buying After 5 Years

• Homeownership (Buying): You’ll have $58,637 in equity after 5 years.

 

• Renting: You’ll have spent $108,000 on rent with no equity to show for it.

What Does This Mean for You?

 

This comparison highlights how home buying can build wealth over time, even with a modest 3% annual appreciation. While renting may seem easier upfront, it often comes at the cost of long-term financial growth.

 

Of course, everyone’s situation is different and renting can still be a great choice for flexibility or short-term living. But if you’re ready to invest in a home in Myrtle Beach and take advantage of the equity-building potential, I’d love to help you explore your options.

 

Let’s discuss what’s best for your unique situation and long-term goals!

 

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