Rent or Buy?

With mortgage interest rates low these days and the rental market in the Georgetown area stubbornly high, many prospective renters are taking the time to examine if the time is right to purchase a property.

Rates on mortgages range from around 4 percent for adjustable rate mortgages to 5 percent or slightly higher for fixed rate conforming mortgages. A conforming mortgage is a mortgage backed by Freddie Mac or Fannie Mae, which can range up to $729,000 in Washington, D.C. The District is a high-cost area that allows for this high mortgage limit.

Rates are about the same for government-backed FHA mortgages. Loan limits for FHA loans also go up to $729,000 in the District.

The required down payment, if the house is a primary or second home, ranges from 10 percent on conventional mortgages to as little as 3.5 percent on FHA-backed mortgages. What would the payments look like? Per every $100,000 borrowed at 4 percent, the payment would be $477 a month for a principle and interest loan. The payment on an interest-only would be even lower: $333 a month. These figures do not include taxes or insurance.

Appreciation is another motivation for buying instead of renting. Georgetown area real estate has held up well during the Great Recession. A lot of real estate watchers think that prices have stabilized and prices will likely go higher over the next few years.

Tax incentives are another motivator. The mortgage interest deduction is alive and well in America. One can deduct the mortgage interest expenses on a primary or secondary home. Investment properties also have a lot of tax advantages. In recent years, parents of some university students in Washington have even bought houses instead of paying rent for their sons and daughters.

If one buys a house for their son or daughter and rents other parts of the home to four or five other students, it is not too hard to produce adequate, after-tax cash flow. If a mortgage is around $4,000 a month and one has four renters, in addition to their son or daughter living on the property, the numbers can work. This is one of the reasons for the number of rental houses around area universities.

Up until a few years ago one could buy a house in the Georgetown area and in four years sell the home at a handsome profit. The days of a guaranteed profit have not yet returned.

If the money for a down payment and closing costs is not a problem, then buying a house can be a smart alternative to renting. Even amid a volatile stock market, Washington area real estate is stabilizing, which makes putting money into local real estate an attractive option. As one should do when looking at any other investment, consult your financial professional when making this type of decision.

Bill Starrels lives in Georgetown. He is a mortgage loan officer who specializes in purchase and refinances mortgages. He can be reached at 703-625-7355 or by e-mail at bill.starrels@gmail.com.

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Thu, 27 Nov 2014 03:12:27 -0500

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