Renting versus Buying a home | Housing | Finance & Capital Markets | Khan Academy

In this video us I want to set a framework for thinking, whether to rent or buy an apartment. I hope you find out after watching the video That answer to whether you prefer rent or buy it is not easy. For completeness, own a house and I bought it for a variety of reasons some were emotional, some maybe economic. It depends on your personal context, where are you in life and in which part of the world do you live, and what the economy is currently doing, and what are the prices of rent and housing.

Perhaps the video will give you a framework at least for how to think about it. Let's say this house is on the market for a rent of 1,500 per month. 1,500 a month, which is the same as 18,000 a year. 18,000 a year is one option you have. Let's say the market is for sale the same neighboring house, and you have the opportunity to buy it. Let's say this house is for sale for $ 400,000. You don't have $ 400,000 and you will have to borrow some money. You saved 100,000 on the down payment. Deposit 100,000. You will have to borrow the rest. You can borrow 300,000. Now, a traditional mortgage that is fixed-term maybe for 15 years, maybe for 30 years. You pay every month to maintain a mortgage account, some of it goes with a traditional mortgage on loan repayments, and something goes on interest payments, and the rest to repay the loan.

For example, let's say you pay a mortgage payment of 1,800 monthly. Soon, interest may be disproportionate. It could be say 1,500 a month at interest and $ 300 actually to repay the loan, to repay this $ 300,000 loan, and then when the loan is repaid at the end of your mortgage period It may go another way where you pay much more in installments every month. Maybe it's 1,500 and the interest and when the interest is at a lower amount, because you have already paid most of the installment Your already interest rate may be lower. This is the usual process of a regular mortgage. To put it simply, I suppose you only choose a loan with interest a loan where you are required to repay interest rate, and the loan you can repay as you wish. Let's just say it's just interest. This will help simplify the whole thing, of course, if we wanted to break it down in detail, so we would take excel for that, so we can analyze and see it, how interest payments change, throughout the loan.

Let's say it's an interest rate of 6%. Interest alone at 6% interest. That is, in a year you pay interest 18,000. 18,000 for interest, 6% of 300,000. 18,000 for interest. It depends where you live and what is your income. You can reduce your mortgage interest somewhere from your income, so that doesn't mean that you get 18,000 back, that is, if you earn 100,000 per year, instead of paying eg 30% out of 100,000, you pay taxes for 100,000 minus 18,000. Your taxable income will be reduced to 82,000. You will save roughly your tax rate as a% of it. Let's say you save about a third on reduced taxes, so we have tax cuts. So the effective interest you pay after deducting taxes, it is about 12,000.

12,000 of its own or if effective. Effective interest costs. Interest expenses. We're not done yet. There are costs of ownership. You will have to pay property tax When property tax is 1% of 400,000 That's 4,000 for property tax Of course, you also have to maintain the house. Maybe you have a gardener. Maybe you need to fix something, paint anything. These are things you don't have to usually pay when you rent an apartment. Let's say that while it may be different, of course it depends on the situation Let's say it does 2,000 a year. 2,000 per year for maintenance. The reason I mention it all here and of course we can go into more detail and think about other things as well for different specific situations, but this is a list basic things which will cost you something You rent 18,000 per year, which go away that's what you have to pay for that you live there. When you buy a property, you pay for effective interest costs, real estate tax, maintenance When it adds up 4,000 plus 2,000 is 6,000 plus 12,000 is 18,000. 18,000. Annual expenditure which go away although everyone will have different ones costs, as appropriate this is just an example.

So at least 18,000 are gone, but that's not the end of it. We didn't even talk about what we do with those 100,000 Here we had to use them for backup. We can invest 100,000 here, we'll get some income from that of the 100,000 we wouldn't have here it depends on how we handle them, when we have them in a savings account maybe we get 1 to 2%, but we may invest them in a wider portfolio and we get 4% or so, but we have to think about what we would get out of that deposit, when we invest it. Let's say we get a 2% return, 2% annual yield, that means 2,000 of that investment of those 100,000. So on our own, if we were accurate, that yield or the investment used for backup and we're at 16,000. 16,000 of its own. 16,000 per year. By choosing these numbers for this video, so it turned out purely economic, for this year, which we'll talk about in a moment, things may change in the following year, but for this year, it looks like that it pays to rent a house.

Of course, this is how the analysis changes depending on the change of those numbers. If your house was cheaper or had lower interest rates, anything, and all at once it can look much better. If the rent was higher, so the numbers wouldn't look so good anymore. If your return on investment was not so high, so it won't look so good anymore. The aim is to try to analyze how much is your own cost. From a psychological point of view, when i have this mortgage so at least it forces me to save.

It is such a forced investigation. But theoretically you can do it here. The amount you would have to pay for the interest or interest part of your loan, this is your rent, you could save 300 a month and invest them and in 30 years you could have a nice amount as a source of your income. You can't just say it is renting better than buying your own and conversely. Depends on the situation. That's just an estimate. We will do more in the future, but there are other things to think about out of numbers, and these are the intangible ones. Let's think for a moment. Why we prefer renting and why buy your own. Reason number 1, and that's why we bought a house a few years ago, is stability. It's stability. Maybe you have a great rent, and great landlords in an amazing place but maybe he'll rent it to someone else or he moves there himself and you will have to move out.

When you buy a house, as long as you pay or when you pay for it, and pay property tax and other things so you are sure that you can stay there. Another reason to buy is the unpredictable price of rents, rents may increase. If you live where the rental market used to as Manhattan, San Francisco so it's nice to say: I have fixed mortgage and I will repay so much. When I pay for it, I don't have to stress around rents, because a lot of people want to live in the same place. Another thing is, that you want to rent a lot of things to change, improve. When we rented a house, we saw a lot of places which might look nice if they remodeled the bathroom or kitchen or if they didn't paint it there yellow. When you buy a house, you can improve it to your liking. But the benefits are not just about buying, but also rent.

If you want to settle somewhere, and map the terrain first, you don't want to commit in one place without finding out how things work here, so you need flexibility. Rental flexibility. When buying or selling a house There are a lot of costs and fees around even for mediation, so flexibility can suit you, you get a contract for 6 months or a year. And when you find out how it works, so you can buy a house or rent it elsewhere. And as we could see from 2003 to 2008, sometimes there are raises and sometimes it's due to economics housing disproportionately expensive. Buying your own is compared to renting very expensive. Again, it depends on the situation. Perhaps you have gained at least a basic awareness for deciding between purchase and lease.

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