A Tale of Two City Homes

the word home over some wood panels
Even
though
I’ve
sort of borrowed
the title from a 19th-century
classic of literature as my own title, I’d like to tell you about another book
I recently read.  I’ll sum up the basic
premise of the book with a quote from the author in an interview he gave to The Huffington Post:  “If your emotions are constantly being pushed
this way or that way, and you feel like you’re never in control, it’s probably
because you’re valuing a lot of the wrong things.”  As part and parcel to that thought, in the
book he talks about the choices we make and our willingness to accept the
“pain” that those choices carry with them –
ironically, that pain is the key to our happiness.  Let’s
look
at a choice of options: renting a really nice apartment versus buying a very
modest house. 
The
apartment in question is two bedrooms and two baths, 1,200 square feet, and the
monthly rent with a 12-month lease is $1,450. 
The appliances are brand new, you have a really nice pool, a sand
volleyball court, and a surprisingly large workout facility.  Also, you’re right downtown, so you’re
surrounded by great restaurants and convenient shopping.  Bonus! 
The
home in question is two bedrooms and two baths, 1,300 square feet, and the
asking price on the house is $199,000. 
On an FHA 30-year fixed mortgage at 4.25% (5.462% APR) with 3.5% down,
the monthly payment (including taxes and insurance) is
$1,354.  Obviously, it’s an older house, and it
doesn’t have the pool, volleyball court, or workout facility.  The home is in the same general area, though,
as the apartment, so you’re still close to the great restaurants and convenient
shopping. 
The Pain
Let’s
start with the house: it’s not brand new, you’ll have to maintain the yard
yourself, and you’ll need to come up with the 3.5% down payment, which is
$6,965.  If you want to have a workout
facility, you’ll need to budget an additional $40/month to join a local
gym.  Now for the apartment: after the
first year, the landlord or management company is going to raise your
rent.  Let’s be conservative and say it’s
just over a 5% increase, or $75;
the following year could be more because they want to spruce up the complex’s
look.  You’ll
only have one covered parking space, and it’s not right next to your
apartment.  Lastly, while you’re on the
ground floor so you don’t have to worry about stairs, you have neighbors above
you who work odd hours and find
slamming doors to be fun . . . at 3:00 a.m. 
The Payoff (Happiness)
This
time, let’s start with the apartment: you don’t have to worry about any yard
maintenance.  If the water heater springs
a leak or decides to explode, you don’t have to pay to fix or replace it.  You might have rock-hard abs and a finely
toned body from the workout facility. 
Now for the house: each year at tax time, you get to deduct the interest
you’ve paid on your mortgage –
suddenly, you’re getting money BACK from Uncle Sam instead of owing him.  Home prices have increased conservatively at
5% year over year, which means your house has gone from being worth $199,000 to
$208,950 –
just by owning your home, you’ve earned almost $10,000 in equity in one
year.  Last but certainly not least, your
mortgage payment isn’t going up year by year.
So,
let’s do some quick math: at the end of two years, if you choose to live in the
apartment, you MIGHT have rock-hard abs at the cost of $1,450/month for the
first year and $1,525/month the second year. 
If you choose to purchase the house, you will have over $20,000 in
equity and have saved $1,152 the first year and $2,052 the second year
(mortgage versus rent).  In other words,
you’ll be $23,204 ahead of the apartment choice with a healthy tax break.  Sounds to me like the pain is worth the gain –
and you can do sit ups anywhere. 

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