Eugene Loan Guy

All of us involved in mortgage lending want the Real Estate market to turn around. We want to see Eugene and Springfield homes selling. We want people to be taking out mortgages. But, we also want to have our clients well served by these loans, especially when working with first time home buyers in Lane County. Therefore, I want to suggest Cash Flow as a method of determining suitability. Interest rates and payments are important, but what about “Cash Flow?” Does being a homeowner make sense?

By this, I mean if you are a renter or have a renter for a client (if you are a Realtor®), is it really a good move for you and them to think of buying in this market. In many cases, the answer is yes. In some, the answer may be no.

So, how do you determine the cash flow of a home? One of the easiest tools is the rent vs. buy mortgage tool. If you don’t have access to one, feel free to give me a call and I would be happy to run the numbers for you. Today, I want to run a few numbers just to give you a clue about this process.

Let’s assume the following (this would definitely be area specific):

1.      Current rent – $1000 month

2.      Comparable home price – $175,000

3.      Normal yearly rent increase – 3%

4.      Time horizon (3 or 5 years) – 5 years

5.      Appreciation value of home – -0% per year (bad case scenario)

6.      Tax bracket – 25%

7.      Down payment – 3% (FHA)

8.      Mortgage Ins. – .5%

9.      Interest Rate – 5% (only as an example)

10. Property Taxes – $1,800

11. Insurance – $360

Using these calculations, your net difference (between average rent over 5 years and after tax mortgage payment) is $107 to the purchase side. Also, even with a no appreciation, at the end of 5 years, you will owe less than the property is worth. The chance of the market having no appreciation for 5 years would really surprise me. So, basically, you are getting the same home for less money per month.

Needless to say, if the price of the home goes up or the rent goes down, these numbers would change. But it really does make sense to see if it is worth owning your own home. Down payment makes a huge change in the calculations. Just remember, this is only an example, not final numbers for anyone.

Also, the main reason for owning a home is shelter. Investment value is great but for your personal residence, shelter is the number one reason for having a home. Everyone needs a place to live. It could be an apartment, duplex or a single family house but shelter is one of the basic human needs. Doesn’t it make sense to see if you are spending your shelter dollars wisely? With today’s historic low interest rates and reduced house values, many people that couldn’t qualify for a loan 18 months ago can qualify for a mortgage today. There are also some programs, like HAP and SHOP still available for down payment assistance. Additionally, the government is still offering the $7,500 tax credit for first time home buyers that meet income qualification.