I’m a broken record on this point, but I have used it a few times in the past year to convince several friends not to buy condos – two of which have already dropped in price while the others haven’t appreciated at all.
Your friends really need to look at the cost of renting vs. the total cost of ownership over the next several years. Insted of worrying about the payment, look at total asset value – cash and equity at the end of 5 years.
In my ‘hood, you can rent a place for $2000 that would cost $600K to purchase.
Ditech tells me the monthly payment would be $3,794 on a fixed rate loan at 6.5% with nothing down. Add 1.25% for taxes (I think) => (600K * .0125 / 12) = $625/month.
Add another $50/month for insurance.
You might have some PMI in there also – call it $100/month, which is surely too low.
TOTAL PAYMENT: $4569.
This means, if you can afford a $4569 payment, you could rent for $2,000/mo and put $2569 per month into the bank. After five years, you would have put $154,000 into the bank. I’m to lazy to do the interest calc, but you would have more than $160K in the bank after five years !!!!!
This is $160,000 you won’t have if you buy and you could lose equity.
In 5 years you could put a down payment on a house at a lower price with a higher interest rate and be sitting pretty.
One of my friends was going to purchase a place in City Heights with a Principal and Interest Payment of $1900 per month. She pays $800/month to live in PB now. Thank god I stopped her.
