Should I Buy or Rent?

I received an email this week from Samantha asking if she should buy a home now or continue renting.  Here is her basic information:

• Gross annual income $85,000
• Current rent payments $1350
• Purchase price for home she's considering:  $399,000
• 10% down payment (from 401k and savings)
• 38 years old
• Average to good credit

Based on the information Samantha provided me, she easily qualified to purchase the home she was interested in.   She only planned on staying in the home for 4-5 years and wanted the lowest payment possible, so I provided her with a Good Faith Estimate based on using a 5 year fixed 10 year interest only product with a note rate of 5.75% (APR 5.854%).    Her total mortgage payment, including estimated taxes and insurance would be $2,278.   

Here's where it gets more interesting for people who don't own a home yet...when you factor in Samantha's income tax bracket, her effective payment (factoring in what she will be able to claim on her income taxes in a full calendar year) is actually $1,633.

$1,633 IS MORE ($263 more to be exact) than her current rent in the amount of $1,350.   However, if you consider a conservative appreciation on her potential new home in the amount of 5% annually...the picture changes dramatically for creating wealth.

In 3 years, Samantha will pay $50,793 in rent with nothing to gain.   As a homeowner, after taxes she will pay $58,700 BUT her home will be valued (again, very using a very conservative figure of 5% appreciation) at $461,892; providing her with $103,956 in equity...in just 3 years.

So what if Samantha decided to rent and invest the difference of the after tax mortgage payment and rent in the amount of $263 into an interest bearing account (I'm sticking with 5% interest)?   In three years, after investing $263 per month, she would have just over $10,000.   And how likely is it that someone would actually be disciplined to do that? 

You can guess my answer to Samantha.  BUY! In three years, she could decide to sell the home and would have more of a down payment for a next home.  If she opts to rent, her $10,000 would make a significant difference in a down payment.  Her $399,000 home she wants to buy now would then cost $461,892.   She would still have 10% down based on the appreciation (assuming her savings and 401k performs well) ...only now the house and the mortgage payment cost more and she would not have the $103,956 in equity.   Not to mention the emotional values of owning your own home and the freedom it provides.