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A lot of
American's dream of their first house with the white picket fence... But
they like the lower monthly bill associated with renting. The phone
calls come every day, “I rent for $900, how much home can I get?”
Although the tax benefits are significant, some people don't feel
comfortable with the larger payment.
So why
not look at a cost effective solution that can save you money each
month.
Buying a
duplex has a number of financial advantages over buying a house. To
illustrate these points lets compare the financing for a house versus a
duplex.
Lower
Monthly Payment
While
there homes available for less than 150k, for the sake of comparison
lets use this price. To keep things the simple let’s assume, a 6.5 (6.9%
Apr) percent interest rate, 3% down payment and Austin taxes are 2.5
percent of the purchase price and insurance is $60 a month.
Let's compare a 150k house price with a 5.5k (3%) down payment
Mortgage Payment with mortgage insurance = $913.34
Homeowners' Insurance = $60
Monthly
Taxes (@2.5%) = $312.5
Total
Payment (PITI) = $1285.84
While duplexes do cost more, the rent leads you to a lower net payment.
So to pick an easy number, duplex should be selling for 150k. We are
also going to assume that the other side of the duplex is being rented
for $700. The rental will sometimes be vacant, so we will assume 25%
vacancy, just like lenders.
150k
Duplex price with a 5.5k (3%) down payment
Mortgage Payment with mortgage insurance = $913.34
Homeowners' Insurance = $60
Monthly
Taxes (@2.5%) = $312.5
Total
Payment (PITI) = $1285.84
Net rent
(700-25%) = -$525
Net Payment after rent = $760.84
The monthly payment on the duplex comes out to be $525 less than on a
house. That is cheaper than a typical rent for a typical 2 bedroom
apartment. Remember talk to your real estate agent for exact numbers,
these numbers are dependent on homes and rents available.
Buy More House
Besides
the lower net mortgage payment, your buying power is increased when
buying a duplex as a personal residence. To understand this, we need to
understand a couple rules about how lenders determine whether to provide
loans. Foreclosures cost lenders about 25 to 30% of a home value, to
avoid these, lenders have designed rules to minimize the number of
foreclosures based on actual loan default data.
One big
rule is lenders are not allowed to count rental income when getting
approved unless you have been a landlord for 2 years. (This ensures
against a default for renter vacancy.) But since primary residences
have a lower default rate But when you buy a duplex for your home,
lenders are allowed to count that income. This gives you a more buying
power, a huge advantage, when buying a first house.
Another
rule is called a debt ratio. It is the percentage of debt to gross
income that you have on a monthly basis. Different loan programs allow
for different maximum ratios, but generally they allow no more than 45%
or 50% maximum ratio. To be safe, lets assume 45%.
Lets use
the same house from earlier.
For this
example, lets assume you make $3500 a month in income, have $700 a month
in reoccurring debts and have good credit, etc. We take the monthly
debt plus housing expense divided by your gross monthly income.
Debts / Income = Debt Ratio
$700
general debt plus $1285.84 in house payment divided by $3500 in gross
income
(700 + 1285.84) / 3500 = 58.7% Debt ratio
This
would be too high for the 45% maximum. In fact, this person would
qualify for a $90k house.
But with
the duplex, things improve significantly.
$700
general debt plus $1285.84 in house payment minus the net rent of $525
divided by $3500 in gross income.
(700 + 1285.84 – 525) / 3500 = 41.7% Debt ratio
This
would be perfect for loan approval. So you would be able to buy more
house with a duplex than with a standard home. With the net rent you
can qualify for a nice home or nicer neighborhood, than with a single
family house.
Build Your Wealth
The
first way to increase your wealth is to own a home. According to the
National Association of Mortgage Brokers, the average renter is worth
$4000, while the average homeowner is worth $145,000. Home ownership is
great way to build your wealth. When you rent, you are actually giving
your wealth to someone else.
An
additional opportunity is to applying the rent towards the down
payment. If you apply the net rent of $525 towards the mortgage
balance, you will pay the home off in just 139 months (less than 12
year). This reduces the payoff time by 60% and saves you $123,762.26 in
interest.
Conclusion
Owning a
duplex provides gives you the opportunity to lower your monthly payment,
buy more house and build more wealth.
To know
how much you can afford, contact Ethan Hoke @ 924-5741 Land America
Mortgage Co.
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