Now I’m sure that by now, you have heard time and time again about how buying a home is better than renting. I have talked a lot about how you can actually save a lot more money by owning a home than just paying rent. However, there is still something that is hold you back. Maybe you are a bit skeptical about this advice. Everyone says buying real estate in Chicago is better than renting, but is it really true? In order to take away the mystery surrounding the subject, I’ve decided to go a little more in depth on the subject in order to really see the difference between buying vs. renting.
Average Rent in Chicago vs. Avg Home Prices & Mortgage Payments
First, let’s start with some general data on Chicago real estate. According to Curbed Chicago, the average monthly rent for a 2 bedroom apartment in Chicago in 2018 was just under 1800. Now this number should be taken with a grain of salt for two reasons. First, anyone who knows Chicago knows that’s prices can change dramatically depending on which neighborhood the apartment is in. For example, a 2 bedroom in Bronzeville averages around 1400 per month, while a similar apartment in Lakeview can easily be over 2000.
Second, I decided to use the average of 2 bedroom apartments. There are cheaper options, such as a 1 bedroom or a studio. Since those do not really compare in size to a single family home, I did not include them. Also, I’m only comparing the rents to single family properties, not condos, which are a different monster. (I may do an article comparing rent to condos at a later date.)
Now, let’s see the monthly costs of owning a home in Chicago. According to the data from our MLS in Chicago, the average monthly price of a home in Chicago in 2018 was just under 290,000. If you get an FHA loan with a 3.5% down payment, and the taxes are 4500, your mortgage payment is estimated at around 1940 per month. Use this mortgage calculator if you want to play around with the numbers.
There are also a few things to keep in mind with this data as well. For starters, a lot of homes in Chicago tend to have at least 3 bedrooms, not 2 bedrooms. Also, a lot of these homes tend to have a basement, so in all you will get a lot more space than you’ll get with an apartment. However, the monthly price will tend to be higher with a mortgage than when renting.
For a better example, lets look as a specific neighborhood: Auburn Gresham (60620 zip code). In Auburn Gresham, the average rent for an apartment is $1000. The average price of a home in Auburn Gresham that was not a foreclosure was 150,000. Most foreclosures aren’t move in ready, so I didn’t want to include them. The estimated mortgage for a 150,000 with a 3.5% down payment with an FHA loan is around $1100. That’s a $100 difference between owning a home and renting an apartment.
Saving Money & Building Wealth Through Equity
Now, let’s get into the real reason why owning vs renting: the equity. So you can get a better understanding, let me explain all the parts of a mortgage. Whenever you make a mortgage payment, it is split up by the bank for different things. The first part is called interest, which goes to the bank. The second part is the taxes, which banks put in a separate escrow account that they use to pay your property taxes. The third part is for insurance, which the bank uses to pay your homeowner’s insurance. The last (and most important part for you) goes toward the principal, or toward paying off the money that you borrowed. This principal is the total amount of money that you borrowed, and that you owe to the bank.
Now you may start to wonder how you are paying yourself if the principal just goes toward paying off the money that was loaned to you. Let’s try thinking about it in a different way. When you own a home, you own an asset, which is, following the same example, worth 150,000. You borrowed the money from a bank with a loan to buy this property. The total amount you borrowed was 150,000, minus the down payment that you paid. That money you borrowed is the principal. Now, every time you pay a monthly mortgage, you pay off some of that principle. The more of the principal you pay off, the less you owe the bank. Still with me?
Now, let’s say you want to move, and decide to sell your home after living there for 5 years. Your asset, which is your home, will still be worth 150,000 as long as its still in the same condition. However, since you have been paying off the principal this entire time, you no longer owe the bank 150,000. You now only owe the bank 135,000. That is 15,000 that you made through the years without even thinking about it! Now, compare to paying rent for 5 years. You aren’t getting any of that money back once you move.
Here, I have included an amortization table for a 150,000 home, which explains how the money is split month to month. Take a look at the principal, and see how much of the principal you pay off each year. From this example, if you bought a home in August 2019, by the end of the year you will have paid $1,004 toward the principal. In the year 2020, you will have paid off $2,484 off of the principal, in that year alone This is the money that you save for yourself! Now do you see why it is worth paying that extra $100 a month?
For learning purposes, I kept this example as simple as possible. I didn’t include the fact that the home may appreciate in value, which means it grows in value over time. That can lead to even more money for you from owning a home, and all you did was pay your monthly mortgage!
Tax Benefits
Another huge benefit of owning a home vs renting is that owning a home can provide extra tax deductions for you. The two main things you can deduct is the mortgage interest from your loan and your property taxes. Using the same example, if you bought a home in August 19 with a 150,000 mortgage, by the end of the year you would have paid around $2500 in interest already! Property taxes in Chicago can easily reach $3000! That’s a lot of money in deductions you can take off of your tax bill.
Keep in mind that all of this is included in your 1100 monthly mortgage, so remember for all of this you are still only paying $100 more vs the option of renting for $1000 and getting absolutely nothing in return. Even though you are paying that extra money, you will get money back plus save a lot more when you own your home instead if renting. Any questions or comments, please feel free to reach out to me. Thanks and have a great day!