The cost of renting
The average rent in Naples in Naples is $2,252 for a place with just over 1000 square feet. That represents an increase of about 40% over the previous year, 2021. But how much house could you get for $2,252 at the current mortgage rate of interest?
The cost of a mortgage
Unfortunately, with inflation running amok, interest rates for people with an average credit score of about 700 are around 5.8%, and they’re unlikely to come down much in the near future. (If you can get your credit score closer to 800, you can get a rate of just over 5.5%, which will save you tens of thousands of dollars over the life of a 30-year loan, but that’s a topic for another day.)
So, at 5.8%, how much mortgage can you afford to take on, assuming your paying the average rent for a place here in Naples? The answer depends on how much down payment you put down, but let’s start with the standard down payment of 20%.
The answer for 20% down is that you can afford a mortgage of about $320,000 to buy a house for about $400,000. This will leave you with a monthly mortgage payment of about $1,880. With taxes and insurance totaling about $300-400 per month, you’ll be in the range of the $2,250 monthly rent you’re currently paying. Of course, you’ll need to have $80,000 to make the down payment.
PMI
However, if you elect to use Private Mortgage Insurance (known as PMI) to reduce your down payment to only 5%, a $340,000 mortgage with $17,000 down will cost you about $2,300 a month. So while you can no afford quite as much house, the down payment will be much more manageable. It’s a trade-off that may be worth it to you.
VA loans
Finally, for veterans who qualify for VA loans, which have no requirement for any down payment, that same $340,000 house, with no down payment, will cost you about $2,500 per month. To get down to the $2,200 per month payment that will match your average rent payment, you’ll have to borrow only $300,000. Still, you’ll have no down payment, and you’ll be paying the principal down at a level rate for 30 years however you buy your new home, after which you’ll own the home outright, and you’ll never have to make a house payment ever again if you don’t want to.
Mortgages are inflation-proof, once you have one
Let me repeat the most important part of that last statement: you’ll be paying the principal down at a level rate. That means that no matter what happens with inflation, you’ll be making the same house payment for 30 years, after which it goes to $0 per month. Contrast that with rent, which 1) you’ll continue to pay as long as you’re renting and 2) will almost certainly continue to rise right along with inflation. Think about that. No longer will some landlord be able to jack up your rent. The only increase you’ll see is the increase in the value of your house, which will go up with inflation.
That last thought is also worth remembering. The price of housing is going up, whether you own one or not. So the sooner you act before inflation causes prices and interest rates to go up further, the more house you'll get.
To summarize this very important point, if you're renting, plan to pay more rent in the future as inflation continues. However, when you buy a house using a level-term mortgage, your mortgage payments are fixed for the life of your mortgage, which is typically 30 years. The only impact inflation will have on you is to make the value of your house increase. You don't ever have to worry about the house payment increasing, and eventually it will go away. Think about that...
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