Originally posted by p-bo
This is how I look at the buying vs. renting debate. If you are going to be in 3 year residency and rent, you will pay about $650/month for 36 months. That is $23,400! $31,200 for a 4 year residency. If you buy a modest home in an area that residents have a history of living in, you should be able to sell without too many problems when you finish. Even if the home depreciates a little, it is very unlikely it will depreciate $23,000! When you look at the tax deductions for the interest, I think you'll come out ahead buying. I could be totally wrong and hopefully someone will beat me down if I am!
I'm not trying to "beat you down," but I think that there are some important things you might be missing:
1) You can't just look at how much money you pay on your mortgage over the years and apply it to principal. In fact, most of the money you spend in the first few years of a loan goes to interest, and very little actually goes toward principal. If you calculate it out, on a 30 year mortgage you will have paid approx 5% of the principal at 5 years.
2) As circleK pointed out, you have to pay closing costs when you buy and when you sell. Although you can avoid some of those if you don't use a realtor, I would imagine that most of us wouldn't have the time during residency to try and sell on our own. From what I understand, the seller pays the commission to the realtors, which is standard 6%. Also, when you are the buyer you end up spending 2-3% on other misc closing costs, like inspection fee, courier fee etc.
3) It's true that you get tax deductions on the part of your mortgage that you pay towards interest. But this may not be as significant for relatively low income residents who are already in a lower tax bracket. The tax advantage is nice, but when I've calculated it out it seems to just offset the cost of property taxes.
It is for these reasons that people say you should own for at least 3 and preferably 5 years to make you money back on buying a home. When you are planning on keeping a house for only 3-5 years, you essentially lose all the money you pay on your mortage to interest and closing costs. People only make their money back if the property value appreciates in the time that they own their house. Most property does appreciate, especially over the long term. But this is somewhat of a gamble because you never know what will happen to the housing market in your area in the next few years.
So you really have to know the housing market in your area, and have confidence that the property you are interested in purchasing will appreciate over the next few years. Particularly if you own for just 3 years you could end up actually owing money when you sell if your property fails to appreciate or even depreciates.
Also, it is important to include all additional housing expenses when doing the rent vs buy calculation. Buying includes several additional expenses, including maintenance/repair costs, homeowners insurance, property taxes (usually offset by income tax advantage of buying), and additional monthly costs you wouldn't pay when renting such as garbage, water, sewer etc.
I've been doing a lot of research, as I am also trying to make the rent vs buy decision. If you are serious about buying, check out the book "Home Buying for Dummies."
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