Friday, September 10, 2021


mortgage rates 2020

With Los Angeles Mortgage Rates At Historic Lows (September 2021), and Home Prices Still Increasing, Buying Is Still Better

In 2013, we started following a typical Westside home worth $650,000. We now have data through 2021 and while every situation is not the same, the results are pretty clear in this analysis. Buying is better!
According to the rental value of that home was $3150 a month in 2013.  The estimated mortgage was $2441 based on 20% down and 3.75% 30 year fixed mortgage.  Property taxes and insurance would add another $730.  Maintenance might be $500.  So total out of pocket was around $3700 in 2013. Other considerations would be the tax deductions on property tax and mortgage interest, and any maintenance costs. So the net financial impact per month for the owner was probably less than $3700.
You can follow this property year by year to see that it is always better to have owned than to have rented this home, but let's jump ahead.
TODAY - September 2021. For those who like to skip to the end of the book, here's the current situation. 
2013 Zillow estimated value $650,000.  September 2021 Zillow estimated value $1,372,000. 
The value is over double the original price after just eight years. Zillow estimates that the net proceeds from a sale at this point would be $1,261,000, resulting in a profit of $611,000 on an investment of $130,000 or so. 

But the really amazing part is that the rent in 2013 would be $3150 and today is double that at $6170. So, by owning, the out of pocket would increase due to property taxes to about $4200 per month, but the rent would have doubled. Due to the shocking drops in interest rates, the owner could do even better by refinancing the remaining loan and lowering the monthly payment. 

Of course, we can't know what the future will bring in Los Angeles or Detroit, but this random house was selected in 2013 and we've followed it for 8 years. The house is actually located in a nice part of Inglewood, so homes on the other side of the 405 probably did much better.

In today's market, you will want to go shopping for a home with a completely underwritten, pre-approved loan. Bill Rayman can help you get this done. Then once you negotiate a price, all you need to do is get an appraisal and home inspection and the loan is just about ready to close often in just 16 or so days. 
Right now Bill has loan programs offering Jumbo loans with just 10% down. Now would be a great time to start working on buying your dream home. Call Bill at (323) 682-0385 or email For more information

Back to the story in the first year of ownership, 2013.
The tax advantage in the 25% tax bracket would come in at around $800 month, so the net advantage to buying was around $250 a month that year. If the house was purchased in 2013, there would have been at least $6000 in closing costs. We’ll spread those over 3 years. That would result in another $166 per month.
Rent vs buy in 2013.  About even.
Zillow says the house is now worth $795,000, for a gain of $145,000. Last year the interest was 3.75%.  Today interest would be 4.5%. Total monthly mortgage would be estimated at $3129 now vs $2441 a year ago. All of these estimates are from, and we can't totally rely on their numbers.  In fact, the rent number seems suspect, as it has dropped from $3150 to $3125.  Government statistics for cost of living specifically associated with rental of a primary residence showed a 2.7% increase in the LA area.  Even so, that would only boost the rent by $90.  My gut tells me that rents are up and that the 2.7% number might be more in line with reality.   If this was a new purchase, there would be a slight bias to the renter of around $300 a month. However, if the home was purchased in 2013, the owner just made $145,000. The renter could have put the 20% down payment in an investment and made 6% on the $130,000 or $7,800.
Rent vs buy in 2014. Cash flow benefit to the renter.  Wealth increase huge win for the buyer
Zillow now says the house is worth $840,000. And increase of $190,000 over the last two years. The rent is up from $3150 to $4000 per month. Markets don’t always act like this, but the tenant would likely be subject to these increases and would now be paying $4000 for rent vs the $2700 they would still be paying for mortgage, property tax, insurance, and repairs if they had purchased in 2013. They would also have a $190,000 capital gain on their $130,000 down payment. The purchase in 2013 would have been a huge success. Of course this capital gain would be offset by costs of purchase and costs of sale if the increase was to be realized rather than just on paper. If we used 10% or $83,000 for that number, we are still $50,000 ahead by the end of year two. In other years this could have gone the other way.

The current mortgage based on a 20% down payment and 4% interest rate would be $3208 with another $900 for property taxes and insurance. Add in $500 for repairs and the total is approximately $4700. Tax savings would be $1000 using the same criteria as above. So the net cash cost per month is $3700 vs rent of $4000.
Of course, every house in every neighborhood will have different results, but Zillow has done an analysis by neighborhood that predicts how long it will take to break even on a purchase vs a rental. Their system is not very sophisticated and does not take into consideration appreciation.

We skipped a year, but how is that same house doing in 2017. Zillow says that the house is now worth $970,000 and the rent is likely to be $4000.
For the owner who purchased in 2013, his out of pocket is now $2900. He has a capital gain of $320,000 which would be reduced by about $50,000 for real estate fees were he to sell. The gain would still be at least $270,000.
The renter who put his $130,000 into an investment returning 6% compounded would have made $34,122.
Owner out of pocket $2900 vs renter out of pocket $4000
Owner ROI $270,000 vs renter ROI $34,122
So, what about buying that home today? Is it still a good deal? With 20% of $194,000 down and a 4.15% mortgage, the monthly payment including taxes and insurance, would be $4700. Add in the $500 for maintenance and subtract the tax IRS advantage of $1200 per month and you have $4000 per month out of pocket, just about equal to the rental amount. The closing costs of $10,000 would result in a the buyer paying about $300 per month more than the renter in the first year. But by year three it is likely that the monthly rent would be up another few hundred dollars, and in year four the amortization of those closing costs would be over (based on our idea to amortize them over 3 years.)
After four years of running this experiment, and even with a supposedly overheated seller’s market in Los Angeles, it seems that buying just makes way more sense than renting. We can imagine scenarios where this would not be the case. The housing market is subject to downturns just like any market. It is possible to imagine this home dropping by $300,000 if there were a typical drop in market values like 1999 or 2008.
Even then, these markets correct, and over time the likelihood is that the home will continue its upward valuation curve. On the other hand the market may continue strong and deliver another $100,000 or so in appreciation over the next three years.
A major issue in the 2017 market was whether you could even get a mortgage in Los Angeles

For the owner who purchased in 2013, his out of pocket is now $3000 per month. He has a capital gain of $550,000 which would be reduced by about $60,000 for real estate fees were he to sell. The gain would still be at least $490,000.
The renter who put his $130,000 into an investment returning 6% compounded would have made $54,407.
Owner out of pocket $3000 vs renter out of pocket $4950 per month
Owner ROI $490,000 vs renter ROI $54,407.

Rent today would be $4950 and mortgage payments (4.0% on 30-year fixed) based on a purchase today would be $4600 + $1150 in taxes and insurance (estimates). Even with the new tax law, the current out of pocket on this home if purchased today would be less on a monthly basis than renting the same home. (Of course the $240,000 down is not included in that analysis)

Some say that the LA market has cooled this year. But this home has seen an increase of $100,000 since January of 2019. Zillow predicts no increase the rest of 2019. 

Let's consider a possible worst case scenario based on over 100 years of California real estate history. If there is a housing bust, this home will likely drop about $300 - $400,000. But within five or so years that amount would be made up, and would go to new highs. 

If you are currently renting and wondering about the rent vs buy decision, the above analysis would suggest that buying has been the right answer for many years. 

According to Zillow, the property is now worth $1,304,000. This would mean that in the last 12 months, the home has appreciated another $100,000. This is in keeping with the average since we began the analysis. 

The rent continues to be $4950 per month. Buying continues to beat renting.  
The trend continues upward. 1,372,000. Rent is now $6100 per month for this home. 

Bill Rayman

(323) 682-0385


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