September 5, 2018
Unbiased Financial Information Provided by Financial Finesse
Rent or buy: The question confounds people in every income bracket, age group and geographic location. There's no easy answer, because the benefits of owning or renting are different for every person. Some people love the independence that renting offers -- no huge mortgage debt, no maintenance woes, and the freedom to move from place to place with just a month's notice. Still, in most cases, buying a home is better for your finances in the long run.
Buying Delivers Big Bottom Line Benefits
Below is the cost/savings comparison for a three-bedroom townhouse in Madison, Wisconsin, that was offered for rent at $1,000 a month and for sale at $200,000. The mortgage interest rate is 5.5 percent, the down payment is $20,000, the closing costs are $4,000, and the owner plans to keep the house for seven years. When the home is sold for its appreciated value, there is a 6 percent commission on the sale. The cost of rent is expected to go up 2.5 percent a year; the value of the home is expected to appreciate by 4 percent per year. The renter can earn 6 percent on the amount he would have to use for the down payment and closing costs if he were to buy.
|Rent||Buy||Savings of Ownership|
|Monthly rent payment||$1,000||Monthly mortgage payment||$1,017|
|Renter's Insurance||$30||Homeowner's insurance||$53|
|Private mortgage insurance (PMI)||$78|
|Total monthly payment:||$1,030||Total monthly payment:||$1,356|
|Total payments over 7 years:||$93,089||Total payments over 7 years:||$113,934||-$20,845|
|Investment of down payment and closing costs:||$36,087||Home appreciation after sales and closing costs:||$87,527||$51,440|
|Net savings of ownership over 7 years:||$30,595|
The financial benefit of owning ends up being substantial -- $30,595 over seven years! What about the short-term impact on your budget? Your total monthly payment on the home in the first year would be $326 more than your monthly rent.
The example above supports the theory that buying is better, financially speaking, than renting. But keep in mind that not every housing market is the same. It is possible to have a situation where home prices are particularly high and rents are unusually low - a market where buying might not be the best choice. To be sure you're making the right choice, run the numbers yourself.
The Decision to Rent or Buy Has to Be Personal
When you first start thinking about buying a home, there are three things about yourself you need to consider:
- Income -- You'll need income high enough to cover your monthly mortgage payments, with plenty left over for other bills and living expenses.
- Savings -- Unless you qualify for a special housing program that grants exceptions, you'll typically need to have enough saved to cover a down payment of at least 5 percent of the purchase price.
- Credit Rating -- If you have bad credit, most mortgage lenders won't touch you, and those that do will charge high interest rates. The better your credit rating, the better your loan terms.
Use an online calculator to compare what the actual costs of buying and renting would be for you. Be prepared to plug in:
- Your monthly rent.
- Anticipated rent increases.
- Purchase price of the home.
- Anticipated down payment.
- Estimated mortgage interest rate.
- Number of years you expect to own the home.
- Expected annual appreciation.
- Your income tax bracket.
- Savings rate.
- Other factors, such as closing costs and property taxes.
The financial benefits of owning a home will differ depending on a number of factors. If you're in a low tax bracket, your tax savings won't be as great as if you're in a high tax bracket. If you're a savvy investor who can expect to earn 10 percent or more a year in the stock market, you should take that into account, because the money you're not pouring into a home could be invested. Another important consideration is the amount of time you expect to own the home. The longer you remain in a home that you own, the greater the potential financial benefits.
The best way to choose between renting and buying is just to plug in your numbers and decide if you can afford to make the extra monthly payments without dramatically changing your lifestyle or getting yourself into a financial bind. If you're confident you can swing it, then homeownership is usually worthwhile.
Besides the tax savings and equity, your dog can live with you and you can paint your walls any color you like.