Better to Rent or Own?
The decision to own or rent a home is generally based on three elements: cost; investment; and personal preference. When the real estate market is strong and interest rates come down, it motivates many renters to become buyers.
Even the prospect of coming up with a substantial down payment may not deter many potential homebuyers. Currently, there are numerous loan programs offering “no money down” and reduced closing costs.
Most lenders now allow borrowers to spend about one-third of their income on housing—up from one-quarter in earlier decades. A general guideline for calculating housing affordability is that a family should plan to spend, at most, two-and-a-half times their annual gross income. Thus, a family with an income of $75,000 may be able to “afford” a house costing about $190,000.
On a cash flow basis, forgetting taxes, you can often rent for about half the cost of buying. Homeowners can deduct mortgage interest and property taxes, which represents considerable savings in regions where property taxes are high.
The following calculations may help you decide whether you should rent or own:
While the above method offers a rough comparison, you also need to determine all of the other non-financial advantages that home or condominium ownership provides. Pride of ownership may create security, and your home is the place where you and your family will continue to return year after year. Because of this, many feel that home ownership can be priceless.
- Write down the purchase price and financing terms for the house or condominium. Include the down payment, closing costs, and any points.
- Estimate your “gross monthly” costs as a homeowner, including utilities, maintenance, and repairs.
- Calculate your “net monthly” outlay. This is computed by taking into consideration any tax savings received by deducting mortgage interest and property taxes.
- Project what the proceeds would be after selling the property in five, ten, or twenty years.
- Calculate your total rent for the same period. What would your financial results be if you invested—at 10%—the money you would spend on a down payment, closing costs, and points, as well as the difference between your rent and the “net outlay” as a homeowner?
- And last, compare the two sets of figures.