Owning a home is a dream for many Americans. But as the housing market continues to move up and down, does it make more financial sense to rent a house or get a mortgage? Ultimately, the answer depends on multiple factors, including your finances, your long-term plans and the real estate market in the area you’re looking in. Ask yourself these questions as you make long-term housing decisions:
1. How long do you plan to stay?
Whether renting or buying a home is the best financial choice usually comes down to one thing: timing. Finding an affordable home (and later making a profit on it) depends heavily on how long you plan to keep the property.
Keep in mind that not every market is booming. In fact, two-thirds of U.S. homes still haven’t returned to their pre-recession values, and owners looking to cash out may have to wait until 2025 before securing a profit. Carrying debt is something of a risk, and a 12-month lease gives you the freedom to move and adjust your housing expenses based on your current needs and income level — two things a fixed mortgage can’t deliver. Do your homework and use a comparison calculator to help you understand the costs of buying and renting.
2. Do you know all the costs?
Comparing rental prices to mortgage payments is a good start, but it’s also important to consider the hidden costs associated with each. For renters, the “cost” is the lack of home equity and the inability to claim housing-related tax breaks. For example, suppose you’re a homeowner who lives in Denver and falls within the 28% income tax bracket. If your mortgage is $200,000 with a 4.5% interest rate, you qualify for $3,585 a year in tax deductions. That said, you’ll also deal with expenses that don’t impact a renter’s monthly budget, including:
Homeowner’s insurance: Protecting your home from damage comes at a price, and while insurance rates vary, the rule of thumb is to divide your home’s value by 1,000 and multiply the result by $3.50. If you home’s value is $200,000, for instance, you’d pay around $700 per year, or $58 per month, for coverage. Renter’s insurance, meanwhile, is usually less than $20 per month.
Private mortgage insurance (PMI): If you have less than 20% equity in your home, expect to pay PMI, which is usually between 0.50% and 1.2% of your loan value. For example, 1% assessed on your $200,000 mortgage would add $200 to your monthly housing expenses until you built up at least 20% equity in your home.
Property taxes: A typical household spends $2,127 each year on property taxes, but you could pay more or less depending on location and community benefits.
Maintenance: Homeowners shell out nearly $170 per month on average for regular maintenance and repairs, and that’s not including big-ticket items like a roof repair, a new HVAC system, and other needs that can cost four or five figures. In this scenario, owning that $200,000 home costs $7,267 a year in extra expenses — more than double what you’d save in taxes. Consider the hidden costs to learn whether those big tax breaks are worth it.
3. Are you “throwing money away?”
It’s often said that renting is “throwing money away,” but building home equity isn’t the only way to watch your money grow. There’s no denying that property can be a valuable asset, but on a month-to-month basis, owning a home is still more expensive in all 50 states, according to a 2017 NerdWallet analysis, and an inflated budget can seriously impact your ability to save for retirement.
According to the Economic Policy Institute (EPI), the average American has less than $5,000 in savings, and couples between age 50 and 55 only have about $125,000 earmarked for their golden years. That’s not nearly enough to fund a long and financially secure retirement, and lower monthly costs can help you divert funds into catch-up 401(k) and IRA contributions, liquid savings, and other investments.
So, is owning a home worth it? The answer depends on your current situation, whom you ask, what inputs are included in their model, and their general disposition toward investing—and the answer will almost always be “it depends.”
There are plenty of online tools available to help you assess whether your current financial circumstances would render a monthly mortgage payment lower than your monthly rent. But there are many more factors to consider before you make what will likely be the largest purchase in your lifetime.
Questions? Call us at 719-422-6618.