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By Pam Leibfried
When you or your adult children are trying to decide whether to continue renting or to buy a home, it’s important to carefully weigh the costs and benefits of each option to make a smart, informed decision.
Many factors go into calculating the value of renting vs. buying a home – it’s not just a simple comparison of the cost of rent and the cost of a mortgage payment. There are less obvious costs, plus some intangible benefits and drawbacks of each option to consider.
You already know what you pay for rent, so calculating that part of the cost equation should be a breeze. Estimating your mortgage costs, however, will require some research to get several pieces of information:
Once you have an idea of how much your potential home might cost, you can subtract any down payment savings from that total to find out how much you need to borrow to buy a house. Then you can calculate the cost of a mortgage loan on the remaining amount to come up with an estimate of your monthly mortgage payments. (Or, find a mortgage loan calculator to help you with the math.)
If you rent, the only money you can expect to receive when you move out is your security deposit – and you’ll only get that back if you didn’t damage your apartment. When you buy a home, on the other hand, there is the potential to build equity so you can pocket a profit when you ultimately sell the house.
Of course, there is no guarantee the value of your home will increase while you live there, but historically, home equity has been a key way to build a family’s net worth. If your calculation of costs for renting and buying are similar and you plan on staying in the house long enough to build equity, buying may be the way to go.
When calculating the cost of homeownership, don’t forget to budget for ongoing maintenance. You’ll pay for annual furnace and air conditioner tune-ups and costs incurred less frequently, like appliance repairs, deck resealing or plumbing issues. And then there are the costlier – though thankfully not frequently incurred – expenses like replacing your furnace, windows or roof.
The age of a home and how long you plan to stay factor hugely into how much you should budget for this type of expense. If you buy a new home, or even an older home with a new roof, furnace and windows, it’s not likely you’ll need to replace those items if you only live there for 8-10 years.
Insurance costs are lower for renter’s insurance because only the personal belongings of the policyholder are insured, while the building itself is insured by the landlord. Homeowner’s insurance, on the other hand, covers personal belongings and the building, so it costs more. Premium rates for both types of insurance vary depending on where you live, so a bit of research is necessary to accurately calculate the costs you’ll face as a renter or homeowner in your locality.
When buying a condo, you’ll likely have monthly association fees to calculate into your total cost of homeownership as well.
And of course, if you own property, you’ll pay property taxes, but there are also tax benefits from homeownership. You may be able to claim deductions for mortgage interest and property taxes. Depending on your income tax bracket and the property tax rates where you live, those benefits can be significant and can decisively tip the dollar-cost scales in favor of homeownership.
If you think you may move in the next couple of years, renting might be the better choice. This is because of the expenses you pay when closing real estate transactions – home inspections, title transfer fees, private mortgage insurance, points, etc. The average closing cost for buyers is around $3,700, but some lenders have lower, fixed origination fees so that could lessen your costs considerably.
At a closing cost of $3,700, even if your rent/buy cost analysis shows you’d save $100 per month by buying, you’d need to stay in the home for 37 months to recoup the closing costs and realize any savings. The exact timeframe for when you’d break even on your closing costs varies depending on rental and home prices where you live, but real estate experts often suggest five years as a ballpark estimate.
In addition to calculations of the monetary costs, there are also more subjective lifestyle factors to consider when making the decision to rent or buy. They can’t be quantified like the cost-to-own vs. rent dollar amounts, but they are just as important in terms of ensuring that you are able to enjoy life to the fullest.
On top of costs related to home maintenance, you also take on added responsibilities when you buy a home. If the furnace breaks down or a tree falls on your roof, you can’t just call the landlord; you are responsible for repairing the problem or getting someone else to do so.
The fact that you are responsible for repairs can be a benefit too, as it means that you will not be at the mercy of an unresponsive landlord or building superintendent. As anyone who has experienced a bad landlord can attest, being forced to wait for someone else to make time to fix your problem can be very frustrating.
Buying is also a great option if you’re a DIY fan who enjoys puttering around on the weekends doing home maintenance and remodeling projects. Likewise, if you have a green thumb and have always wanted roses, lilacs or a vegetable garden like your grandma had, you’ll likely be happier if you buy; after all, it’s hard to find apartments with garden space.
If you have a case of wanderlust and hate staying in one place for too long, renting may be a better option so you have more flexibility and are free to pick up and go the next time your lease is up. But if you’re a homebody who values stability and would like nothing more than to settle down, buying a home of your own might be the right decision for you.
Pam Leibfried is a marketing content specialist whose love of words led to a writing and editing career. After a brief stint teaching English, she transitioned to corporate communications and spent 20 years at The Nielsen Company before joining Alliant’s content development team. Early in her work life, Pam’s friend Matt explained the benefits of a 401(k) and her dad encouraged her to start a Roth IRA. Their good counsel prompted her to prioritize retirement savings, which just might enable her to retire early so she can read more and live out the slogan on her fave T-shirt: “I have a retirement plan: I plan on quilting.”