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By Pam Leibfried
When you or your adult children are trying to decide whether to continue renting or pull the trigger to stop renting and start owning 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 house – 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 take into account.
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 your 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.
If you need help making the calculations and estimates related to this decision, there are online rent/buy calculators that can help you to weigh the costs of each option. One such rent vs. buy calculator is available in The Upshot section of the New York Times website.
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 that you can pocket a profit when you ultimately sell the house.
Of course, there is no guarantee that the value of your home will increase while you live there, as the millions whose home values declined steeply during the Great Recession can attest. But historically, home equity has been a key way to build a family’s net worth, so 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 lawn mower repair, new carpeting, appliance repairs or deck resealing. 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.
If you own property, you’ll pay property taxes, but there are also tax benefits from home ownership. 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 home ownership.1
If you think you may move to a different location in the next couple of years, you should probably rent instead of buy. This is because of the expenses you pay when closing real estate transactions – home inspections, title transfer fees, mortgage insurance, points, etc. The average closing cost for buyers is around $3,700. [But keep this in mind if you decide to buy: Alliant mortgages have low, fixed origination fees, so you may lessen these costs considerably with an Alliant mortgage.]
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/rent dollar amounts, but they are just as important in terms of ensuring that you are able to enjoy life to the fullest.
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.”