The math seems pretty simple when deciding if you should keep renting or buy a home. If a monthly mortgage is less than the monthly rent check, then it’s time to buy.
But like all math, this equation gets complicated when you consider all of the other factors that can come into play.
Personal choice aside, the monthly housing bill is just the start of deciding if it’s time to buy a home or continue renting.
Buying Pays Off In 6 Years On Average
Since 2012 when it started tracking which option is cheaper, Trulia has found that it’s always better to buy than rent. It just takes time for the savings to add up.
After six years, buying a home is cheaper than renting, according to Trulia. But only under certain conditions. If you’re moving before six years for a new job, then buying will cost more. Renting is often cheaper if you have a roommate.
Monthly rent amounts usually rise over time, while a fixed-rate loan can keep a monthly mortgage the same for 30 years.
Before the coronavirus pandemic caused rent growth to flatten, national rents grew 1.4% in the year up to April 2020, according to data from Apartment List. That’s the lowest national growth rate it has seen in the past five years. Prior year-over-year growth rates in April ranged from 1.5% in 2019 to 3.1% in 2015.
In dollars, the national median rent in the United States was $1,078 for a one-bedroom unit at the end of 2019 and $1,343 for two-bedroom apartments, according to a report by Abodo.
The average monthly mortgage payment in the United States last year was $1,029, according to Lending Tree. That’s after making a sizable down payment, which averaged $22,561 for first-time homebuyers in early 2018, according to the Urban Institute.
A rent vs. buy calculator can give you some basic numbers on which is cheaper for you. To get the full picture, it can help to understand the many factors that go into that calculation and into the personal choice of what’s best for you.
Where You Buy Is Important
One of the first areas to fill out on a rent vs. buy calculator is your ZIP code. Renting and buying costs vary by where you live.
Renting is cheaper in high-priced cities such as San Jose and San Francisco if the rent is shared by roommates, according to Trulia’s data.
Buying is cheaper in most American cities, but only if you can afford the mortgage payment and other costs of home ownership.
For example, if you can’t afford the average monthly mortgage payment of $1,784 in Washington D.C. — the most expensive state to buy a home in 2019 — then splitting the average rent of $2,234 with a roommate in the nation’s capital can make living there affordable.
Or move to West Virginia and buy a home. The average monthly mortgage payment there is $690, the lowest in the country.
Many renters consider a down payment to be their biggest obstacle to buying a home. But it doesn’t have to be.
It used to be thought that a 20% down payment was required on a home purchase. For a $150,000 home, that’s $30,000 required upfront.
Putting that much down is a good idea if you can afford it. It lowers the monthly mortgage payment and doesn’t require buying private mortgage insurance, or PMI. Once ownership is attained, PMI can be dropped. It also saves buyers a lot of money in interest over the life of the loan.
Many loan assistance programs allow much lower down payments. Veterans can get home loans with no money down, and first-time homebuyers can put down as little as 3.5% with Federal Housing Administration loans.
In 2018, the median down payment amount in the U.S. was $15,490, which is 5.37% of the median price of $270,000, according to data from Lodestar Software Solutions.
How Much Savings Do You Have?
The usual way to make a down payment is to save for it. This can take years, and should include saving for other upfront costs of home ownership.
It can be worthwhile to create a savings fund that you automatically contribute to each month to pay upfront and continuing costs such as home maintenance.
A home purchase shouldn’t drain your savings entirely. If it would, then renting is best for now.
How Long Will You Stay?
After all of the money decisions are made — and we’ll get to more later — the biggest factor in if buying or renting is cheaper is how long you’ll stay in the home you’re buying.
People are more likely to move early in their careers, when renting will likely be cheaper than owning. Or you may grow out of a home within six years by having children.
Buying a home is 37% cheaper than renting for households that move every seven years and can afford to put 20% down, Trulia says. Sharing rent with a roommate, however, is 25% cheaper.
Staying in a home longer helps spread the upfront costs out over time. And there are other reasons why staying in a home longer can lower the cost over renting.
Home prices and rents often rise over time. That’s a given. But don't take this for guarantee... cough cough, The Great Recession.
Renters, however, have almost no control over how much their rent payments will increase. An annual lease could keep costs steady for a year, but then what? The rent will likely rise.
Homeowners have the predictability of a steady monthly payment. A fixed-rate mortgage will have the same payment forever, often 20 to 30 years.
Ownership Eventually Means No Payments
If you don’t move or refinance your mortgage into a longer term, eventually you’ll own your home on the original timeline set up with the mortgage. That means no more monthly payments.
Renters don’t have that option. Their rent payments will never stop as long as they’re renters.
That may not sound like a problem now, but it could be later in life when you’re income will probably drop.
Buying a home comes with all kinds of other costs that real estate agents and loan officers may not tell you about when you walk in their door.
Pipes and roofs leak, lawns need to be mowed, and many other problems can pop up at any time. All require money.
A good rule of thumb is to budget up to 4% of a home’s value in annual maintenance costs. For a $300,000 home, that’s $12,000 per year, or $1,000 each month.
Property taxes must be paid each year. A 2019 analysis of U.S. Census Bureau data found that the typical U.S. homeowner pays about $2,279 in property taxes annually.
Property tax rates vary by state and county, starting at a median of 0.18% in Louisiana to as high as 1.89% in New Jersey.
Closing costs are another expense that can vary by state. In general, they run from 2-5% of the loan amount, which equals $6,000 to $15,000 on a $300,000 home purchase.
P.S. A Personal Loan Can Help With Your Down Payment