The Rent vs. Buy Debate Revisited
According to the American Tenants Association, over 100 million people rent homes and apartments in the United States. They rent for a variety of reasons. Some don’t want to spend time and money taking care of a house, others don’t plan to stay in their current locations for very long. Still others simply don’t want to buy into a market that has dropped so dramatically in the last few years.
The current economic crisis and housing bust have reignited the debate over whether people are better off renting or buying a home. Just a few years ago, the general consensus was: “Why rent when you can buy?” Today, that mindset has flipped, and people are instead asking “Why buy when you can rent?”
A sharp drop in home values, combined with tougher mortgage qualification requirements have steered many people away from home ownership. But, according to a recent article in the Wall Street Journal, this is a great time to buy – if you live in the right place.
Our collective mindset around buying verses renting tends to be backwards. We shy away from home ownership when prices drop, because we don’t want to put our money into something that’s losing value. On the surface, that makes sense. But, in truth, there’s no better time to buy than when the market is low. It will rebound eventually, which means there’s potential for a significant return on your investment.
When weighing the benefits of renting verses buying, there are several factors to consider:
1) Monthly rent. If you rent an apartment or house, how much will you be paying every month? Add up the rent, utilities, and any other costs associated with renting (like Association Dues – if you have them.) To make things simple, use a free online budget planner to add up all your expenses.
2) Mortgage payment. For this one, you’ll probably need some help. Talk to a mortgage banker – or check your options for free online. It’s also helpful to ask for a Good Faith Estimate – a document outlining the type of mortgage you qualify for, the interest rate, and estimated monthly payment. A Good Faith Estimate can be confusing. There are a lot of numbers, and unfamiliar names that don’t make sense. Ask the mortgage banker to talk you through it.
3) Taxes. With home ownership come taxes. This, again, is something a mortgage banker can help calculate. Often, taxes are rolled into mortgage payments, and listed on the Good Faith Estimate, but ask for verification.
4) Price changes. This one is tricky, because it’s hard to predict. Ask a Realtor how much he expects home prices to change in the next few years. This is an important factor to consider, because if rental prices are expected to rise more quickly than home values, buying makes better financial sense.
5) Length of stay. How long do you plan to be in your current location? A longer stay makes home ownership a better option.
There’s a lot of information to sift through when weighing the benefits of renting versus buying. The New York Times, in an effort to simplify some of the number crunching, created a “Buy vs. Rent Calculator.” All you need is some basic information – monthly rent, home price, down payment, mortgage interest rate, and your property tax rate. Enter all that information, and the calculator creates a graph that tells you when and if buying is the best option. The graph also takes into consideration expected prices changes in both rental and home prices.
For example, let’s say your current monthly rent is $1,100, and you’d like to buy a home priced at $175,000. You plan to put 20 percent down, your mortgage rate would be 5.5 percent and your tax rate would be 1.35 percent. According to the New York Times calculator, buying is your best option if you plan to be in the house for at least seven years.
When all is said and done, only you know whether renting or buying is best for you. Lots of people will offer lots of advice, but none of them know your current situation as well as you do. The best advice anyone can give is to do the math. You’ll be best equipped to make a good decision once you have a solid understanding of the financial impact of both options.
For more tips and tools to help you decide if homeownership is right for you – including a free credit report and score, an estimate of how much home you can afford and personalized home loan recommendations – visit theimk.com.
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