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Should I Buy or Rent a House or Condo?

Calculate Renting vs Buying a Home

Unsure if you should rent or buy a home? The decision is the biggest purchase in most people's lives & the financial decision has many components to it.

Comparing rent vs buying is more complicated than looking at payment priceas alone because you have to consider the opportunity cost of the investment, your job stability, if flexibility to move is important, along with many factors not reflect in the monthly mortgage payment price: closing cost, property taxes, potential returns on other investments, real estate appreciation, selling costs, etc.

Description Amount
Monthly Rent ($):
Monthly Rental Insurance ($):
Annual Inflation (APR %):
Home Price ($):
Down Payment ($):
Mortgage Term (years):
Annual interest rate (APR %):
Discount Points:
Mortgage Origination Fee (%):
Other Loan Costs ($):
Mortgage Insurance (PMI %):
Annual Homeowner's Insurance ($):
Monthly HOA Dues ($):
Monthly Maintenance ($):
Annual Property Tax ($):
State + Federal Income Tax Rate (%):
Rate of Return on Other Investments (%):
Annual Home Price Appreciation Rate (%):
Years Living at This Property:
Realtor Commission (%):
Total Rental Cost:
Total Purchase Cost:

Current Thirty Year Mortgage Rates Available Locally

The following table shows current 30-year mortgage rates in your local area. You can use the products menu to select loans of different durations.

Should You Rent or Buy?

Purchasing a home is often the single biggest financial commitment of most people's lives.

Such purchases are often financed over a 30-year term, which impacts many other aspects of life.

Top Reasons to Buy a Home

Stability

If you are fairly certain in the stability of your career and your family wants to settle down then buying a home can make a lot of sense.

Home buyers who used fixed-rate mortgages can lock in low interest rates for decades to come. If rates rise their interest rates stay the same along with their monthly mortgage payments. If rates fall then the homeowner can refinance to lock in the lower rate.

Personalize Your Home

Do you want to knock down a wall? Would you like to add on an extension? Are there other home renovations you would like to do which a landlord won't allow?

When you own a home you have more flexibility with making changes to the property. And if you make renovations which increase the value of the property then you will not only benefit from those changes while you live in the property you will also increase the value of the home & what you get paid when you go to sell the home.

Tax Advantages

Income Taxes

New homeowners can deduct the annual interest paid on up to $750,000 of home mortgage debt from their income when they file their state and federal income taxes.

The standard deduction is $12,000 for individuals or married people filing individually, $18,000 for head of household & $24,000 for married couples.

This would mean that at a 4.2% rate of interest on a 30-year home loan individuals who borrow $290,000 or more would save money by itemizing their deductions, while married couples filing jointly would save by itemizing on $580,000 or more. If interest rates rise then tax savings over the standard deduction would kick in at even lower borrowing amounts. State and local taxes are also deductible, up to a limit of $10,000 per year.

Capital Gains

Homes purchased with a mortgage and down payment of 20% gives the homebuyer 5 to 1 leverage on the purchase. So long as the home appreciates faster than the cost of the interest they are charged there is a good chance the homeowner will make money when compared against renting, particularly if they intend to live in the home for at least 5 to 7 years.

Longterm capital gains are typically taxed at a significantly lower rate than ordinary income. In some cases homeowners can generate up to $250,000 on the sales of their primary residence without incurring any taxes on the transaction.

Briefcase Full of Money.

Top Reasons to Rent

Instability

Is your job in an industry which is in flux? Or might your employer require you to move if you get a promotion? If so, then homeownership can be a risky proposition. If you pay on a 30-year loan for 15 years and suddenly get sick or lose your job you could have the home foreclosed on & lose all of your investment.

Similar sad events can happen with marriages. Around half of all marriages end in divorce. Divorce is expensive & stressful. The added cost of going through a divorce could make the family budget fall apart. And if things go south while the economy is also in a slump then you are likely to either sell at a loss or gain much less than you would have if you could have sold the home in a hot market.

All families should try to have at least 6 to 12 months budget saved for any emergency which make come up, yet very few families do.

Hidden Costs of Ownership

When calculating the cost of homeownership many people include PITI - principal, interest, property taxes, and homeowner's insurance. Owning a home also has other significant costs including property maintenance and in some cases association dues. Many people who rent do not realize how much some home repairs can cost, though homes come with many big ticket expenses:

  • Roofing: Roofs may need to be replaced roughly every 25 years. It is not uncommon for a new roof to cost $5,000 to $10,000 or more, depending on the materials used & the size of the home.
  • Septic Tank: Replacing a septic tank can cost around $5,000 with some high end jobs costing up to three times that much.

Problems with flooding, a home's foundations or an issue like termites can also be quite expensive.

Illiquid Investment

Investors who purchase a low-cost Vanguard index fund or a stable stock with high liquidity can quickly liquidate the position in a matter of seconds at a cost below $10. Investors who have a temporary cash shortage may also be able to borrow agaisnt some investment accounts & quickly repay it, or they could choose to sell only a small portion of their overall holdings to cover the funding needs, obligating themselves to only pay capital gains taxes on the portion of the position which was liquidated.

Homeowners who have most their wealth tied up in a house will have a much harder time leveraging their liquidity in crunch time, as home equity loan approval can take weeks. Those who decide to sell their house outright still have to figure out where to live while the house is being sold. If the market is down when they need money there is not an easy way to liquidate a portion of the position. Shifting from a renter to a landlord is a lot of hard work.

In down markets transactions are slow as credit standards tighten when demand cools and prices are falling. Transactions are also expensive as Realtors typically charge a 6% sales commission in addition to all the other costs associated with transfering ownership.

The Bottom Line

In some markets renting is a far better deal than buying, while in other markets buying is a far better deal than renting.

All real estate markets are local. A big employer coming to town can drive up prices. A big employer leaving town can drive down demand and prices.

In hot real estate markets home prices often appreciate faster than the associated rental prices change as people buy in the hope of capturing future appreciation.

The future is unknowable & past performance does not guarantee foward performance. A few ratios you can look at to see how your local market compares to other markets are:

  • median local home price vs median local rent
  • median local home price vs median local income

As this article discussed, you not only need to account for the market conditions, but you also have to consider your family plans, financial position, career options & life goals.