Renting vs. Buying: A 7-Year Comparison

Posted by Laine Smith on 3/24/16 10:17 AM

Topics: Purchasing A Home Saving Money First Time Home Buyer Property Taxes Renting Mortgage Insurance home buying Home Equity

To rent or to buy? That is the (important) question. And it should be – choosing to buy a home is most likely the biggest financial decision of your lifetime. Choosing between a home purchase and a rental is also a highly personal decision, but here’s what we know on the financial side.

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Images courtesy of Hywards at FreeDigitalPhotos.net

In 2014, homebuying was 38 percent cheaper on average than renting  with a 30-year fixed rate of 4.5 percent, according to the Trulia Rent Versus Buy study. Meanwhile, rental affordability affects renters in every state of the country, with cost-burdened households ranging anywhere from one-third to well over half of the rental population.

We also know that the average apartment rent increased faster in 2015 than any year since 2007, up 4.6%, according to a report by real-estate research company Reis Inc. The average apartment rent stood at $1,180 in January 2016.

Let’s take a look at how renting and buying stack up against each other using the following factors for methodology.

 

Buying

Renting

Initial Costs

Down payment and closing costs

Security deposit and broker’s fee (if applicable)

Recurring Costs

Mortgage payments, homeowners association (HOA) fees, maintenance and renovation costs, property taxes and homeowner’s insurance

Monthly rent and renter’s insurance

Net Proceeds

Amount of money received from the sale of your home, minus closing costs and the amount needed to pay the remaining mortgage principal

Return of rental security deposit

 

Using the above in mind, let’s do a cost comparison of renting versus buying for a span of 7 years. Consider the following scenarios:

Purchase – John purchases a home for $180,000 using a 30-year fixed-rate mortgage at a 4% interest rate. He put 5% down of the purchase price and was charged 3% of the price in closing costs. He pays an annual home insurance premium of $780, $2,200 on annual property taxes, and spends $1,200/year on home maintenance, repairs and renovation. When he decides to sell 7 years down the road, home values have appreciated at a 3% yearly rate and John pays 6 percent in realtor commissions for the sale of his home.

Rent – Jane decides to rent a home for $850/month. Her rent appreciates at the rate of 2% per year (a conservative appreciation rate; 2015 rental appreciation neared 5%). Her landlord requires a security deposit of $850 and that she carries renter’s insurance, which costs $120/year.

 

Buying

Renting 

Initial Costs

$14,400

$850

Recurring Costs

$107,436

$76,596

Net Proceeds

-$61, 518

-$850

Total Cost

$60,318

$76,596

 

As you can see, by adding the initial and recurring costs and subtracting the net proceeds of both the purchase and rent, John comes out over $16,000 ahead over the 7 year time-frame. Keep in mind, this comparison doesn’t include the tax benefits John would also receive as a homeowner, such as the deduction of mortgage interest and property taxes.

The buying versus renting comparison depends on multiple factors, including how long you plan to stay in the home, rent and housing prices, income, and personal preferences. If you are interested in knowing how buying versus renting compares in your personal situation, talk to one of our mortgage bankers.

For more information on the home buying and financing process, download our free Mortgage 101 Handbook, a great go-to for all things homebuying.

  Download: Mortgage 101 Handbook

 

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