Renting vs. Buying: Weighing Your Factors

Posted by Laine Smith on 8/19/15 2:38 PM

Topics: Economy

In 2014, U.S. renters collectively paid over $41 billion in rent, up nearly 5 percent from 2013, according to a Zillow report. While annual rent inflation hit its highest acceleration in six years in November 2014, the average monthly lease reached $1,124, the highest rent amount since Reis, Inc. started collecting real estate market data in 1980.

Renting_vs._Buying_-_Weighing_Your_Factors

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

So what's the better financial decision for U.S. consumers: renting a home or owning one?

Tax Deductions

Owning a home wins over renting when it comes to tax deductions. Homeowners save around $100 million every year by deducting mortgage interest on their tax returns, according to Realtor.com®. Homeowners can also deduct points or origination fees in the year they were paid, property taxes, and private mortgage insurance (if the home was purchased on or after January 1, 2007).

Price Appreciation

Median home prices increased in almost all U.S. metro areas in the second quarter of 2015. Due to low inventory levels, surmounting rental prices, low mortgage rates, and a stronger job market, median home prices have increased 8.2 percent from this time last year.

Price appreciation is a huge upside for homeowners when it comes time to sell or refinance. Homeowners who gain equity through home appreciation can tap into that equity through a refinance or home equity line of credit. Many homeowners use a cash-out refinance to pay down credit card debt or finance large expenditures, like college tuition, weddings, and large home improvements and renovations.

Due to rental vacancy data hitting its lowest percentage (6.8%) in 30 years, economists are expecting rent increases to get steeper throughout the remainder of 2015. Today's median rent requires 30.1% of a renter's income, compared to 25% historically. In comparison, 15.3% of income is needed to purchase a median home today, compared to 22% historically.

While a rent payment may be cheaper than a mortgage payment, escalating home prices push up rental prices over time. Homebuyers can lock in a mortgage payment and benefit from home price appreciation rather than suffer with rental prices that increase over time.

In 2014, homebuying was 38% cheaper than renting.

Cost Comparisons

A recent Wells Fargo survey showed that many U.S. consumers are misinformed about what it takes to get a mortgage. Thirty-six percent of survey respondents said they believe you need a 20% down payment to purchase a home. While a 20% down payment used to be the status quo, there are tons of programs that allow eligible borrowers to put down little to no money.

Some of these programs even allow down payment funds to come from a family member or a grant from a state or local government down payment assistance program.

While some renters are turned away from homeownership due to the recurring costs of maintenance, renovations, property taxes and homeowner's insurance, this 7-year buying versus renting comparison shows how a homebuyer comes out ahead.

Mortgage Interest Rates

While there are several personal factors, like credit score, down payment, and loan type that affect your mortgage interest rate, rates are still near historic lows. Low interest rates have made homeownership more affordable than ever.

The average interest rate in the 1980's was 12.7%, meaning a $200,000 home would result in a $2,166 principle and interest payment with a 30-year mortgage. Today's interest rate of 4.04% in that same $200,000 and 30-year fixed rate mortgage would result in a monthly principle and interest payment of only $959. Click here to see the cost of a mortgage over the last four decades.

Whether Your Buy or Rent

The decision to buy or rent weighs on multiple personal factors, as well as financial. Overall, take a look at what you are comfortable paying monthly, how long you plan to stay in a specified area, your personal preferences (in reference to home upkeep and maintenance), and the surrounding rent and home prices.

If you're on the fence about buying a home, contact one of our mortgage bankers to see what an affordable mortgage payment would look like for you.

For more information about what it takes to buy and finance a home purchase, download our Mortgage 101 Handbook, a great reference for first-time homebuyers.

Download: Mortgage 101 Handbook

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