While choosing a home is an emotional decision for many, the decision of whether to buy or rent should be made with the bottom line in mind. Too many people automatically assume that buying is somehow superior to renting. This attitude is reinforced by everything from government homeowner subsidies to dating sites ("do you own or rent?"). The US Department of Housing and Urban Development (HUD) is emphatic:
The desire for home ownership is deeply rooted in the American psyche. Owning a home embodies the promise of individual autonomy and of material and spiritual well being that many people sought in coming to this country. In addition to its functional importance and economic value, home ownership has traditionally conveyed social status and political standing. It is even thought to promote thrift, stability, neighborliness, and other individual and civic virtues.
Of course, judging from the number of former homeowners, it doesn't appear that ill-considered home ownership confers "stability" or any other "civic virtue." But if the time, place and property are right, buying a home can create wealth and security. You just have to put your heart on hold and listen to your head.
The Real Cost of Real Estate
It's easy to get caught in the trap of thinking that a mortgage payment and a rent payment both cover the same things. But they don't, and just because you can handle a $1,000-a-month rental doesn't mean that you can cover a $1,000-a-month mortgage. When you buy a home, the mortgage may be only about 65% of the total cost of home ownership. Here's a sample rundown of monthly expenses on a $220,000 home with a $200,000, 5% mortgage in a state with low property taxes:
- Mortgage payment: $1,074
- Property tax at 1.25%: $229
- Property insurance: $50
- Mortgage insurance at $45 per $100,000: $90
- Maintenance and repair: $75
Your total expense each month is closer to $1,500 than $1,000, and that's not including increases in costs fo things like utilities and commuting.
Finding Your Bottom Line: The Rent Vs. Buy Calculator
HSH's rent Vs. buy calculator weighs the cost of renting for several years against the cost of buying (the calculator assumes the same monthly outgoing expenses for each option). The cost of renting includes the rent you are paying now (subtract out the costs of any utilities included in your rent), and incorporates anticipated rent increases over the years. The cost of buying includes the down payment, the interest that you could otherwise earn with it, mortgage interest, property taxes, maintenance (be sure to include insurance in the maintenance costs), plus the costs of selling the home. Ownership expense is offset by your tax deduction (applicable only if you file a Schedule A to itemize deductions), and expected property appreciation. If you anticipate getting a tax credit, the most conservative treatment is to just add the credit to the figure in the "effective gain of owning vs. renting" section at the bottom of the calculator.
When you play with the numbers, you'll notice that the attractiveness of renting or buying varies with the mortgage rate, and especially with the rate of expected appreciation on the property. Check out current mortgage rates and property appreciation rates in your area so that you are confident in your numbers and your estimates. If ownership looks like a bargain, you'll want to reach out to a real estate agent to locate homes in your price range, then contact mortgage lenders to see what kind of home loan you qualify for.
Get Help from Professionals
Do numbers make you dizzy? No problem, make an appointment with a HUD housing counselor. They are trained to help you determine if you should keep renting or take the plunge.
Buying a home doesn't make you a better, more attractive, or more responsible person. Managing your debts and saving money -- whether you make a mortgage or rental payment each month -- is the true test of responsibility.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.
