Renting vs. Buying
June 1, 2022
June is National Homeownership Month, which is an ideal time to examine the pros and cons of buying and renting. Are you considering purchasing your first home? As with most things, there is not a one-size-fits-all approach to the decision, and certain elements of homeownership are more appealing to some than others.
Homeownership is typically viewed as an investment because it enables buyers to build equity and for the home to potentially increase in value over time. A fixed-rate mortgage can be a positive, as it allows the borrower to have a consistent payment each month over the course of the loan. This is not the case for renters, as rent is subject to increase based on the market. Other advantages of homeownership include the ability to customize, pride of ownership, and the opportunity to put down roots in a community, to mention a few.
While homeownership has many advantages, there are also costs associated with the investment. Maintenance costs deter some individuals from purchasing a home, as it can be inconvenient to arrange and finance repairs. Other potential disadvantages include the risk of decreasing property value and the cost of property taxes.
Renting can be an attractive option for those who do not intend to stay in one place for an extended time, as it is relatively easier to move out of a rented space than one that is owned. Renting is generally equated with fewer repair costs as well, with the bulk of large maintenance costs falling to the landlord. Additionally, renting is viewed as less risky and does not require the payment of property taxes.
However, rent is an example of a sunk cost, which means there is no potential for the payment to be recovered in the future. In contrast, homeowners can build equity as they pay down their mortgage and the property increases in value. Another disadvantage of renting is that the cost of rent typically follows the market, and it is subject to increase at any time. A third negative is that renters have less freedom to customize their homes, as the landlords determine which changes can and cannot be made to the space.
One way to determine if buying or renting is ideal for your unique situation is to calculate the breakeven point. Use this calculator to plug in where you want to live, the home price, down payment cost, interest rate, and the loan term. Complete the breakeven calculation by providing the monthly rent in which you are comfortable paying. The calculator will then show an estimate of how long you will need to stay in your home for buying to be more cost-effective than renting.
Another determining factor for potential homebuyers is the cost of the down payment. If you are not sure what the down payment might be, utilize this down payment calculator to enter the down payment you are comfortable making, the interest rate, and the term of the loan. After inputting these amounts, you will see an estimated monthly payment and will be able to adjust the percentage of the down payment based on the price of the home.
As you are thinking about buying a home, it is important to be honest with yourself about how large of a monthly payment you can afford. Use this home affordability calculator to input your desired city or zip code, annual household income before taxes, down payment, monthly expenses aside from housing and food, and your credit score. After entering this information, a home price and monthly mortgage payment will appear, after which you can slide the bar to look at home prices and monthly payments that fall within ranges that are either affordable, stretching, or aggressive.
Deciding whether to buy or rent is a financially significant decision that requires a lot of reflection on what matters most to you and/or your family. The calculators referenced in this article will go a long way in helping you determine the financial implications of this decision and whether homeownership is a good fit at this particular point in time.