Is it better to rent or buy your next home in today’s landscape of rising home prices and interest rates?
Several factors come into play when deciding if it’s better to rent or buy.
The length of time you plan to stay in the property, your credit score, your income.
Let’s take a look at some of the advantages and disadvantages of this age-old question.
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Advantages of buying
There are many benefits of homeownership. You get a home all to yourself; no need to worry about a landlord anymore. Upgrade and renovate the home as you choose. You can finally start taking a real pride in your new home. Here are some of the advantages of buying:
- You will eliminate monthly housing payments once it’s paid off.
- If the home appreciates more than you’ve paid in mortgage, interest, taxes, and maintenance over time, you earned a return.
- Interest paid is a tax deduction.
- The home value may increase over time.
- Build equity as time goes by is like a savings account.
- The pride factor
- You can make renovations to customize it to your style.
- Payments help to build credit.
- Good investment
Disadvantages of buying
- You’re responsible for all repairs.
- Requires a sizable downpayment
- More difficult to qualify for
- Property taxes, mortgage insurance, homeowners insurance
- HOA dues
- More difficult to relocate
- High up-front costs
Advantages of Renting
Renting makes much more sense for some people. Let’s say a single person living in a nice area where the home prices are too high to afford. Renting a one-bedroom apartment is the only logical choice for them.
But what about in cases where the rent and mortgage payments will be roughly the same? In this scenario, the decision isn’t so simple. Some of the advantages of renting are:
- Repairs are included
- Easy to relocate
- No HOA dues
- Low move-in costs
- The monthly payment is lower in some cases
Disadvantages of Renting
- You cannot make changes to the property.
- You earn no return on your payments.
- Monthly rates could increase.
- Renting does not improve your credit.
- Dated feel, landlords don’t make cosmetic upgrades while you’re in the home
Rent vs. Buy Calculator
Rent vs. Buy | Which is Cheaper?
Buying is cheaper than renting. And renting is cheaper than buying. It really all depends on how long you stay in the property and how you look at it.
Let’s look at an average home with a value of $200,000 that you plan on staying in for 3 years.
Renting – It’s suggested that landlords charge between 0.8% and 1.1% of a home’s value for rent each month. That’s between $1,600 and $2,200 each month. Let’s say the rent on this $200,000 home is a good deal at $1,500 each month. A $1,500 refundable security deposit is required. You pay the deposit, plus the first month’s rent of $1,600; the total out of pocket to move in is $3,000.
Purchasing – Buying the same $200,000 house using an FHA loan, you will need 3.5% ($7,000) for the down payment. Assuming the closing costs of 3% and an interest rate of 4.5%, the monthly mortgage payment comes to $1,461.
The total amount of rent you will pay over the three years is $54,000. Almost $6,000 cheaper over 36 months when compared to buying. Total mortgage payments plus down payment is $59,595.
Renting saved $277 over buying after 36 months
This means that the total out of pocket costs over 3 years are less with renting than buying. Let’s say you’re ready to move. If you’re renting, you move out, no hassles, free to leave as fast as you want, no strings attached.
Owning the home makes the process of moving is more of a pain in, you know what. But, assuming an average appreciation rate of 2% per year, this once $200,000 home is now worth $212,000, and your loan balance is $194,277.00 give you $17,723 worth of equity.
Add on the 6% for realtor fees when the home sells, leaving you with $5,723.00 from the sale of the home. So while you paid less by renting over buying, you would have ultimately brake even.
At 4 years, the reserve is true; you save thousands of dollars by buying vs. renting after 4 years. This savings increases substantially every year after that as well.
Save money by Renting if you stay 3 years or less.
The above example shows that the typical break-even point is 3 years. If you are going to stay in a home for less than three years, it’s cheaper to rent. If you will be staying for 4 years or longer, then buying is cheaper than renting.
This is the typical break-even point for renting vs. buying costs: Marie Bromberg, Realtor with The Corcoran Group. Says, most of the time, when you do the math on how much someone is paying in rent vs. buying, it usually makes more sense to buy if you estimate you’ll be there for a few years.
That said, I do know some renters have an amazing deal from their landlord and are perhaps paying sub-market rental rates. In these situations, they’re loathed to give up the “great rent” and begin paying what is sometimes a larger monthly mortgage. Even in a case like this where your payment is less than it would be for a mortgage, buying is still more advantageous if you plan on staying in the property for more than 3 or 4 years.
First-Time Home Buyers
As a first-time buyer, the idea of buying a home and getting a mortgage seems intimidating. However, the process is not always as difficult as you may think. First-time buyers may qualify for a mortgage because of their low credit score and down payment guidelines.
Bromberg says that homeowners build equity; this means the property is theirs, and they can borrow against it if need be. You cannot do that for rent. Homeowners enjoy stability. They know what their monthly mortgage is every month for the next 30 years.
Renters have to rely on their landlords’ good graces to continue to get sub-prime rents, and every year they have to wonder this.
Mortgage Banker Brandon Hendrick says buyers who are on the fence about taking on a mortgage should remember there are other reasons to buy a home other than the chance it will appreciate.
Homeowners can have the pride of homeownership and renovate and increase the value of the home overall. Plus, you’re able to write off the interest and real estate taxes. Homebuyers could have lower monthly mortgage payments or pay the same amount as rent.
Several programs require five percent or less down and veteran’s loans, which require no down payment.
Get a home-equity loan after you have built up equity.
Rent to Own Homes
A Rent to own home is where a seller agrees to sell you a home for a certain price. You will pay rent each month, and a portion of it goes towards your down payment when you buy the house.
You will need to pay an up-front option fee in a rent to own contract. These can be a good option for home buyers that can’t get approved for a mortgage. Read all about the advantages and disadvantages of lease to own homes.
Buying with bad credit
It can be difficult to qualify for a mortgage loan if you have low credit scores. Steve Surkis, Senior Mortgage Banker, states that it does hold true that the higher your credit score is, the lower your contract mortgage rate will be. However, homebuyers need to know that there are programs that will allow buyers to qualify for a mortgage with FICO scores starting at 580.
Compensating factors such as a proven rental history, no late payments being reported on your credit report within the past 12 months, surplus savings, and a down payment greater than the minimum may be required.
An FHA loan is a Government-backed loan program that makes it easier for borrowers with low credit scores to qualify for a mortgage. A consumer may qualify for an FHA loan with a credit score of 500-579 and a 10% down payment. However, it isn’t easy to close on a mortgage with a credit score in this range.
FHA offers a low 3.5% down payment mortgage to borrowers with a 580 credit score or higher. A credit score in this range is more likely to be approved than someone with a score below 580.
Renting with bad credit
It can also be quite difficult to find places to rent if you have less than perfect credit. While most rental companies or apartment complexes check a potential tenant credit report, individual landlords tend not to check credit nearly as much. According to a study by the credit reporting agency, TransUnion.
Only 43% of landlords who participated in the survey said they run credit checks on tenants. While finding individual landlords that don’t check credit is difficult, you can find them with a little research. You might want to check out this article on 8 things people with bad credit can do to approve a rental property.
Improve your credit score
Become an authorized user
A relative or close friend can add you as an authorized user on their credit card account. You don’t need to possess a credit card either physically, so there’s limited risk for the account holder. As an authorized user, the account appears on your credit report.
FICO factors authorized users into their credit scoring model. It’s an effective way to increase your credit score quickly to improve your odds of qualifying to buy or rent.
Pay the balances on your credit card accounts
Credit utilization ratios are the current balance of your credit account compared to the card limit. The lower your balance, the higher your score will be. Lower your utilization ratio under 15% to ensure your credit score is as high as possible. Here you can read more tips to increase your credit scores fast.
The numbers and experts tend to agree that buying a home has more advantages than renting does.
Renting is great for people who move around a lot, so don’t expect to stay in a property or location for too long.
Renting is cheaper than buying, only if you plan to stay in a home for 3 years, or less.
If you don’t plan on moving for at least 4 or 5 years, then buying has many advantages over renting.