Although the U.S. Federal Reserve has just indicated that it may step up the pace of interest rate increases, there has yet to be any indication that changes in mortgage availability might change how people decide whether to buy or rent homes.
Choosing whether or not to buy a home is a serious decision. It’s a substantial financial investment. The median home value in the country is around $215,600, and that number is expected to rise by about 6.5 percent over the next year.
But the median rental rate is also substantial, coming it at around $1,650 per month. This means that remaining a renter can also be costly.
Where It’s Cheaper to Buy
However, there are still several cities where it’s cheaper to purchase a home than rent — and in some cases, the savings are so profound, it might even be worth relocating.
One example, according to MarketWatch, is Pittsburg: The average rent is over $1,200 per month, but your monthly mortgage payment would come in less than that due to the overall price averaging less than $150,000.
Another great city for homebuyers: Tampa, Florida, where renting costs at least 80 percent more than buying in most locations.
Believe it or not, even Orlando, Florida is a better place to buy than to rent; it costs twice as much to rent than to purchase a home.
Still, other cities where it’s cheaper to buy: Boston, Detroit, Miami, Philadelphia, Cleveland, Kansas City, Cincinnati, and Houston.
Other Costs for Buyers
However, the decision on whether to buy or rent shouldn’t just concern the property’s sale or rental price, as there are other expenses that come with buying a home.
Usually, you’ll need to pay for an appraisal, which normally runs between $300 and $500. On top of that, you’ll need a home inspection, which typically costs a similar amount.
Homeowners are also responsible for property taxes. Since property taxes are paid upfront in six-month increments, you may need to reimburse the seller for taxes between the date of closing and the next tax period.
Additionally, you might have to pay for a year’s worth of homeowner’s insurance in advance, depending on your lender or insurance carrier.
Closing costs are another expense. Typically, they amount to 2 to 5 percent of the purchase price.
Mortgage Principal and Interest
The biggest ongoing expense of buying a house is the mortgage payment. If you use a loan to finance your purchase, you’ll be paying that debt down over the course of 15 to 30 years, unless you work to pay it off faster. This means you are also paying interest, which is based on your creditworthiness.
Private Mortgage Insurance (PMI)
If you aren’t putting 20 percent down, then PMI is an additional expense you’ll be shouldering. This protects the lender should you fail to make your payments, requiring them to foreclose on a property that is upside down. It’s a monthly expense, tacked onto your mortgage.
Often, your lender will also open an escrow account associated with your loan. Typically, this collects additional funds for property taxes and homeowner’s insurance payments. The amount needed to fund the account is attached to your mortgage payment, ensuring you don’t miss a payment or drop your policy.
If you live in an area with a homeowner’s association (HOA), there’s usually a monthly or annual fee that you’ll need to cover.
HOA fees can vary dramatically, as they only apply to a single community. In some cases, the fee may be $20 a month. However, homes on golf courses, in resort-style locations, or areas like New York City may have monthly HOA fees over $500.
You also need to factor in utility costs, especially if you are looking at purchasing a larger home. As a homeowner, you are directly responsible for electricity, water, sewer, garbage, and natural gas, depending on which are on your property. The only exception is with some HOAs, where the association may handle some or all utility costs.
Beyond your mortgage payments, you also have to plan for home maintenance. Unlike in a rental situation, if something breaks in a house you bought, you’re probably on the hook for any repair costs.
Repairs and Upgrades
Plus, you’ll need to plan for significant repairs or upgrades, like replacing the roof when necessary or updating your attic insulation.
Most experts recommend setting aside at least 1 percent of your home’s value each year for repairs and maintenance. However, aiming for 3 percent is wiser, especially if you know a large expense (like the roof repair above) is on the horizon.
In most cases, the cost of renting a home is substantially easier to calculate. Generally, you’ll be responsible for a monthly rent payment and renter’s insurance.
Often, the rent amount is over what you’d pay for a mortgage on a similarly sized property — but that’s because you aren’t directly responsible for a variety of other expenses (at least not directly), which are broken out above.
Landlords generally pad the rent to make sure that they can manage repair costs and make a profit. In some cases, utility costs are also part of the rent amount if they included.
Do the Math
If you want to figure out if it makes more sense to rent than buy, you’ll need to do some math. Begin by reviewing all of the expenses associated with purchasing a house in your desired budget.
Make sure you include the mortgage payment (including interest, PMI, and the escrow account), maintenance costs, utilities, and HOA fees. Also note any other costs that have to be paid upfront, like appraisal fees.
Next, find a similar rental property. Add the cost of rent, renter’s insurance, and utilities. Then, compare that number to the one associated with buying a home.
So Is It Cheaper to Rent Than Buy?
Ultimately, by making the comparison, you can determine whether it makes more sense to rent or buy in your current area at this specific time. In some cases, you’ll discover that homeownership may be cheaper. Adding to the cost benefits, you get to build equity, which is a nice bonus.
However, renting can be a better financial choice in some cities, so don’t assume that buying always wins out.
Also, market conditions can fluctuate: Even if buying is better today, that doesn’t mean it will be a year from now — for instance, it’s possible that the continued ascent of interest rates might eventually bring about a softening in home price inflation.
If you don’t intend to move forward quickly, you’ll need to look at the calculations again when you actually get ready to buy.
Readers, how have you grappled with the decision to rent or buy? Tell us about it in the comments below.
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