Rent Or Buy How To Compare

Dated: 02/07/2017

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This Is How You Compare Renting vs Buying A Home

Don’t be hasty when you make a decision be sure to know your numbers.

Often we are approached about whether renting or buying is home is the route to go.  The answer is based on your personal needs, but logic and math have their place when making the comparison in this equation.

This is a very personal decision so don’t let others needs influence yours.  Of course talk to people but don’t do something just because the Jones’ are.  Make the decision that best put you in a position to succeed. 

You should know that the math never lies and should be relied on heavily when making one of the biggest decisions of your life.  Here are a couple of ways to determine what is the best route for YOU.

But you should also know how rent vs. buy calculations work so you can feel confident in deciding what’s right for your budget and your family. Here are two easy ways to do this.

Use a rent vs. buy calculator to do comparisons specific to you.

Checking the math

First, you need to understand the math and how it affects you personally. You need to calculate the costs of homeownership, subtracting benefits (mortgage interest, property taxes), then comparing the figures to the cost of renting a similar property (same neighborhood, size, etc.)

You also need to know your credit score.  This means you need a copy of your credit report.  You can get a copy by calling a lender.  Your credit score is the single biggest determiner on whether or not you can buy a house.  For conversation sake, let’s assume your credit score is 750, and a $275,000 house with 10% (that’s $27,500) for a 30-year mortgage.  Current rates are around 4.50%

In this scenario, a mortgage calculator quickly tallies your total monthly housing costs as follows:

Mortgage payment of principal and interest

$1,266.71

Property taxes

$286.46

Private mortgage insurance (PMI)

$104.17

Homeowners insurance

$83.33

TOTAL monthly housing cost with PMI

$1,740.67

 

Now it’s time to calculate your tax benefit. Once you own a home, you get to deduct mortgage interest and property taxes. When you own a home, you are able to take advantage of deductions like property taxes and mortgage interest.

To figure out your mortgage interest, you multiply your $250,000 loan amount by your 4.50 percent rate to get $11,250. Then you calculate annual property tax, you multiply your $300,000 home price by a national average of 1.25 percent property tax to get $3,300.

The sum of $11,250 in mortgage interest and $3,300 in property tax is $15,550 in deduction expenses. You are likely in the 28th percentile tax bracket to qualify for $275,000 house.   To figure out how much income you need in order to qualify for a $275,000 home  Based on the income needed to qualify for a $275,000 home, your tax bracket is likely around 28 percent.

To get a quick estimate of annual tax savings, we multiply $15,550 by 28 percent to get $4,074.

Next, we divide $4,074 by 12 months to get a monthly estimated tax savings of $339.

Then we subtract $339 from your total monthly housing cost of $1,740 to get estimated after-tax cost of $1,401.

Finally, you compare this estimated after-tax housing cost of $1,401 to market rent for a comparable home in the same city. Be sure to compare properties of the same size, quality, and location to ensure your analysis is accurate.

When does owning become more advantageous than renting?

The second item you must wrap your head around is when does it become cheaper financially than renting.  When does buying become less expensive than renting aka breaking even? 

Some brainy guys at Zillow made looked at all the benefits, costs to buy a home, as well as the cost to rent and figured out that you break even the horizon in Utah is about 1 to 2 years.  Breakeven horizon is the year when buying costs become less than or equal to renting costs when the accounting of all of the factors noted above.

 

The second thing you need to understand is how long it takes for buying to become more financially cheaper than renting. In the U.S. the Breakeven Horizon was one year and eight months as of 2016.  With rising rents, low interest rates, and home values increase this will continue to remain true or even shorten. 

When deciding if renting or buying is for you always consider the true costs of both. 


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