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Rent vs Buy Calculator

Rent vs Buy Calculator
Tim Lucas - Home.com
VP of Content, Home.com
 

What’s better for you? To buy a home or continue renting?

The answer is different for everyone. It depends on factors like how long you plan to stay in the home, rents and home prices in your area, and your income stability.

Well, we can’t tell you if you’ll be relocated, but we can run the numbers based on your assumptions and tell you if renting or buying pencils out better for you.

How to use this calculator

This rent vs buy calculator examines whether it will be more cost-effective to rent or buy a home over the coming years. It will tell you the tipping point at which buying becomes cheaper than renting, which can be helpful if you plan to be in the home or the area only a certain amount of time.

Simply input your rent payment along with proposed home buying costs such as the home price, taxes and insurance. If you don’t know some of the numbers, the calculator will estimate them for you.

You can even change assumptions, such as estimated home appreciation and rent increases. By dialing in your numbers, you can get a fairly solid sense of which will be cheaper for you long-term: renting or buying.

Rent vs buy: How do you decide?

If you can afford to buy a house, there’s not much room for debate between renting vs buying. It’s often best to buy because your house payments contribute to your equity, and equity is a crucial component to building wealth.

With each mortgage payment, you own a little more of a valuable financial asset. As a renter, your rent payments build your landlord’s financial asset. 

But there are practical benefits to renting, especially in the short term. Maybe you won’t be staying in the area very long. Or maybe you’re not sure you’re ready for the responsibility of maintaining a home. And the biggest question of all is: Can you really afford to buy a home?

Running the numbers on our rent vs buy calculator can help you with the math.

But there are other questions to consider as well.

Are you ready to put down roots?

Homebuying invests your money into real estate, but not just any real estate. You’re investing in your block, your neighborhood, your city, and your region. Buying in an area you’re not excited to live in could lead to homebuyer’s remorse and cause you to pull up stakes.

Yes, you could always sell the home and buy in another neighborhood. But pulling up roots too soon — within the first couple of years or so after closing — could undermine your investment. You may even lose money by selling too soon. It costs 8-10% of the home’s price to sell it, between agent commissions, closing costs, and local taxes. Not to mention all the money you put in upfront for closing costs on the loan.

Between the lender’s origination fee, appraisal and title search fees, attorney’s fees, and other closing costs, you’re looking at a few thousand dollars just to move into the home. You want to get your money’s worth out of living there rather than moving on when you’ve barely had time to settle in.

All that is to say, if you’re not ready to commit to your neighborhood, or even to your city or state, you should keep renting for now.  

How long do you plan to be in the home?

The house you buy this year may not be the house you’d buy next year. This is especially true if you’re thinking about changing careers or starting a family soon.

Life can change suddenly, but homeownership is a long-term investment. If there’s a good chance you’d sell within the first couple of years after buying, you’re probably better off renting until you find a place for the long haul. You usually need to be in a home for five to seven years for it to make sense financially.

Maybe you’re the type of person who likes the idea of moving around a lot — you want to try New York this year and San Francisco the next — renting is probably your best bet for now.

Eventually, you may want to buy a home for the wealth creation benefits, and the sense of groundedness it can provide. But if you’re not sure where you’d want to do that, rent until you find a place that feels like home.

Are you ready to be a homeowner?

As a renter, you can call your property manager when the toilet won’t flush or the AC has, inexplicably, started pumping out warm air.

As a homeowner, you can call, well, yourself.

This doesn’t mean only home repair gurus should buy homes. We all have different comfort levels when it comes to DIY projects, and that’s OK. When you can’t fix something, you can call (and be prepared to pay) someone who can.

And homeownership requires more than fixing broken stuff. You’ll also need to:

  • Pay property taxes: Your mortgage loan servicer will make this easy by breaking your annual property tax bill into monthly installments and adding them to your house payment. These taxes pay for things like your local schools and police, fire, and emergency services
  • Pay homeowners insurance: Your loan servicer will also collect your annual homeowners insurance premium and send it to your insurance provider. If a fire or bad storm destroyed or damaged your home, your insurance policy would fund your rebuilding project.
  • Pay homeowners association dues: Neighborhoods with communal spaces and that provide lawn care and other upkeep services charge these annual dues to homeowners 
  • Keep good records: You may be able to write off interest paid on your mortgage to save money on your income taxes, not to mention take advantage of manufacturer’s warranties if an appliance breaks down. But only if you take the time to keep track of your payments and paperwork to verify these expenses
  • Maintain the home: A leaky pipe today could be a rotting floor next month. Properly maintaining your home and its major systems can prevent costly repairs later

All this may seem overwhelming, but don’t let the responsibilities put you off. In reality, most homeowners take potential problems in stride, and the stresses of homeownership pale in comparison to the benefits.

Advantages can outweigh the drawbacks

In addition to tax savings and home appreciation, there’s nothing like knowing the home you live in is your own. You can renovate and decorate to make it truly feel like yours, and you develop a deep sense of being connected to your community.

Homeownership provides stability and constancy, on top of the financial benefits. And all of that is well worth the work you have to put into maintaining the home.

You can be preparing for homeownership before you’re ready to purchase a home by improving your credit score, paying down debt, saving for a down payment, and scoping out neighborhoods that have caught your eye.

It’s best to get preapproved with a mortgage lender before you start looking at house listings. But it never hurts to start a wish-list for what you want in a new home or to make note of houses in your area that appeal to you. That way, once you are ready to start looking at houses, you’ll have an idea of what you like.

Do you have an emergency fund for the home?

Eventually, every furnace will blow its last burst of hot air. Every refrigerator will spoil the salad greens and sandwich meat. Every roof will need to be torn off and replaced.

This means every homeowner who sticks around long enough will face a large repair bill. A new fridge may cost $1,500. A new HVAC system could run you $10,000 or more.

Covering these costs is much easier when you have an emergency fund standing by. Even if your emergency fund can’t absorb the entire bill, keeping some cash on hand means you can rely less on borrowing money in an emergency.

If you’re not sure how to set up an emergency fund, it’s easy: Just put $75 or $150 — whatever you can spare without hardship — into a savings account every month. Set up an automatic transfer and forget about it until you need it.

Experts recommend having three to six months’ worth of expenses in an emergency fund. But something is better than nothing, so save what you can until you have plenty of reserves for any repairs or issues that arise.

Rent vs buy: Which is cheaper?

On the surface, renting and buying come with similar price tags:

  • The cost of renting: The average rent in the U.S. recently topped $1,700 a month, according to Redfin.
  • The cost of buying: The current median home price is about $360,000. With a 5% down payment on a 30-year mortgage (and a good credit score) you’d pay about $1,800 a month, including taxes and homeowners insurance

But these numbers don’t tell the entire story.

Rents increase while fixed-rate loan payments don’t

Rent prices change with the market. A decade ago, for example, monthly rent averaged $845. In another 10 years, the average monthly rent payment could far exceed its current level of $1,700, especially if current trends continue.

Meanwhile, your 30-year mortgage interest rate won’t change – can’t change – throughout all three decades of your loan term, if you opt for a fixed-rate home loan. Taxes and insurance might increase, but not your mortgage payment itself.

As you can see from using the rent vs buy mortgage calculator, buying a home appears costly upfront but it becomes cheaper than renting over time.

If you buy a $300,000 home with 3% down, and we assume that the home will appreciate at 3% each year with a 5% rate of investment return, and that rents will increase at 4% per year, then in less than four years, buying a home will be cheaper than renting.

And while you might be thinking, “Sure, I could buy now but housing prices are high. Maybe the market will cool off,” consider this: if the market cools off, it will return to normal appreciation of 3-5% per year. Prices will most likely not go lower.

And mortgage rates could rise as well. In the meantime, you’re missing out on locking in a  low rate now. If you wait a few years to buy, you could pay significantly more because you may get a higher rate on a more expensive home.

That means a few things:

  1. You can stabilize your housing costs
  2. You can budget more effectively, since there’s no variability in your principal and interest payments
  3. You’re paying into your own equity, rather than ever-increasing rents that enrich your landlord

When we mention rent increases, it’s not to villainize landlords. They have costs to cover as well, including a mortgage if they financed the property, taxes, insurance, and maintenance and upkeep. They might also be paying a property management company to look after the building for them. And as their costs rise, so will your rent.

There’s not a lot you can do to keep your rent prices low, short of moving every time your rent goes up. Even then, there’s no guarantee you’ll find something suitable at a more affordable price.

Becoming a homeowner may cost less than you think, thanks to low down payment loan programs, gift fund allowances, and down payment and closing cost assistance. And as you make payments each month, your equity goes up while your mortgage balance goes down. When you’re renting, it’s likely that your costs are only going to go up.

Buying can lower taxes

When you file your annual income taxes, you can write off the mortgage interest you paid that year. Your mortgage interest deduction could approach $8,000 in the first year of the loan if you bought a $360,000 home. You may be able to write off your property taxes, too.

You can also find tax credits and rebates for buying a house in some areas. Ask your real estate agent whether your city has these programs, or check your city or county government website. And you could receive tax benefits for making energy-efficient home improvements or buying energy-efficient appliances.

Buying builds your own equity

As you make mortgage payments, and as the value of your home increases, you build equity. Equity is the part of your home’s value that you’ve paid off and own outright.

Later, you can borrow against your equity and spend the money however you wish. Home equity loans or home equity lines of credit (HELOCs) could help you consolidate high-interest debt, renovate your home, or invest in more real estate.

In short, home equity lets you save or invest money elsewhere in your budget. It’s a flexible tool for your financial future. When you rent, you’re helping build your landlord’s equity but not your own.

Benefits of homeownership

✓ Financial stability

✓ Consistent payments with a fixed-rate loan

✓ Build equity

✓ Wealth creation

✓ Pride of ownership

✓ Connection to the community

Costs of homeownership

Owning a home comes with steep upfront costs, including down payment and closing costs. But there are ways to make these manageable, including no and low down payment mortgage loans and closing cost assistance programs.

  • Down payment: This is the part of your home’s purchase price you pay out of pocket and upfront. You could skip the down payment if you’re eligible for a 0% down VA loan (available to members of the military community with full entitlement available) or a USDA loan. But most homebuyers pay at least 3% down, and the average down payment for a first-time homebuyer is 6%. On a $300,000 home, 3% equals $9,000.
  • Closing costs: Closing costs range from about 2% to 5% of your loan amount, and they pay for a variety of services and legal fees required to make your home purchase official. If you bought a $300,000 home with 3% down and your closing costs were 3% of your loan amount, they would total $8,720.

Now, coming up with more than $17,000 upfront is no small task. However, homebuyers who need help paying these big, upfront costs can often find local assistance programs. For most homeowners, this upfront investment pays off as the years pass and their property becomes more valuable.

But this is why it’s not usually a good idea to sell your home within a couple years after buying it: You might not have time for these large, upfront costs to pay off. You’d likely save money by paying a security deposit and rent during those years and then buying once you’re ready to put down roots.

Ongoing costs of owning a home

Once you’ve finalized your mortgage and become a homeowner, you’ll need to pay the ongoing costs of owning a home. Of course, there are ongoing mortgage payments which are comparable to rent payments.

But there are other costs to consider, such as:

  • Lawn care: An out-of-control yard invites insects and rodents, but it can also erode your property value. As a homebuyer, you’ll either need to become an amateur landscaper or hire a professional one
  • Maintenance: Even the best-built homes need someone to care for them. You can probably change the air filter in the HVAC system, but can you patch a roof or unclog a sump pump? If not, you may need to once again pay a pro
  • Taxes: Property tax rates vary based on your county and state, but they average a couple hundred dollars a month, and the money funds your local public services. They’ll be included in your monthly mortgage payment
  • Homeowners insurance: Your lender will also collect your homeowners insurance premiums as part of your monthly payment. This policy helps protect your investment in case a fire, tornado, or some other peril strikes
  • Mortgage insurance: This is an extra fee lenders charge when you put down less than 20% down on a conventional loan. Private mortgage insurance (PMI) costs about 0.5% to 1.5% of your loan amount each year, and the PMI requirement falls off automatically when you have 22% home equity. Government-backed loans (except for VA loans) include their own versions of upfront and annual mortgage insurance
  • HOA dues: Homeowners association dues are kind of like neighborhood-level taxes, but not all homes have HOAs. If you’re buying a condo or in a planned development, you’ll likely pay into an HOA for costs such as lawn care, snow shoveling, and upkeep of common spaces. The HOA may also restrict the types of modifications you can make to your home and property 
  • Home warranties: These optional policies can be purchased to help cover the costs of major appliances breaking down and other certain repairs not covered by your homeowners insurance

And, of course, you have to expect the unexpected.  That’s why an emergency fund is so important. When a tree branch falls on the roof of your garage or an animal makes a nest in your attic and causes damage, you’ll have the funds on hand to take care of those issues sooner rather than later — and that can be critical for avoiding even bigger and costlier repairs.

Pros and cons of renting vs buying a home

There’s good and bad in just about any housing option. Here are some pros and cons if you’re making a rent vs buy decision this year.

Pros and cons of renting

ProsCons
Short-term housing: Renting works well for people who move a lotNot an investment: Renting doesn’t build your home equity
You can call your landlord for help: You’re not responsible for repairsPrice instability: Rent could increase significantly year to year
Fewer financial responsibilities: Landlord pays property taxes and insuranceLack of control: Landlord must approve even minor renovations or modifications
 Instability: Landlord could sell and make you move

Pros and cons of owning a home

ProsCons
Building equity: Your house payment gets saved and invested as equityInitial costs: Large upfront investment required
Stability: Principal and interest due on loan won’t increase like rent, if you get a fixed-rate mortgageResponsibility: You’re on the hook for repairs
It’s your house: You can take pride in owning itMore responsibility: You pay for taxes and insurance
Control: Your home = your decisionsSlow exit: In some real estate markets, selling could take a while

Methodology

This rent vs buy calculator factors in costs associated with buying a home and renting. The home price, down payment, and mortgage rate are considered, as well as PMI costs. Additionally, taxes, insurance and HOA dues, if applicable are factored in. But those aren’t the only costs to buying a home. You need to pay closing costs upfront, then maintain and renovate the home, as well as pay agent fees when you sell. These factors are calculated into the entire homeownership cost.

But there are also savings associated with homebuying. You get a tax break, so the rent vs buy calculator estimates tax savings for things like mortgage interest and property taxes based on whether you file single or married. Plus, you benefit from home price appreciation, which is calculated as well.

On the rental expense side, the calculator factors in your current rent amount, plus lets you estimate your rental deposit, expected annual rent increase. Think your money is better spent in the stock market? You can also estimate growth of your investments assuming you don’t put that money into a down payment.

Definitions

Down payment: The difference between your home price and loan amount. For instance, if you are purchasing a $300,000 home and getting a $270,000 loan, your down payment would be $30,000. This would be a 10% down payment.

Mortgage rate: The rate at which you pay interest on the loan. For instance, a 4% mortgage rate means you pay $4,000 per year, per $100,000 borrowed. Interest is broken up into 12 monthly installments and paid along with principal. A special formula is used to keep your payment the same each month on a fixed-rate loan, even though your principal balance and interest paid are going down each month.

HOA fee: Some properties are within a homeowner’s association, or HOA. The HOA typically charges dues each month to each homeowner within the complex to maintain common areas and the building itself.

Closing costs: The fees that are required to close a loan. For instance, appraisal, title, escrow, processing, and underwriting fees are all closing costs. They are typically equal to 1-5% of the loan amount.

Seller closing costs: When you go to sell the home, you will incur costs. You will pay agents around 5-6% of the sale price in commissions to sell the home, as well as certain taxes and fees. Typically, around 7-10% of the home’s price goes toward these costs and fees.

Homeowners insurance: Lenders require you to maintain homeowners insurance, which pays for the home to be repaired or rebuilt in case of fire or another disaster. Most homes cost between $50-$100 per month to insure. Note that this insurance does not include flood or earthquake protection. Those policies can be as much or more than the standard homeowners insurance. If you need such policies, place the total insurance cost in this same box.

Marginal tax rate: The tax rate you plan to be in based on your income bracket.

Renovation costs: This could include renovations or expected repairs you expect to encounter over the time you own the home.

Renter’s insurance: Typically an inexpensive policy that insures personal property within the home or apartment that you rent.

Expected home value increase: The amount you expect home prices to rise, on average, each year for the next 30 years.

Expected rent increase: How much you expect your rent to go up, or rent in general over the next 30 years.

Further Reading

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