Do I Rent or Do I Buy?

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rentThere is uncertainty in the housing market and there is no doubt that obtaining a loan can be tedious and elusive to some.  There are pros and cons to renting a place just as there are pros and cons to owning a home. Renting has its advantages but so does home ownership and in 2013, with interest rates at an all-time low, ownership is much more economical.

Obviously, one of the most compelling arguments against renting is that the money you spend on rent each month is money not invested and there will be no return on the money spent. There’s no question that buying a house makes sense for some folks. Owning a home gives you stability. You are not at the mercy of a landlord and you definitely have more freedom.  You can paint the walls, add a patio, install new fixtures – the list goes on.

In some areas of the country, the cost of owning a home can be higher than renting by the time you add up taxes, interest, insurance, HOA and maintenance.  There was a time when you could sell your home for a much greater value than when it was purchased. There are pros and cons, however, there is a way to objectively choose between renting and owning.

Always check the price-to-rent ratio.  This number gives you a rough idea whether homes in your area are fairly priced. Find two similar houses or condominiums or apartments.  One should be for sale and one should be for rent. Divide the sale price of the one place by the annual rent for the other. The result is the price-to-rent ratio.

Another way to gauge the cost of housing is to compare it to your family’s income. From 1984 to 2000, median home prices were about 2.8 times the median yearly family income. (In other words, the typical house cost about three times what a family earned in a year.) During the early 1970s, home prices were about 2.3 times median family income. During the housing bubble, this ratio jumped to 4.2. These numbers does not mean much on their own, but they can give you some sort of idea of whether housing is overpriced in your area. Plus, it seems safe to assume based on past figures that most families can comfortably afford a home that costs about 2.5x their annual income.

With a 20% down payment, a 30-year fixed mortgage rate at 3.5% and at the 25% federal tax bracket, homeownership is cheaper than renting in all of the 100 largest metros by a wide margin. There is no market where the financial decision is even close, so long as you plan to stay in the home for at least seven years, get 3.5% mortgage, and itemize your tax deductions. However, how much cheaper it is to buy a home than to rent really depends mostly on where you live.

Costs aside, the decision to rent or buy a home is very personal. There’s a strong emotional component: some people want the security of homeownership and others want the footloose freedom of renting. But the financial factors are also very personal because the decision to rent or buy depends on whether or not you can qualify for the best rate available and how long you will stay in the home. Home ownership has always been a part of the “American Dream” and most likely always will be.

Source: Kolko, Jed. “Buying a Home Is 45% Cheaper Than Renting.” The Huffington Post.,  14 Sept. 2012. Web. 05 Mar. 2013. – “Is It Better to Rent or to Buy?” Business Money Is It Better to Rent or to Buy Comments. Web. 05 Mar. 2013.

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