Exciting news for those dreaming of buying a home! The Federal Housing Finance Agency (FHFA)…
Renting vs Buying Revisited
When you rent a home, you typically pay a monthly rent to your landlord. You’re not responsible for property taxes, homeowners’ insurance, maintenance, and repairs. When you own a home, you’re responsible for everything. This initially makes renting a less intimidating choice as well as seeming like the better financial choice.
Renting vs. Buying: The Basic Economics
There are a few things to consider before you make that assumption. First, while your monthly rent might be lower than your monthly mortgage payment, you’re not building any equity when you rent. When you make a mortgage payment, a portion of that payment goes toward paying down the principal on your loan, which means you’re building equity in your home.
While you might have to pay for maintenance and repairs on your own when you own a home, you could also build equity through home improvement projects. When you make improvements to your home, you increase its value, which means you can potentially sell it for more money in the future.
Calculating with Numbers for Example (Rent vs Buy Calculator)
Let’s say you’re considering renting a home for $1,500 per month or buying a home for $300,000 with a 30-year mortgage at a fixed interest rate of 4%. To make the comparison apples-to-apples, we’ll assume that the home you buy is similar to the one you’re considering renting in terms of size and location.
First, let’s look at the costs of renting. If you rent for 30 years, you’ll end up spending $540,000 in total (30 years x 12 months x $1,500 per month). You won’t have any equity built up, so that $540,000 is gone forever.
Now, let’s look at the costs of buying. If you take out a 30-year mortgage for $300,000 at 4%, your monthly payment (not including property taxes and insurance) will be $1,432.25. Over the course of 30 years, you’ll end up paying $515,610 in principal and interest. However, you’ll also build up equity in your home. Let’s assume that your home increases in value by 2% per year (which is a conservative estimate), and that you make $50,000 worth of improvements over the course of 30 years. At the end of 30 years, your home will be worth approximately $830,000, and you’ll have built up $580,000 in equity.
So, in this scenario, buying a home would be the better financial choice. While your monthly payments might be slightly higher than if you were renting, you’ll end up with a valuable asset at the end of 30 years.
BE MINDFUL that you’ll need to factor in property taxes, homeowners’ insurance, and maintenance and repair costs. You’ll also need to consider how long you plan to stay in your home (buying generally makes more financial sense if you plan to stay for at least five years). Ultimately, the decision to rent or buy a home is a personal one that depends on your unique financial situation, lifestyle, and goals. If you’re trying to save money, it’s important to do your research and consider all the factors involved.