The Math behind Renting vs. Buying

The debate between whether it is better to rent or buy has been happening since historic times. Many people argue that renting is better because, there are no out of pocket repair and maintenance costs. Others favor buying because, when a home is paid off, it belongs to the owner and the expense of housing is eliminated (with the exception of yearly property taxes).

 

In my opinion, renting and buying aren’t fundamentally good or bad. It is whatever is practical to the individual. I also think that many renters don’t consider buying a home an option, because of pre conceived notions that they just can’t buy; whether it be due too down payment costs, credit scores or other factors. One thing is for certain though, and that is, the first and often most important factor in deciding whether to rent or buy is often how much each will cost.

 

 

Breaking down the costs

 

  • If you rent a home: your monthly costs are generally fixed. A fixed, monthly rent rate may or may not include utilities such as electric, gas, and cable or internet (water is usually included in the rent price). Most leases require the first month’s rent, last month’s rent and a security deposit equal to one month’s rent in advance to move in.  Also, when renting you’re a tenant and your landlord is responsible for paying to fix any maintenance issues with the property.

 

  • If you buy a home (not cash purchase): most mortgage lenders will require a down payment of between 5 percent and 20 percent of the home’s price. Some loans may have a lower threshold, but down payments below 20 percent will mean paying for private mortgage insurance, or PMI, which is an additional monthly expense. So your expenses will include: monthly mortgage payment, utilities, cable and/or internet, yearly property taxes, yearly homeowners insurance, yearly flood insurance (if property is located in a flood zone), monthly home owners association fees (if property has a HOA) and all maintenance and repairs are the responsibility of the home owner.

 

 

Renting vs. Buying: Crunching the Numbers

 

The costs of renting or buying are varied, making it hard to tell which makes better financial sense. To see whether renting or buying is the best option for you, you’ll need to crunch some numbers to see what works best for you. Use the Freddie Mac Home Calculator below to evaluate the costs associated with renting and buying.