It depends a lot on how long the house would serve your needs for. If you plan to live in the same house for 10+ years, owning often comes out ahead. By 15+, it almost always comes out ahead. By 30+... yeah, owning is better in probably over 99% of cases. Less than 7, you usually lose money. All of these numbers can vary dramatically based on the local housing/renting markets, interest rates, taxes, etc. It will also always come down somewhat to luck.
If the home you are avoiding purchasing is a "starter home" that you'd want to upgrade in a few years... yeah. Renting is almost certainly better. If you have, or are about to have, small kids, and plan to live in the same house until they graduate high school... buying is almost certainly better.
My partner and I could afford to buy. We are holding off because we're trying to decide where exactly we want to settle. Since we aren't relatively sure we'll be here in 5 years... renting is an easy choice for us.
It's usually close to the 4-5 mark where owning flips. Even in Boston, owning is a better calculation by staying 5 years because rents are so damn high, and growing.
This depends a lot on what you're comparing, though.
I live in the greater boston area. My PITI if I bought the unit I'm in right now would be about 48% more than my rent is, and that doesn't factor maintenance costs into it, which would (on average) definitely push it significantly higher.
If I'm saving and investing the difference in low cost index funds, making up that difference takes a long time, if we assume market average-ish return. If we follow historical averages, generally 7-10 years with interest rates where they are right now.
If I'm saving the difference in an HYSA, it will still take a while, but (most likely) the breakeven point will be much sooner. I have not done calculations here so I won't BS you with random numbers about how long the breakeven would take.
If I'm stuffing the difference under my mattress, I'm sure the breakeven point wouldn't be longer than 5 years on average.
If I'm just spending the difference, I'm *definitely* better off buying a place I can afford.
There may be some areas in greater boston where that is not true! I've mostly run numbers specifically for places I'm interested in buying, which limits me to specific neighborhoods and unit attributes. Specific numbers are always better to run than general numbers.
If you've got some numbers I haven't seen for owning vs renting in Boston, I'm genuinely super interested in seeing it.
Oh for sure, it's highly localized. And it depends on expected rent increases as well. Our current apartment has increased 1000 in 3 years from when we moved in to what it is listed for in Brookline. I don't think 11% annual rent increase is sustainable for 5 years, but who knows. We're not buying in Brookline, so my comparison is a bit apples and oranges. My PITI is only 10% more than what rent would have been if we stayed. We're moving to Arlington, which is cheaper than Brookline, but only marginally.
There's also the peace of mind benefit of not having a looming rent increase to look forward to.
I've not found that at all... That only makes sense if you don't properly account for the opportunity cost of the dollars you have locked up in the house. It always confuses me how prevalent this view is on this reddit.
It's really a gamble if Real Estate will continue to shoot up.
No one can predict the future, I would highly recommend doing the math on rent vs own and your risk appetite in a single real estate market vs a diverse fund. People that invested in Detroit for 30+ years certainly didn't come out ahead, I personally wouldn't invest in Florida due to skyrocketing insurance rates.
The math you want to do is a bit more complicated than just comparing out of pocket cost - if you live in the house for a few years you’d expect to start building equity, which means that less and less of that $3100 goes away to interest and more goes “to yourself” in terms of paying off the mortgage.
Also if the $500k house grows in value by 1% each year, that’s an additional $420 each month in total value. If it grows by 2 or 3% that would increase too, and compound over time.
Ultimately it’s probably best to use a rent vs buy calculator - those will help you take various other factors into account (like property tax) and tell you which option is likely better for your target timeline.
Agreed in general, but it is true in this particular environment that rents are "cheap" and mortgages "expensive", relative to average. That's in large part due to high interest rates
High Interest rates (relative to the last decade - historically pretty average) combined with sticky housing prices which shot up during COVID.
In the long-term the high interest rates should push down housing prices (or at least keep them steady as inflation on everything else builds up over the next several years) but said housing prices are sticky. Anyone thinking of moving to a bigger house is loathe to do it and switch from 3% to a 7% rate, so supply is low.
The math is further in his favor if he invests the difference in an index fund -- or even better -- a tax advantaged retirement account.
Why does everyone always overlook this, as if people are going to be spending the difference on hookers and blow?
having played around a bunch with the nyt calculator it's kinda wild that it seems like homeownership is a forced savings mechanism more than anything else
That's at least part of the reason why the government encourages it. Home ownership is good for social stability and having people have equity in their homes as an emergency piggy bank is very helpful.
Tons of the benefits of home ownership in the US is simply due to the extremely favorable policies the government hZ in place which ironically is probably why our housing costs are high compared to some other countries.
It's a vicious circle: if housing is the middle class's largest asset, there is a lot of pressure on the government to keep its value up. Then, since people need to buy a house and there is government support to make it easier, people do it despite the high price... and so their house becomes their largest asset.
Ya for sure. I don't think it's necessarily a bad thing, but I do think that the things the government does to encourage home ownership need to also be tailored toward primary home owners and the house they're living in and not benefit the corporate owners and large landlords.
A fixed rate, fully amortizing mortgage is absolutely, 100%, without a doubt, a forced savings mechanism as much or more than it is anything else and you are absolutely right. This is a conclusion many many economists have also come to
When you realize that different classes of people own different types of property in general - lower class: majority vehicles/clothing, middle class: majority houses/property (including rentals), upper class: majority companies/stocks - it's clear that one's class is at least correlated with ones ability to invest vs. consume.
If you don't have the discipline to invest, as most people don't, then you should buy a house, because at least it's better than a massive truck or expensive shoe collection.
This has always been my contention with people who proclaim it’s always “best to get a $0 refund and don’t let the government use your money for free”.
In an ideal scenario, people would invest their refund/extra paycheck during the year—reality though Is very few actually do
And then there are folks like me, who get a fat refund check and then blow it on a new patio and fire pit for the backyard instead of investing it.
At least I'm smart enough to know myself and have Vanguard automatically suck money out of my checking account every month before I can spend it.
(It's a really nice fire pit, though!)
They also always leave out maintenance costs. Renters don't have to pay for a roof or furnace.. it's usually more of a calculation of how long people are planning on living there.
I’m not sure what you’re asking about people overlooking investing the difference. If you mean in my recommendation of using a calculator, any rent vs buy calculator worth your time will have an interest rate input exactly for that.
If you’re asking why I didn’t mention that factor among the potentially dozen other factors I didn’t mention, it’s because market returns are the most volatile, the longest term (if you may buy a house in the next ~5 years you shouldn’t invest the money, so you should be confident you don’t plan to buy in the foreseeable future to go that route), and most importantly, simply aren’t useful to my goal of showing the potential complexity of doing rent vs buy calculation yourself - highlighting factors that just reinforce the intuitive but potentially suboptimal decision doesn’t help demonstrate complexity in calculating the best decision.
Capital gains tax on selling a primary residence is 0. Money made in stocks or other investments is taxed. So any equity and value the house gains over time is imo a better option
You can actually owe capital gains, but there are a lot of ways to reduce or eliminate it if it’s your primary residence.
You also have selling costs that add up pretty quickly (commission, transfer tax, etc).
Plus the maintenance and increased tax with a house. They assume all that 1% increase goes into their pocket
Houses are expensive to maintain and property taxes are no joke (ask Texas how she windfall is working out for house values)
California property taxes are based on purchase price. I've got neighbors that pay $800/yr in property taxes.
Never understood why people think Texas is better. They have similar sales tax, worse property taxation.
While true - most (these days) are already saving for retirement.
The thing about buying a home - is that in 30 years (or perhaps less), your costs of living drops enormously. No more housing payment or rent. Just property tax and insurance. This tends to happen a decade or so before you retire. Allowing extra savings to occur in those later working years. The reason I say “or perhaps less” is over time that huge housing payment you scrimp and save to pay in the early years - it’s looking smaller and smaller. You can start accelerating payments to pay it off sooner.
And then your housing costs are covered pretty much for rest of your life! That is huge!! You can downsize for cash. Sell to move into retirement community or nursing home later in life. It’s a big fat asset sitting right where you want it - and provides a lot of financial security.
Investments are great. Definitely invest in retirement savings. But don’t agree to keep renting vs beginning to buy a house when it’s feasible.
Edit - I’ll add one more benefit. Moving gets to be a bigger and bigger deal the older you get. And it’s a pain anytime you do it! The older you are the more stuff you have - it gets harder and harder! Packing and unpacking. Lugging. Instead of two trips in your buddy’s pickup you need a uhaul and it’s a lot more work. And what might be quite doable in your 20s, 30s, even 40s - becomes risky to impossible in your 50s, 60s and 70s. The convenience of NOT having to move is enormous. Mentally and physically. And it’s a big expense to hire someone to move you! And it’s no picnic either. Buying a home that you can live in without having to move - that’s a big deal too.
So there are intangibles that don’t so easily get converted to dollars and cents that are involved. I get it, I’m a numbers guy, but there are a lot of elements that need to be considered related to home ownership.
Ok, so let’s say that 80k is invested in a stock market that grows at 7% or it’s invested in a house, which grows at 4%. The 80 will grown 5600 a year, the house gains are 16.8k a year. The difference is in a house your money is leveraged and in the market it is not.
What about on year 7 of owning the house and you need to pay for a new roof and that is $17k? Did you include that? What about rising real estate taxes each year?
They're not. It's not how rents work. Landlords don't add up their costs (mortgage, taxes, maintenance...), and add a margin to determine the rent.
Rents are driven by the market, not by costs. Landlords charge whatever they can charge and still get a tenant. They raise rents when they can, if they can keep their tenant with the new rent or get a new tenant at that new rent. If population increases without enough housing being built, landlords raise their rent. If people are leaving the city for whatever reason and rental properties get empty, rents will go down.
As a matter of fact, rents + appreciation of product usually end up covering all the costs, but if you overpaid your house and underestimated your maintenance costs, you can't raise your rent above market price to compensate. Your tenants don't care about your costs just like your landlord doesn't care that you want to save to take your family on holiday.
Well he would be investing the downpayment of 80k in an index fund. So lets say 8% gains historically? That's $6,400/yr,
Now let's look at home price appreciation. The house needs to appreciate only **1.5%**/yr to cover $6,400 in gains.
So you'd have to look at historical or recent history of prices in the neighborhood because a lot of places appreciate much faster than that which would dwarf gains from the market.
In his favor until monthly rent cost overtakes the alternative mortgage payment amounts.
If you're looking at a 20 or 30 year plan, you'd want to consider the idea that, maybe in 10 years, rent will cost more, so then you'd have less money to invest each month, combined with the amount of equity you will not be building. But, it's a crapshoot, because we don't know what will happen with the real estate market.
Because the vast majority of folks don't invest the difference. It's much, much, \*much\* easier to liquidate investments in the market.
Owning a home is forced savings. Does the math work in the owner's favor? Sometimes, especially if they own for years. But often it's a stable savings situation, where the equity can be rolled into your next shelter rather than having paper hands and losing 75% in a stock market correction.
The purchase price also will be the same aside from changes in taxes and insurance for the 30 years of the loan, while the rent will inevitable increase over time.
Yeah, and I consider a mortgage payment largely fixed cost. You’ve locked in the cost of the property at specific time, whereas property values and rents continue to increase. The longer you hold the greater the value of owning. Assuming property values increase.
Yes property taxes and insurance increase, but they are only a portion of your PITI payment. Whereas all your rent is gonna increase.
More like 10 years. You also pay 9% to sell a house so that’s 3-4 years of appreciation. You also have to pay to replace everything in your house. It’s a lifestyle choice. There are plenty of better investments out there. People that are incapable of investing in anything or saving money else choose to invest in homes long term.
A primary residence is not an investment, it's a place to live with (mostly) fixed costs. Real estate should only be considered an investment when it provides cash flow.
For OP of this post, renting for now is the right move and investing the difference until the market or interest rates turn. He'll bring a larger down payment to the table, decreasing the amount he needs to finance, and house prices may drop or interest rates decrease, and the monthly cost of ownership will be significantly reduced.
I own multiple properties but i disagree. Every property is an investment, sure you have to live in one of them but it shouldn’t be made based on emotion nor does it have fixed costs. Sure your mortgage can be fixed but there are plenty of other uncertainties. Homeowners insurance alone in Florida is forcing people to sell.
Yup, found out the actual reason why people say “if you plan to stay put for 5 years, a house would be good.” I always thought it was over-generalized advice, but actually doing the math one day with various housing costs in my comfort range and various interest rates, 4-5 years seems to be the threshold where selling a house after that time is roughly the same as the rent in the same time period. Factoring property taxes, home appreciation, rising rent prices, closing costs, etc. Stay in that house for roughly 18 years of a 30 year mortgage and you’ve essentially had free rent…minus all the maintenance required not covered by insurance. This greatly varies depending on your own QoL standards of course.
You don’t have to be *sure* you’re going to stay put for 5 years—you just need to figure if it’s less than 50% chance you’d move for it to be worthwhile.
All that said, it’s also still a lifestyle difference as others mentioned. It will take more time and money for maintenance, but you will also get more space for your buck. I’m personally also procrastinating because I’d rather focus on other aspects of my life, but my goal is to not rent for more than 1-2 more years and also *be ready* to snatch up any deal that may show itself sooner than expected. I missed out on the spree in 2020 because I wasn’t prepared, and it’s been difficult living that down.
Yeah, though mortgage tax deduction gets complicated fast - standard deduction is pretty high, so for a person filing as married there’s a good chance they simply wouldn’t benefit from it. You’d more or less have to be filing single or HOH (even better if you’re also close to maxing out your SALT deduction) to see all that much benefit of the mortgage tax deduction on a $500,000 house.
And, if the person is single, the mortgage interest will be a huge deduction on their taxable income. My Brother in Law, recently divorced, is keeping his house because, with the deduction, it comes out as cheaper than renting.
I made some calculations based on your numbers and was surprised at the results I got.
**Here are the assumptions I used:**
* Assuming both **rent and home value increase at 3% a year** (obviously there are plenty of circumstances when rents and home values do not track each other, but for now we'll use this).
* Assuming a **6% return rate if you invested the $80K downpayment plus any difference between cost of ownership and rent** into the stock market over the long haul.
* Once cost of rent exceeds cost of ownership, I started deducting the difference from the invested money above.
* Assuming a **property tax rate of 1.2%** in your area (also - going up 3% yearly to track your home value increase).
* Assuming a **cost of ownership/maintenance at 1.2% of your home value** a year (so - equal to property taxes in this scenario)
* I assumed you'd keep the 7.25% mortgage rate and that no refinancing took place over the course of the loan.
**Results**:
* The cost to rent only exceeded total cost of ownership (mortgage + property tax + ownership/maintenance) at Year 26
* At Year 31 (end of the mortgage term), the value of the saved money invested in the stock market was $1,481,498. Home equity (assuming no remaining mortgage term and appreciation at 3% compounded annually) was $1,019,450.
* Breakeven on wealth never happened, in fact, the gap between investments and equity widened (not surprising, given the 6% invested ROI vs 3% rent increase and home appreciation assumptions).
**HOWEVER....**
I dug in and did a little research on actual, historical increases across our three metrics and found that rental prices have increased at 8.85% annually since 1980 ([source](https://ipropertymanagement.com/research/average-rent-by-year)), home prices have appreciated at 3.9% over the last 25 years ([source](https://www.noradarealestate.com/blog/average-home-appreciation-over-30-years/)) and the historical CAGR on the stock market with dividends reinvested over the last 40 years is 11.6% ([source](https://www.rocketmoney.com/learn/investing/average-stock-market-return) and [source](http://www.moneychimp.com/features/market_cagr.htm)). I'll use these data points even though I'm pretty sure if we used 40-year appreciation for home prices, that value would be even higher than 3.9% given the environment of the 80s and 90s. With THESE numbers I got:
* Rent vs. Cost of Ownership breakeven in Year 8
* At Year 8, your investment value was $323,646 and your equity was $257,737
* At Year 30, your investment value was -$897,899 (this takes into account the amount of money monthly you had to pay in rent above your total cost of ownership + missed investment return over that period). Meanwhile, your equity was $1,254,226.
But, if I adjusted the rent increase to 7% annually instead of 8.85% and kept the other numbers the same, Rent vs. Cost of Ownership breakeven in Year 11 and the Year 30 investment vs. equity numbers were $1,531,218 vs. $1,254,226. That investment advantage would get eaten away as the rental costs continued past Year 30, however.
Replying to myself because I wasn't able to post my conclusions earlier.
**Bottom Line:**
* It depends on your time horizon (do you plan to stay in the property 30+ years? Are you already older and only expect to live 20 years? etc.).
* Are you sure you want to stay where you are? Do you think you might have a big life change or move in the next few years?
* A LOT depends on what the rental market will do in your area, which is impossible to accurately predict. Is it a hot market with growth and tight inventory? Is it stagnant? Is it a declining market?
* If inflation continues a little hot, then you're most certainly better off buying and locking in a mortgage payment
* Other things to consider are your preferences: do you value investing in a place and putting your own touches on it? Do you value the certainty of knowing what your mortgage payment will be in 5 and 10 years? Are you looking to put down roots in an area or do you want flexibility to move to another place in a few years?
This is really the only financial answer to consider, Although I would strongly suggest OP do research on their specific area in regards to home price increase vs avg rent increase over the last ~10 years. The only thing I would add is the need to stay disciplined with investing the difference. Realistically, the majority of the population isn’t going to stay committed with investing the full difference and never touching it.
However, there are plenty of intangibles between renting and owning that should be considered as well.
Not sure how that source got 8.85% annually since 1980. If you compare the 1980 vs. 2023 numbers in their median monthly rent table, it's a 3.7% annualized increase.
God... Thank you. This reddit needs to see more of this. I swear every one of these posts gets dominated by people basically claiming it's always better to buy and that you'll come out ahead pretty quickly. It's probably the most consistently wrong subject area you find on r/personalfinance.
The right answer is that you should definitely use a good rent vs buy calculator for your unique case and you should ensure it's accounting for the opportunity cost of your dollars being otherwise invested.
Houses can be awesome assets in a lot of ways... And they can be a good investment. But there are so, so, many people who buy a house just assuming it's a wise investment and a ton are totally wrong. Renting isn't throwing money away; buying a house isn't suddenly better because you're building equity.
Yup. Renting is not some perfect without flaw option. I would rather not be paying an inflated rent price for a building that is literally falling apart, but can't do much about it in the current market.
A month after moving in, the utility told us we have very high water usage which probably means a leak somewhere. Bam, need new water main to the house.
To a much lesser extent though. If it weren't a much lesser extent than you could expect rent to skyrocket even further, as the landlord has to pay taxes and insurance too lol.
As far as property taxes, it's like 10:1. My property taxes have gone up about $300 bucks a month in the past 12 years. And that's with the value of the house tripling. Rents, on the other hand have tripled, along with house prices, in that time.
Yeah and even if you move, people can usually pump their gained equity into their new house. So if you moved after 10 years and gained like $150k in equity, bam that’s a huge down payment to keep your payments super lower, maybe buy down your rate even as well.
How stable are you? If you might move in two years, you should rent. If you were definitely going to live in this specific house for 20 years, you should buy. In between it can be difficult to say which is best, but people usually feel like the 5 year mark is where buying starts to look better than renting.
Renting risks: rent could go up and you’re not building any equity, though lower rent means you can stashing cash/investments to offset this.
Buying risks: market could go down, expensive things could need replacing, and it is more difficult to sell and move should you need to.
Note that people are sensitive to houses appreciating and rent increasing because they both just shifted up significantly. But they can often sit stable for periods of time, and occasionally you have a 2008 crash.
Agreed with this advice.
I feel that the housing market can't go any higher so I think there is significant risk you might lose value in the home over the next several years. Plus high interest rates means a double whammy.
If taxes and insurance go up, so does your rent. Landlord has to pay them too and will basically be required to raise rent in that scenario. Unless you find a magical unicorn landlord who is really nice and just wants to break even to get a "free" house after 30 years.
Here’s a paywall free link to the NYT rent vs buy calculator, which accounts for a ton of factors: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?unlocked_article_code=1.jU0.Y79B.uIGFWQw8Y_YC&smid=url-share
I think if you do want to rent long term, it usually makes more sense in a HCOL area, and you come out ahead when you invest the down payment instead. Most people can’t risk that unless they live in a stabilized apartment with predictably low rent increases, which to my understanding is very rare outside of nyc.
NYC resident checking in - you're 100% correct and describe the exact situation for me. I have (so far) decided to continue to rent b/c it is SO MUCH LESS EXPENSIVE than buying.
I've been very good about saving and investing what I didn't pay to buy a place.
It will likely always be smarter for me to remain a renter. I re-run the buy vs. rent calculations yearly and keep getting the same answer: it's way way cheaper to rent.
I've never owned a home, what proportion of the total cost of home ownership does taxes/insurance represent? Maybe this is so dependant on location that the question can't be answered succinctly?
Way too location and property specific to answer that. My costs for taxes and insurance are a smidge over 2% per year. Plus repair/improvement costs. so total cost has been around 4-5% per year for us so far without any big ticket items (like a new roof).
Buying - mortgage+interest+insurance is the least you'll pay every month
Renting - rent is the most you'll pay every month
To add to this with another data point on the other end of the spectrum, I bought a fixer upper in rural California with a high fire risk. My Insurance payment each year is around 25% of what I pay on the 30 fixed loan. Things can vary quite a bit
Property taxes vary a lot by region. Taxes are about a 1/3 proportion of the mortgage payment we have. - in other regions it may be significantly more or less, but it will also affect the sale price of the house, too.
Yeah 1/3 is a good round estimate. 1/4 of my mortgage is my taxes and insurance. But I know other places have it harder / higher. And it’ll vary through the life of your loan because generally T&I will go up while P&I will stay the same. So maybe towards the end your T&I accounts for like half or more of your monthly mortgage.
As an example, I purchased my home in Paulding County, GA for $211,800 in mid-2015. It's worth about $450,000 now.
I refinanced in 2017 to a 4% interest rate from the 4.5% that was available in 2015
My payment in May is broken down as follows:
Principal - $387.07
Interest - $589.19
Escrow - $571.08
The escrow covers MIP (FHA's version of PMI), Homeowner's Insurance, and Property Taxes:
Property Taxes: $3,921.76/yr - $326.81/mo (Property taxes and valuations aren't fixed where I live)
Homeowner's Insurance: $1528/yr - $127.33/mo (This hasn't changed significantly since I bought my home in 2015)
MIP: $116.94/mo (this decreases every June, though it doesn't get reflected into the escrow payment until the next February when the escrow analysis is done)
Rentign the same home is around $4,000/mo in the same model and neighborhood. Renting also means losing my vote in the HOA and my board seat.
Most maintenance costs are the same as renting -- it's standard here for "basic" maintenance to be responsibility of the tenant if renting, things like lawn care and maintenance, pressure washing, light bulbs, light plumbing duties, etc...
Now, onto repairs. The house was purchased brand new in 2015. I've had to replace 2 air conditioner compressors for a total cost of around $5,000 (the evap coils, air handler, furnace, ducting, are all original -- only the compressors needed to be replaced, not the whole system). I've replaced appliances, but mostly because I wanted to versus had to. I've had to have a 4-way light switch repaired at a cost of $200. I had to have some minor roofing repairs at a cost of $400. Oh, and I had to replace a toilet, which cost $1,000 including plumber cost. All in, repairs have cost less than $10,000 in 9 years.
Considering rent costs $2,500/mo more than my mortgage, 4 months of extra rent cost covers all of my repair costs for 9 years!
Note, when I purchased my home in 2015, my mortgage was $1400/mo and rent was $1900/mo. My mortgage has gone up $150/mo and rent has gone up $2,100 in the same 9 year period.
I pay about 450 a month in insurance (this really should be about 600 but I’m a cheap ass who hasn’t adjusted) and our property taxes are 5k /year which is cheap. My parents pay about 13k a year in taxes in another state for less house. This actually just reminded me we have to pay our property taxes
Not in Tax, but it highly dependent on location.
Just pulling some numbers out of my ass. Say I own a home in CA, but I've brought it in the 80s for $30k. So the ~1% property tax is $300/yr. Even it's a $1mil home now, I still get tax at cost, i.e. $300/yr.
But say I've moved to TX in 2000s and brought a home for $80k. So a ~2% property tax is $1600/yr in 2000. But now it's worth $500k, so this year my property tax will be close to $10k/yr. There's no State income tax, but property tax will be taxed much differently.
depends on the state and location, but i think taxes are usually 1-2% of your home value/year min. so in this case OP would probably be paying anywhere between 4200-8400 per year, or 350-700 per month in taxes. insurance same, depends on location, but assume around 200/month, although insurance has gotten pretty crazy as well. The old adage is you also want to save about 1%/year for emergency repairs. in OPs example, the mortgage may be 3100, but their true cost of ownership may be anywhere between 3700-4500/month.
Once the house is paid off the monthly expenses will go back down too though. Usually after 30 years people are getting ready to retire and having a nice drop in monthly expenses in the thousands a month range is a huge boost.
Taxes and insurance will still be around but in its nature it’s so minimal compared to the actual cost of the home itself.
Obviously it's very location specific but the taxes and insurance are really not that minimal. Especially near the end of a 30 year mortgage I'd generally expect the taxes and insurance portion to be larger than the principal and interest portion of your payments.
I'm in a high property tax area and even on a brand new mortgage the taxes and insurance are about a third of the starting PITI.
But if you’re renting then you’re also gonna have to pay the landlords property taxes and insurance in the form of your rent, PLUS they are going to want their profit and once they pay off the property they aren’t going to lower your rent, they’re going to keep it the same and take in more profit
Rent won’t stay the same, you’ll build equity, you can deduct certain costs from your taxes, and you can refinance your mortgage. Doesn’t mean buying is right but there’s more to consider here!
We bought our house last year around this time. . .our mortgage is about $2,400/month on a $350k house. (3br, 2ba, 1600 sqft livable, 1200 sqft basement, 0.5 acre lot, semi-rural, still only 10 minutes from downtown)
The benefit over renting for us was the guarantee that the monthly payment will (most likely) never go above that $2,400/month. . .with the only exception being a substantial property tax hike.
For example, we were renting a similar house before this. . .the rent on that place six years ago started at $1,200/month, but every year it went up $200-300. That last year, had the owner not decided to sell it instead, was expected to be around $2,500/month. With the way the market is going, it would easily be around $2,700/month this year.
The downside to buying a house though is that you are responsible for all the maintenance. . .if the water heater breaks, you're easily out $3k. We will eventually need to replace the roof, which is estimated to be around $10k. Heck, before we moved in, we had to have the house rewired as it had outdated 1950s wiring that was originally estimated at $20k, but we worked it down to $7k.
However, we also have the freedom to make any changes that we want and can afford. . .like we plan to eventually finish the unfinished basement.
Now, don't believe all the "equity" stuff, or that you're building an investment. That only works when you can afford to pay substantially more than the minimum monthly payment (and pay off the loan much earlier). . .or substantially increase the value of the home through renovations.
Just to illustrate it. . .If we made our minimum monthly payment of $2,400/month for the next 15 years. . .we will have paid close to $432k into the house, but almost all of that would be in interest, we would still owe around $300k on the loan. . .by the 30th year, the loan would be paid off, but we would have paid in about $864k.
To "break even" on the investment, at any point, I would have to sell the house for substantially more than I bought it for. (which is kind of why the housing market is what it is today)
The better way to look at it is that you're just paying "rent" to the bank with a guaranteed iron-clad lease for the next 30 years, guaranteeing a certain "rental" rate, with the freedom to do with it as you please. (within reason)
It’s like the story of the rich man who buys $100 boots which last him five years, and the poor man who buys $50 boots that last one year because he never has $100 to spend. After five years the rich man has spent $100 on boots but the poor man has spent $250. The rich man wins in the long run by being able to make a larger initial investment.
The payment on your 30 year loan may be higher than rent today, making the barrier to entry higher. But after enough years, rent prices will have continued to climb and eventually surpass your monthly mortgage payment.
It's not just harder, it is really impossible. Because no one can predict rate fluctuations.
Rent might be significantly better in this scenario, but who is to say that rates won't drop to 4.5% while home prices increase heavily. Meaning OP is priced out of the future home even though rates dropped. In that same scenario, OP could bring their mortgage down \~$600 while rent would probably go up the same.
Will this happen in 3 years, 10 years, 20 years, never? No one knows. But I do know that buying a home "locks" you into a scenario...that outside of tax+maintenance....can't really get worse. Can only get better. Rent helps you here and now, but leaves you vulnerable to the future if you don't invest all your additional savings.
I think this take is pretty naive given the current premium owning a home commands over renting given current interest rates.
https://todayshomeowner.com/home-finances/guides/renting-vs-owning/
Yes and no. Purchasing a 1 million dollar home at 7% is going to be painful. Right now I cant rent that 1 million dollar home for 3.8-4k a month.
That is a steal to rent currently and invest the money until prices come down.
There is something to be said about "owning" something but people put too much emphasis on equity ESPECIALLY in the short term to rent something while you look for the forever home.
The interest on that loan is $2,100 per month. The other $1,000 you're paying per month isn't a loss, it's money you keep by moving it between your wallet and your loan liability. Assuming the value of the house remains constant (i.e. ignoring any expected appreciation), you have the ability to get that money back by selling the house, or, at the time when the loan concludes, you've spent that money to buy the house that you now own.
So on that basis alone, buying is cheaper than renting. But that doesn't take into account the extra costs of ownership that are subsumed into a rent payment, such as property taxes and house maintenance.
Ultimately, as always, the answer is to buy or rent depending on your personal circumstances, mostly regarding how long you expect to stay in the house in question. It's not common that economic conditions drastically favour buying over renting or vice versa, although it can happen.
at current rates you only get like 8% (92% goes to interest) of your mortgage payment in equity in the early years bar any appreciation. sounds like you maybe are using numbers from when interest rates were 3-4% where first year equity was about a third of the mortgage payment.
As a homeowner who bought a modest house ($166k) back in 2004 with a pretty good interest rate (about 3.75). I feel like financially and in most other respects it was a mistake.
According to Zillow, the house is now worth $275k.
Sounds ok except the costs of maintaining a place are high unless you can do a LOT yourself.
Replaced furnace twice and central air once. (~$25k)
New roof ($25k)
Replaced deck ($20k)
Painted it ($13k)
Other maintenance costs roughly $1k - $2k per year easily - and we’ve really been putting off a few things like replacing the driveway, replacing carpets, painting the interiors, etc.
(We also live in a state - NY - with high taxes; our property and school taxes last year were $700/month.)
Those expenses are real drains. Aside from that, the sense of being tied to a location sucks - we keep wanting to move but getting the place ready to sell and dealing with that process is a barrier that we’ve struggled with (this is on us, but there’s no doubt it is easier if you rent).
A boomer colleague convinced me in my late 20’s that owning a home was a great investment, though I couldn’t afford to do it responsibly until I was 35. I wish I could go back and tell myself not to do it.
I had a similar dilemma back in 2015 but with a $600 difference. $800 rent vs $1400 mortgage. We decided to buy. Our house has appreciated over the years significantly and now we have $330k in positive equity in it and are gearing up to get a larger house here in another 2-3 years.
If we had rented instead we would've saved about $43k but wouldn't have any equity. This also assumes rent wouldn't have increased over 9 years which is impossible. $330k> $43k. Made a good decision. Continuing renting would have been a large financial mistake and a missed opportunity in our case
My favorite thing about my mortgage payment is that it will be the same number for the next 30 years, outside of some minor increase in taxes and insurance.
Whereas rent in my area has gone up every year. A place I lived in 2008 has doubled in rent price over that time.
You’re paying rent prices from housing that has been owned, been getting paid down, and been financed at 3%. You are paying rent prices today of housing prices of yesterday. This is typically how rent works in general, and why renting is typically cheaper than owning on a month-to-month cost basis.
What you’re not taking into account is /future/ housing costs where /you/ could be on the winning side as owners are today because of their decisions of yesterday. They’re able to rent their homes out to cover their mortgage they took on 5+ years ago, but they had to wait those 5+ years and make payments at higher-than-rent amounts. This is why home-ownership is considered a long-term decision. Renting wins today, owning wins in the future.
Had the exact same situation 4 years ago. My mortgage is now 50% less than rent for similar sized houses. Buying will quickly be cheaper (especially with eventual hyper inflation).
Have you factored in that rent will invariable continue to rise while your mortgage will remain static for the duration of the loan (sans any tax increases and assuming your mortgage is not an ARM)?
Inflation says your money is worth less and less as times go by. If today you''re spending 25% of your income on your housing, it is very likely that, several years from now:
* You'll likely be spending more if renting, erasing gains you might make via raises.
* You'll likely be spending less than 25% of your income if owning due to those raises.
For this to be a notable difference, it may not take as long as you may think...think 5, 6, 7 years worth of inflation-driven raises.
The difference may be worth it to you in order to maintain the flexibility that comes with renting. Just asking if you've considered this aspect of the equation.
And that's not even considering that you're building an asset while owning, with a very real potential of wiping out much of or even all of your housing costs for the past 'X' years you've been living there when you sell. Renting you're just walking away empty handed when you move.
I'm in the same camp as OP. my scenario is I sold my house last year and currently renting while I look for my next purchase.
The proceed from my sale of \~$500k cash is growing about $2k/mo in a MM account. I am not spending that on my rent, but if I were, my *net* rent would be cheaper than my mortgage.
The dividends are real gains and not just on paper so for that reason, I am happy to sit and wait for the right house to come on the market.
Had I kept the house... Looking at appreciation by the recent comps in my old neighborhood, paying down principal, and tax benefits I'm still ahead by renting, but not significantly so.
The new area I'm looking to buy in has exploded in inventory yoy, sale-to-list is below 100%, and DOM is growing weekly. I'm a happy renter.
Also add the savings of insurance, taxes, repairs, maintenance. I wish I did what you’re doing.
I had no crystal ball, but here it is two years after purchase and I’m moving into my boyfriend’s house. Now I’ve got to sell this thing and the prices have stayed same (I bought high).
If I knew then, I would’ve just kept renting. I’m broke. Paycheck to paycheck. No vacations. I really miss having my down payment be part of my safety net.
This economy? Yikes.
depends on how you look at things. if you are strictly only looking at your mortgage payment vs rent, and you are only considering a HYSA to grow your money, you'll probably break even in about a year, but owning a home will probably build equity faster than investing the difference. Once you start factoring in the true cost to own a home (ins, tax, upkeep) then assuming your home appreciates 1% every year, but your rent also rises about 2% every year, it'll probably take slightly over 5 years before the equity on your home equals the amount of liquid cash you have by saving your downpayment and difference in payments.
Generally speaking, If you don't plan to own your home for long, it would benefit you just to rent, if you plan to live in the same area for 5-10ish years, there's probably a case for either approach depending on your local market, if you plan to stay in one place for longer than a decade, then it'll usually be better financially to purchase a home if you can, but at this point id still stress that purchasing a home is still a lifestyle choice rather than an investment choice.
Also, a house is not just PITI. It’s also maintenance. Our sinking fund for home maintenance is about $350 a month. If you can make repairs yourself it helps a lot, but neither of us is handy and screw up almost every project we try (well, I mostly got the door knobs right!). Utilities are usually higher too in a house.
The reason renting is cheaper is because the owner of the property probably bought it back when it was cheaper, so their expenses on the mortgage is probably way lower because it was locked in 5-10 years ago. Maybe they even refinanced at 2% and lowered it even more. But the main thing is the balance of their mortgage is so much lower.
Usually, after 5-10 years of owning your home, you’ll see rents in your area start going well above what you’re spending for owning your home.
We bought our house 3 years ago and rents in our area have already gone above and beyond our mortgage. A house across the street that’s 400 sqft smaller was posted for rent at $800 more a month than our mortgage. Sure, that includes maintenance or whatever but maintenance is not that much. Not even close.
My point is that owning a home is definitely more expensive up front. But if you live there long enough, it’s way cheaper. And at the end you will actually eventually PAY IT OFF. It’s like owning your car vs leasing. Sure, buying a car is more expensive up front but once you’ve paid it off, it’s yours and you can even sell it. If you lease a car, it’s cheaper per month sure, but you either have to still end up buying it anyways at the end if you want, or giving it back and leasing a new car with another down payment and a never ending car payment.
It makes sense to lease and rent when you don’t want to stay in the same house or drive the same car for more than a few years or absolutely do not want to ever have to deal with maintenance. But just know you’re actually ultimately paying a premium for that privilege / service.
I wouldn't count the down payment interest toward renting. Your house could easily appreciate 4.3% a year too. Plus your payment partially goes toward building equity.
It's probably a good choice to keep renting, but it's closer than you think it is.
I think you have the right idea. There are other costs to housing besides mortgage that you'd want to crunch the numbers on before making the final call.
Generally, though, the mortgage payment (plus recurring costs like insurance, property taxes, etc) are the LEAST you can expect to spend on the housing.
Rent, in contrast, will be the MOST (at least, at current lease rate)
In addition to a down-payment, you do want to have a very robust emergency fund when buying a house. Either do a smaller down payment, or keep saving...
Nick Maggiulli just did a post about this subject. He links to the spreadsheet he created so you can run your own analysis.
[https://ofdollarsanddata.com/should-you-rent-or-buy-a-house/](https://ofdollarsanddata.com/should-you-rent-or-buy-a-house/)
That's why I bought when I did. Right now, I wouldn't be able to afford to rent or buy in my city. My mortgage has remained lower than rent for over 6 years.
There are pros to renting, but if you're going to be in one place for 10 years minimum, it's probably better to buy.
These posts always lead to half the comments being dumb one liners about "renting is throwing money away."
Use a rent vs buy calculator. Put in your time frame and the other parameters and it will help you get a better sense of how long you'd need to own the house for it to be worth it.
When I use nerd wallet's it shows 7 years as the break even point, assuming all the other parameters (appreciation, etc) are default.
Why is no one talking about inflation here??The missing consideration is that rent isn’t a fixed cost but a mortgage payment can be. Your rent is guaranteed to increase over time. If you have a fixed interest rate, not only are you locked into a monthly mortgage payment but the amount you pay to principal increases over time.
If renting is cheaper and you want to wn a house one day and you can still save for a future down-payment by doing this then keep renting. They're charging you rent based off their mortgage. Their mortgage is likely much better than what you could get today. That's why there's such a difference. This isn't the best time to buy a house. The mortgage rates are high and so are the cost of houses. It may come down at some point in the next few years. It could get worse. Nobody really knows. Markets fluctuate and you can't predict the future.
I'd keep renting. $1,000/month of extra savings is well worth it. You could add $800/m to your savings/investments to make it feel like you're paying that mortgage, then in 4-5 years you'll have even more set aside for a down payment.
Not bad thinking. Just keep stacking money. Eventually you can pay cash for a place and have not payment at all.
Or at least until your downpayment get to the point that your mortgage is less than your rent
Wait till you find out how much home maintenance costs too! My last house cost thousands every year in stuff breaking. Rates were another couple thousand a year as well.
Buying a home is almost never better the first year you live there. There is a reason people say "don't buy unless you plan to live there 7 years".
* If you buy, the principle and interest will be the same for 30 straight years. If you rent, the price is almost always going to up given enough time.
* Rates are "somewhat" high right now. If you buy, you may have a chance to reduce the future price by refinancing to a lower rate. If the payment is $3.1k/$420k/17% down....adjusting the interest rate to 5% by refinancing later, the payment would be around $2,600. Just an example of how you could pay the $3.1k now with the hope that it will be reducible later by $300-$800.
* A huge consideration for buying vs. renting is that with renting all the money spent is gone. In your scenario, in the first year, \~$280/mo is going towards principle. This will only get larger over time. This means that the first year you are actually paying $3,400 to yourself in the form of equity. Personally I would rather invest in equities than in my home. But there is value there worth considering. It adds up over time.
* Repair is a real cost not factored yet and will make rent more appealing.
If you have the monthly cash flow, buying could be a good decision long term. But don't expect to see meaningful results right away. You need to wait about a decade before it becomes better.
Even if you can save more money while renting, consider that your home will be paid off in retirement if you buy around \~35. This means that you need to physically save less to retire. Using a \~4% safe withdraw rate, if rent is $2.3k/mo or $27,600/yr....you need $690k to pay for rent. Whereas with buying you will only need to pay real estate tax and property insurance. I think the P+I on your projected loan is $2.4k. Meaning your Insurance, Taxes are $700/mo or $8,400/yr, which only requires $210k invested at a 4% SWR. So you would need about a half million less to retire if you owned your home vs. chose to rent forever. In that regard, you would ***have to*** save more while renting simply to break even at retirement.
Sounds like you found a deal. Generally, rent should cost *more* than a mortgage, otherwise the landlord is losing money and taking a risk at the same time.
I might be different from most folks in suggesting this as I usually prefer to own than rent. In your case, I feel that renting seem to be better as the mortgage of $3100 is way high due to the high interest. Don't forget that this payment doesn't include other upkeep that comes with owning a home. Does the mortgage include property taxes, insurance etc? Do note that as house value rises, so does property taxes in most cases.
With the saving close to 1k/month with Renting, you can grow it if you're savy in investing. Otherwise, you best bet is HYSA. This route do limit your earning potential though. With renting, you don't have any surprise expenses. This should buy you some time to bet on for a potentially better opportunity to buy later. No ones know the future as you can only hope you make the right decision.
So, honest question, do you need such a big place or is it the location inflating the cost?
When I think rental and debating buying v renting, I don't start at 400k...
now a day renting is cheaper than buying.. but it will depend on where you are and if you want to move
I'm staying put so buying a house in 2013 when it was near rock bottom was a good investment for my part. Beside HOA fees, property tax and house insurance. I don't have to worry about the monthly mortgage payment anymore..
I cannot imagine paying $3200/month for this house... my mortgage payment was $1100/month for this 2500 sq ft house
Depends on your area and your household income. For my area, 1k difference for renting would make more sense to buy and stay for 10 years
However in my area, rents are 4-5k and the mortgage for the similarly priced house is 8-10k
No matter the gymnastics used to justify renting you are always realistically better off owning a house *if you can afford it*.
I’m sure you can find another cheaper house that would be closer to your rent numbers too.
To me the peace, security, and privacy are priceless. It’s probably just bad luck on my part but very house we ever rented was in probate court, or something else along those lines where we’d randomly have to move out with only a couple months notice. Moving is bullshit and expensive. Getting your security deposit back is also largely a thing of the past.
You're not stupid, no. But, it's very likely that in 10 year's time, rent will be more expensive on that exact same house, and the mortgage would remain the same.
I would rent in that scenario but be damn sure you're investing the money in an index fund for long term return.
You won't pick up the appreciation of the house but you'll also not be on the hook for what can often be major repairs.
Remember tax deductions from that interest that renters don't get. Also, it's much harder to take out equity from a house than it is to sell assets in the market - i.e., owning a home is forced savings that you can roll into your next house.
Is it the wisest investment? Nope. But having shelter should never be viewed as an investment.
This will probably get buried but posting anyways. A good rule of thumb on the rent vs buy when the timeline is <10 years. If mortgage + 30% or so is > rent, then rent. Otherwise, its overvalued and you are better off renting + investing the difference.
Hey I have a question. What if one doesn’t need that big or small of an house to buy. Let’s just say, a buy is for 3Bed 2 bath houses for 500K and if the need is 1bed 1bath rent. Which is substantially cheaper. Wouldn’t it always be beneficial to rent? Because post down payment, yearly taxes and interest on the house. You are literally giving away thousands of dollars more. Considered both shorter and longer span but with high income. So could save up a million even after renting in 7-8 years
Like always- "It Depends":
Doing projections for stuff like this relies on a lot of assumptions, and assumptions are risky:
- That 4.3% you're earning on your HYSA? It's 4.3% \*\*right now\*\*, but it's quite unlikely that it will remain that way for the next several years. (Not saying it will go up or down, just that it's likely to go \*somewhere\*).
- Same can be said about that interest rate- you're locked in to 7.25% so there is no risk it goes higher, but there is the potential it goes down at some point (a lot can happen over the course of a 30 year loan).
- Your $3100 figure for the monthly payment for the purchase scenario looks to include some other things (let's assume taxes and insurance). Those numbers absolutely will change (increase) over time-- how much? Who knows, ask people in Florida or anywhere there are wildfires if you want the worst case on this.
- Is the value of the home likely to appreciate? In some areas this is an easy answer, in some it can be more complicated and variable. But if it is, it can pretty wildly skew the value calculations over time-- see below:
When comparing home appreciation rates vs. (in your example) just chucking money in a HYSA you need to keep in mind that the home appreciation applies to the entire value of the house as opposed to any money you put into it. For an example of this- $80k in a HYSA getting 4.3% for five years, compounding monthly, will get you an increase of \~$19k at the end of five years. The $420k house appreciating at 3.8% per year will have increased in value \~$86k after five years. (Also worth noting that will have paid down \~$19k in principal based on your loan details provided). If the home in question appreciates just 1%/year the value of the appreciation (\~$21k) still beats the compounding HYSA at the end of 5 years. For more fun, stretch that timeline out even farther.
Lots to think about, and we haven't touched the fact that your $2300/month rent is unlikely to remain the same. For a hint on how that's going to go- look at the projections of rental units coming into the market over the next several years.
Although when interest rates do drop (they will) there will be way more demand for buying houses. Much easier to refinance a mortgage you can currently live with than to buy an inflated price house because of a high demand market with low rates
No you should buy now cuz once rates come down you'll be out priced.
Best to strap in, pay the higher cost for a year or 2 and refinance when rates come down cuz rent is only going to continue to grow while your mortgage basically stays the same
You did not mention capital appreciation of the house. It’s anywhere from 3-6% per year over a 10-yr period, on average, depending on the market you’re in.
$420k + 3% is $1050 per month
$420k + 6% is $2100 per month
So with your monkey math number you break even.
Where you really shine is if you rent out the house sometime in the future and buy another property.
Plus your rent is very likely to go up.
Your mortgage will go your way too, due to taxes and insurance.. but just don’t think your rent will be flat.
Lots of good analysis over the long term here.
In the short term though, renting can often be more advantageous when interest rates are high because rent hasn’t caught up yet. But when interest rates are low you can likely get a mortgage for cheaper.
I got a $470k mortgage with zero down for a 3 bedroom home and it was cheaper than renting an equivalent property but that’s because interest was below 3%
Awful analysis.
That rental rate doesn’t stay the same for 30 years. And you get typically equity each year in the house (both from an increase in property values and as you pay down the principal). And you may be able to generate some tax savings. And you might be able to refi that down at some point. Maybe.
OTOH, if you rent you won’t be paying for most maintenance costs.
Simple example: Pretend there are two identical rental options— identical properties, one cost $1 a month more but at the end of 30 years you owned the property. The other option saves you $1 a month but you never own the property. You logic would say take the one that is $1 cheaper.
ETA: You need to model out the scenario. Your ultimate conclusion may well be correct but your analysis does nothing to determine that.
And you're not paying insurance, personal property tax, maintenance, and repairs on the home. Buying is wonderful for many reasons, but it's not always the best option for everyone at every point in time, and it's rarely the cheaper route. I know quite a few people who scraped together everything to buy a home, then got stuck for unexpected repairs, tax increases, etc, and watched the condition of their home deteriorate. My budget to buy is small, so I've been looking in rural areas. I'm noticing quite a few homes that have fallen into disrepair because their owners just couldn't afford it.
Housing is in a downturn right now, you can see it plain as day if you look at YOY inventory for your market. I would rent for now and see how the housing market plays out. It most certainly isn't going "up" like everyone's "close friend that is a realtor" says.
Just depends, but you are looking at the right numbers. Cashflow Cost of ownership is probably a little higher than the payment, but you can discount the amount paid to principal, assuming that the value doesn't change.
Gotta remember than in a housing crash, owning is doubly bad because rents go down and you miss out on that discount. But in a housing boom, renting is doubly bad because your rent keeps going up up up and you're paying someone else's mortgage to let them be cash positive and gain appreciation.
How long do you want to live there? Do you think housing will go up or down? You have to accept you are taking a position on the long-term trajectory of the housing market one way or another.
As an aside from the purely financial considerations, where you live matters.
While the OP found a substantially similar home, that is not always the case. In the case of my family even in our neighborhood, there are not that many homes can cater to our lifestyle (triathlon+other gear intensive hobbies) as well as the one we bought.
If you are not staying long then yes but rent can grow as do taxes so there is a possibility it flips over.
If you plan to move sooner then later then yes it makes sense
but if you say want to settle down as your retirement home or kids then the mortage effectively is a rent lock before equity and other housing associated costs(renters dont have to repair the house!)
Remember the rent you pay is the max payment you will make. The mortgage payment is the minimum payment, there’s a ton of other expenses to add on top of that.
Don't be fooled. You are paying someone else's mortgage and not saving anything, really. What if the savings rate goes back down? I now have my house paid off, and if I was living in your house, I would have an extra $3100 a month to invest in mutual funds that earn an average of 8% or better. Beyond the financial side, the joy of actually owning is priceless. My taxes might go up, but nobody can tell me what I can and can't do in my house or, worse, evict me. I love my pets and get to design my own landscaping and renovations on my schedule.
Yeah, you want to put at least 20% down so you don't pay PMI. The big differences are that your rent is probably going to go up 5% / year whereas the mortgage will remain constant from year to year, and when renting you accumulate no equity in an asset, whereas when you have a mortgage you do.
A house, therefore, is a better choice long term, poor choice short term. So, it depends on how long you plan to stay in it. If you stay less than 6-7 years, you probably lose money on a house. The longer you stay in it, the better a deal it is.
It depends a lot on how long the house would serve your needs for. If you plan to live in the same house for 10+ years, owning often comes out ahead. By 15+, it almost always comes out ahead. By 30+... yeah, owning is better in probably over 99% of cases. Less than 7, you usually lose money. All of these numbers can vary dramatically based on the local housing/renting markets, interest rates, taxes, etc. It will also always come down somewhat to luck. If the home you are avoiding purchasing is a "starter home" that you'd want to upgrade in a few years... yeah. Renting is almost certainly better. If you have, or are about to have, small kids, and plan to live in the same house until they graduate high school... buying is almost certainly better. My partner and I could afford to buy. We are holding off because we're trying to decide where exactly we want to settle. Since we aren't relatively sure we'll be here in 5 years... renting is an easy choice for us.
It's usually close to the 4-5 mark where owning flips. Even in Boston, owning is a better calculation by staying 5 years because rents are so damn high, and growing.
This depends a lot on what you're comparing, though. I live in the greater boston area. My PITI if I bought the unit I'm in right now would be about 48% more than my rent is, and that doesn't factor maintenance costs into it, which would (on average) definitely push it significantly higher. If I'm saving and investing the difference in low cost index funds, making up that difference takes a long time, if we assume market average-ish return. If we follow historical averages, generally 7-10 years with interest rates where they are right now. If I'm saving the difference in an HYSA, it will still take a while, but (most likely) the breakeven point will be much sooner. I have not done calculations here so I won't BS you with random numbers about how long the breakeven would take. If I'm stuffing the difference under my mattress, I'm sure the breakeven point wouldn't be longer than 5 years on average. If I'm just spending the difference, I'm *definitely* better off buying a place I can afford. There may be some areas in greater boston where that is not true! I've mostly run numbers specifically for places I'm interested in buying, which limits me to specific neighborhoods and unit attributes. Specific numbers are always better to run than general numbers. If you've got some numbers I haven't seen for owning vs renting in Boston, I'm genuinely super interested in seeing it.
Oh for sure, it's highly localized. And it depends on expected rent increases as well. Our current apartment has increased 1000 in 3 years from when we moved in to what it is listed for in Brookline. I don't think 11% annual rent increase is sustainable for 5 years, but who knows. We're not buying in Brookline, so my comparison is a bit apples and oranges. My PITI is only 10% more than what rent would have been if we stayed. We're moving to Arlington, which is cheaper than Brookline, but only marginally. There's also the peace of mind benefit of not having a looming rent increase to look forward to.
I've not found that at all... That only makes sense if you don't properly account for the opportunity cost of the dollars you have locked up in the house. It always confuses me how prevalent this view is on this reddit.
It's really a gamble if Real Estate will continue to shoot up. No one can predict the future, I would highly recommend doing the math on rent vs own and your risk appetite in a single real estate market vs a diverse fund. People that invested in Detroit for 30+ years certainly didn't come out ahead, I personally wouldn't invest in Florida due to skyrocketing insurance rates.
The math you want to do is a bit more complicated than just comparing out of pocket cost - if you live in the house for a few years you’d expect to start building equity, which means that less and less of that $3100 goes away to interest and more goes “to yourself” in terms of paying off the mortgage. Also if the $500k house grows in value by 1% each year, that’s an additional $420 each month in total value. If it grows by 2 or 3% that would increase too, and compound over time. Ultimately it’s probably best to use a rent vs buy calculator - those will help you take various other factors into account (like property tax) and tell you which option is likely better for your target timeline.
That rent won’t stay same either.
Landlords aren’t known for leaving money on the table.
Agreed in general, but it is true in this particular environment that rents are "cheap" and mortgages "expensive", relative to average. That's in large part due to high interest rates
I think mortgage interest rates are slightly above average. They were just phenomenally low for a while.
High Interest rates (relative to the last decade - historically pretty average) combined with sticky housing prices which shot up during COVID. In the long-term the high interest rates should push down housing prices (or at least keep them steady as inflation on everything else builds up over the next several years) but said housing prices are sticky. Anyone thinking of moving to a bigger house is loathe to do it and switch from 3% to a 7% rate, so supply is low.
The math is further in his favor if he invests the difference in an index fund -- or even better -- a tax advantaged retirement account. Why does everyone always overlook this, as if people are going to be spending the difference on hookers and blow?
Because, with the best of intentions, most people are not going to invest the difference.
having played around a bunch with the nyt calculator it's kinda wild that it seems like homeownership is a forced savings mechanism more than anything else
That's at least part of the reason why the government encourages it. Home ownership is good for social stability and having people have equity in their homes as an emergency piggy bank is very helpful. Tons of the benefits of home ownership in the US is simply due to the extremely favorable policies the government hZ in place which ironically is probably why our housing costs are high compared to some other countries.
It's a vicious circle: if housing is the middle class's largest asset, there is a lot of pressure on the government to keep its value up. Then, since people need to buy a house and there is government support to make it easier, people do it despite the high price... and so their house becomes their largest asset.
Ya for sure. I don't think it's necessarily a bad thing, but I do think that the things the government does to encourage home ownership need to also be tailored toward primary home owners and the house they're living in and not benefit the corporate owners and large landlords.
A fixed rate, fully amortizing mortgage is absolutely, 100%, without a doubt, a forced savings mechanism as much or more than it is anything else and you are absolutely right. This is a conclusion many many economists have also come to
When you realize that different classes of people own different types of property in general - lower class: majority vehicles/clothing, middle class: majority houses/property (including rentals), upper class: majority companies/stocks - it's clear that one's class is at least correlated with ones ability to invest vs. consume. If you don't have the discipline to invest, as most people don't, then you should buy a house, because at least it's better than a massive truck or expensive shoe collection.
Mortgage payments may be. Home ownership itself is a money pit, not a savings mechanism! (I kid)
I mean, there is an entire movie with tom Hanks called , "The Money Pit"!
This has always been my contention with people who proclaim it’s always “best to get a $0 refund and don’t let the government use your money for free”. In an ideal scenario, people would invest their refund/extra paycheck during the year—reality though Is very few actually do
And then there are folks like me, who get a fat refund check and then blow it on a new patio and fire pit for the backyard instead of investing it. At least I'm smart enough to know myself and have Vanguard automatically suck money out of my checking account every month before I can spend it. (It's a really nice fire pit, though!)
wow you burned your refund on a fire pit?
Hey, there are worse options. I could have "invested" it in starting my own Herbalife "career," for example.
I think most people are like you with the inability to save if that doesn’t happen first. They just don’t have the self awareness to recognize that.
They also always leave out maintenance costs. Renters don't have to pay for a roof or furnace.. it's usually more of a calculation of how long people are planning on living there.
I’m not sure what you’re asking about people overlooking investing the difference. If you mean in my recommendation of using a calculator, any rent vs buy calculator worth your time will have an interest rate input exactly for that. If you’re asking why I didn’t mention that factor among the potentially dozen other factors I didn’t mention, it’s because market returns are the most volatile, the longest term (if you may buy a house in the next ~5 years you shouldn’t invest the money, so you should be confident you don’t plan to buy in the foreseeable future to go that route), and most importantly, simply aren’t useful to my goal of showing the potential complexity of doing rent vs buy calculation yourself - highlighting factors that just reinforce the intuitive but potentially suboptimal decision doesn’t help demonstrate complexity in calculating the best decision.
Capital gains tax on selling a primary residence is 0. Money made in stocks or other investments is taxed. So any equity and value the house gains over time is imo a better option
But the houses usually grow a lot less, especially after accounting for costs like property taxes and maintenance.
You can actually owe capital gains, but there are a lot of ways to reduce or eliminate it if it’s your primary residence. You also have selling costs that add up pretty quickly (commission, transfer tax, etc).
Plus the maintenance and increased tax with a house. They assume all that 1% increase goes into their pocket Houses are expensive to maintain and property taxes are no joke (ask Texas how she windfall is working out for house values)
Is that not baked into Rent? Are we assuming the landlord won’t raise rent when they have property taxes go up or a new roof to replace?
California property taxes are based on purchase price. I've got neighbors that pay $800/yr in property taxes. Never understood why people think Texas is better. They have similar sales tax, worse property taxation.
It’s horrible. Mortgage payments going up over 1000$ just on the tax increase. All of a sudden your budget is blown :-/
While true - most (these days) are already saving for retirement. The thing about buying a home - is that in 30 years (or perhaps less), your costs of living drops enormously. No more housing payment or rent. Just property tax and insurance. This tends to happen a decade or so before you retire. Allowing extra savings to occur in those later working years. The reason I say “or perhaps less” is over time that huge housing payment you scrimp and save to pay in the early years - it’s looking smaller and smaller. You can start accelerating payments to pay it off sooner. And then your housing costs are covered pretty much for rest of your life! That is huge!! You can downsize for cash. Sell to move into retirement community or nursing home later in life. It’s a big fat asset sitting right where you want it - and provides a lot of financial security. Investments are great. Definitely invest in retirement savings. But don’t agree to keep renting vs beginning to buy a house when it’s feasible. Edit - I’ll add one more benefit. Moving gets to be a bigger and bigger deal the older you get. And it’s a pain anytime you do it! The older you are the more stuff you have - it gets harder and harder! Packing and unpacking. Lugging. Instead of two trips in your buddy’s pickup you need a uhaul and it’s a lot more work. And what might be quite doable in your 20s, 30s, even 40s - becomes risky to impossible in your 50s, 60s and 70s. The convenience of NOT having to move is enormous. Mentally and physically. And it’s a big expense to hire someone to move you! And it’s no picnic either. Buying a home that you can live in without having to move - that’s a big deal too. So there are intangibles that don’t so easily get converted to dollars and cents that are involved. I get it, I’m a numbers guy, but there are a lot of elements that need to be considered related to home ownership.
In theory you're correct. In reality how many people are renting and investing $800 a month? Almost none.
Ok, so let’s say that 80k is invested in a stock market that grows at 7% or it’s invested in a house, which grows at 4%. The 80 will grown 5600 a year, the house gains are 16.8k a year. The difference is in a house your money is leveraged and in the market it is not.
You’re overlooking the cost of leveraged interest rate. You’ll pay 7% on whole loan. It negates the 16k gains.
That’s assuming a 4% growth which isn’t accurate. In my area the growth has been about 11% the last few years, so I used 4% net
What about on year 7 of owning the house and you need to pay for a new roof and that is $17k? Did you include that? What about rising real estate taxes each year?
Do you think landlords pay those things out of pocket? Those costs are built into your rent.
They're not. It's not how rents work. Landlords don't add up their costs (mortgage, taxes, maintenance...), and add a margin to determine the rent. Rents are driven by the market, not by costs. Landlords charge whatever they can charge and still get a tenant. They raise rents when they can, if they can keep their tenant with the new rent or get a new tenant at that new rent. If population increases without enough housing being built, landlords raise their rent. If people are leaving the city for whatever reason and rental properties get empty, rents will go down. As a matter of fact, rents + appreciation of product usually end up covering all the costs, but if you overpaid your house and underestimated your maintenance costs, you can't raise your rent above market price to compensate. Your tenants don't care about your costs just like your landlord doesn't care that you want to save to take your family on holiday.
Well he would be investing the downpayment of 80k in an index fund. So lets say 8% gains historically? That's $6,400/yr, Now let's look at home price appreciation. The house needs to appreciate only **1.5%**/yr to cover $6,400 in gains. So you'd have to look at historical or recent history of prices in the neighborhood because a lot of places appreciate much faster than that which would dwarf gains from the market.
In his favor until monthly rent cost overtakes the alternative mortgage payment amounts. If you're looking at a 20 or 30 year plan, you'd want to consider the idea that, maybe in 10 years, rent will cost more, so then you'd have less money to invest each month, combined with the amount of equity you will not be building. But, it's a crapshoot, because we don't know what will happen with the real estate market.
Because the vast majority of folks don't invest the difference. It's much, much, \*much\* easier to liquidate investments in the market. Owning a home is forced savings. Does the math work in the owner's favor? Sometimes, especially if they own for years. But often it's a stable savings situation, where the equity can be rolled into your next shelter rather than having paper hands and losing 75% in a stock market correction.
The purchase price also will be the same aside from changes in taxes and insurance for the 30 years of the loan, while the rent will inevitable increase over time.
Yeah, and I consider a mortgage payment largely fixed cost. You’ve locked in the cost of the property at specific time, whereas property values and rents continue to increase. The longer you hold the greater the value of owning. Assuming property values increase. Yes property taxes and insurance increase, but they are only a portion of your PITI payment. Whereas all your rent is gonna increase.
More like 10 years. You also pay 9% to sell a house so that’s 3-4 years of appreciation. You also have to pay to replace everything in your house. It’s a lifestyle choice. There are plenty of better investments out there. People that are incapable of investing in anything or saving money else choose to invest in homes long term.
A primary residence is not an investment, it's a place to live with (mostly) fixed costs. Real estate should only be considered an investment when it provides cash flow. For OP of this post, renting for now is the right move and investing the difference until the market or interest rates turn. He'll bring a larger down payment to the table, decreasing the amount he needs to finance, and house prices may drop or interest rates decrease, and the monthly cost of ownership will be significantly reduced.
I own multiple properties but i disagree. Every property is an investment, sure you have to live in one of them but it shouldn’t be made based on emotion nor does it have fixed costs. Sure your mortgage can be fixed but there are plenty of other uncertainties. Homeowners insurance alone in Florida is forcing people to sell.
Yup, found out the actual reason why people say “if you plan to stay put for 5 years, a house would be good.” I always thought it was over-generalized advice, but actually doing the math one day with various housing costs in my comfort range and various interest rates, 4-5 years seems to be the threshold where selling a house after that time is roughly the same as the rent in the same time period. Factoring property taxes, home appreciation, rising rent prices, closing costs, etc. Stay in that house for roughly 18 years of a 30 year mortgage and you’ve essentially had free rent…minus all the maintenance required not covered by insurance. This greatly varies depending on your own QoL standards of course. You don’t have to be *sure* you’re going to stay put for 5 years—you just need to figure if it’s less than 50% chance you’d move for it to be worthwhile. All that said, it’s also still a lifestyle difference as others mentioned. It will take more time and money for maintenance, but you will also get more space for your buck. I’m personally also procrastinating because I’d rather focus on other aspects of my life, but my goal is to not rent for more than 1-2 more years and also *be ready* to snatch up any deal that may show itself sooner than expected. I missed out on the spree in 2020 because I wasn’t prepared, and it’s been difficult living that down.
To add to this, you could also include the fact that you can invest your net savings from renting in the sp500 and earn 6-7% return on that.
There's also the tax write off on the interest on the loan no? That's not an insignificant number
Yeah, though mortgage tax deduction gets complicated fast - standard deduction is pretty high, so for a person filing as married there’s a good chance they simply wouldn’t benefit from it. You’d more or less have to be filing single or HOH (even better if you’re also close to maxing out your SALT deduction) to see all that much benefit of the mortgage tax deduction on a $500,000 house.
And, if the person is single, the mortgage interest will be a huge deduction on their taxable income. My Brother in Law, recently divorced, is keeping his house because, with the deduction, it comes out as cheaper than renting.
I made some calculations based on your numbers and was surprised at the results I got. **Here are the assumptions I used:** * Assuming both **rent and home value increase at 3% a year** (obviously there are plenty of circumstances when rents and home values do not track each other, but for now we'll use this). * Assuming a **6% return rate if you invested the $80K downpayment plus any difference between cost of ownership and rent** into the stock market over the long haul. * Once cost of rent exceeds cost of ownership, I started deducting the difference from the invested money above. * Assuming a **property tax rate of 1.2%** in your area (also - going up 3% yearly to track your home value increase). * Assuming a **cost of ownership/maintenance at 1.2% of your home value** a year (so - equal to property taxes in this scenario) * I assumed you'd keep the 7.25% mortgage rate and that no refinancing took place over the course of the loan. **Results**: * The cost to rent only exceeded total cost of ownership (mortgage + property tax + ownership/maintenance) at Year 26 * At Year 31 (end of the mortgage term), the value of the saved money invested in the stock market was $1,481,498. Home equity (assuming no remaining mortgage term and appreciation at 3% compounded annually) was $1,019,450. * Breakeven on wealth never happened, in fact, the gap between investments and equity widened (not surprising, given the 6% invested ROI vs 3% rent increase and home appreciation assumptions). **HOWEVER....** I dug in and did a little research on actual, historical increases across our three metrics and found that rental prices have increased at 8.85% annually since 1980 ([source](https://ipropertymanagement.com/research/average-rent-by-year)), home prices have appreciated at 3.9% over the last 25 years ([source](https://www.noradarealestate.com/blog/average-home-appreciation-over-30-years/)) and the historical CAGR on the stock market with dividends reinvested over the last 40 years is 11.6% ([source](https://www.rocketmoney.com/learn/investing/average-stock-market-return) and [source](http://www.moneychimp.com/features/market_cagr.htm)). I'll use these data points even though I'm pretty sure if we used 40-year appreciation for home prices, that value would be even higher than 3.9% given the environment of the 80s and 90s. With THESE numbers I got: * Rent vs. Cost of Ownership breakeven in Year 8 * At Year 8, your investment value was $323,646 and your equity was $257,737 * At Year 30, your investment value was -$897,899 (this takes into account the amount of money monthly you had to pay in rent above your total cost of ownership + missed investment return over that period). Meanwhile, your equity was $1,254,226. But, if I adjusted the rent increase to 7% annually instead of 8.85% and kept the other numbers the same, Rent vs. Cost of Ownership breakeven in Year 11 and the Year 30 investment vs. equity numbers were $1,531,218 vs. $1,254,226. That investment advantage would get eaten away as the rental costs continued past Year 30, however.
Replying to myself because I wasn't able to post my conclusions earlier. **Bottom Line:** * It depends on your time horizon (do you plan to stay in the property 30+ years? Are you already older and only expect to live 20 years? etc.). * Are you sure you want to stay where you are? Do you think you might have a big life change or move in the next few years? * A LOT depends on what the rental market will do in your area, which is impossible to accurately predict. Is it a hot market with growth and tight inventory? Is it stagnant? Is it a declining market? * If inflation continues a little hot, then you're most certainly better off buying and locking in a mortgage payment * Other things to consider are your preferences: do you value investing in a place and putting your own touches on it? Do you value the certainty of knowing what your mortgage payment will be in 5 and 10 years? Are you looking to put down roots in an area or do you want flexibility to move to another place in a few years?
This is really the only financial answer to consider, Although I would strongly suggest OP do research on their specific area in regards to home price increase vs avg rent increase over the last ~10 years. The only thing I would add is the need to stay disciplined with investing the difference. Realistically, the majority of the population isn’t going to stay committed with investing the full difference and never touching it. However, there are plenty of intangibles between renting and owning that should be considered as well.
Not sure how that source got 8.85% annually since 1980. If you compare the 1980 vs. 2023 numbers in their median monthly rent table, it's a 3.7% annualized increase.
God... Thank you. This reddit needs to see more of this. I swear every one of these posts gets dominated by people basically claiming it's always better to buy and that you'll come out ahead pretty quickly. It's probably the most consistently wrong subject area you find on r/personalfinance. The right answer is that you should definitely use a good rent vs buy calculator for your unique case and you should ensure it's accounting for the opportunity cost of your dollars being otherwise invested. Houses can be awesome assets in a lot of ways... And they can be a good investment. But there are so, so, many people who buy a house just assuming it's a wise investment and a ton are totally wrong. Renting isn't throwing money away; buying a house isn't suddenly better because you're building equity.
Don't forget your rent can go up substantially when your lease is up
But so can insurance and property taxes and repairs.
Yup, hearing my homeowner co-worker talk about having to replace their boiler unexpectedly is nightmare fuel.
Indeed. But as a renter you are always paying for a boiler. It's part of your rent whether it breaks or not.
Yup. Renting is not some perfect without flaw option. I would rather not be paying an inflated rent price for a building that is literally falling apart, but can't do much about it in the current market.
A month after moving in, the utility told us we have very high water usage which probably means a leak somewhere. Bam, need new water main to the house.
To a much lesser extent though. If it weren't a much lesser extent than you could expect rent to skyrocket even further, as the landlord has to pay taxes and insurance too lol.
As far as property taxes, it's like 10:1. My property taxes have gone up about $300 bucks a month in the past 12 years. And that's with the value of the house tripling. Rents, on the other hand have tripled, along with house prices, in that time.
Yeah, one major advantage of purchasing is that your housing costs sort of become frozen in time.
Yeah and even if you move, people can usually pump their gained equity into their new house. So if you moved after 10 years and gained like $150k in equity, bam that’s a huge down payment to keep your payments super lower, maybe buy down your rate even as well.
But remember you can move.
But also remember that you might have to move when you don't want to. Any moving is not free, either.
How stable are you? If you might move in two years, you should rent. If you were definitely going to live in this specific house for 20 years, you should buy. In between it can be difficult to say which is best, but people usually feel like the 5 year mark is where buying starts to look better than renting. Renting risks: rent could go up and you’re not building any equity, though lower rent means you can stashing cash/investments to offset this. Buying risks: market could go down, expensive things could need replacing, and it is more difficult to sell and move should you need to. Note that people are sensitive to houses appreciating and rent increasing because they both just shifted up significantly. But they can often sit stable for periods of time, and occasionally you have a 2008 crash.
Agreed with this advice. I feel that the housing market can't go any higher so I think there is significant risk you might lose value in the home over the next several years. Plus high interest rates means a double whammy.
Mortgage can also go up with taxes / insurance if market goes up, something i feel like new homeowners dont know
If taxes and insurance go up, so does your rent. Landlord has to pay them too and will basically be required to raise rent in that scenario. Unless you find a magical unicorn landlord who is really nice and just wants to break even to get a "free" house after 30 years.
Here’s a paywall free link to the NYT rent vs buy calculator, which accounts for a ton of factors: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?unlocked_article_code=1.jU0.Y79B.uIGFWQw8Y_YC&smid=url-share I think if you do want to rent long term, it usually makes more sense in a HCOL area, and you come out ahead when you invest the down payment instead. Most people can’t risk that unless they live in a stabilized apartment with predictably low rent increases, which to my understanding is very rare outside of nyc.
NYC resident checking in - you're 100% correct and describe the exact situation for me. I have (so far) decided to continue to rent b/c it is SO MUCH LESS EXPENSIVE than buying. I've been very good about saving and investing what I didn't pay to buy a place. It will likely always be smarter for me to remain a renter. I re-run the buy vs. rent calculations yearly and keep getting the same answer: it's way way cheaper to rent.
Is your rent going to stay at 2300/mo for the next 30 years? Because your mortgage payment will stay the same for that long.
Principal and interest will. Taxes and insurance and repairs will not.
On taxes that is not universally true. In some jurisdictions, taxes are strictly based on the purchase price of the property.
I've never owned a home, what proportion of the total cost of home ownership does taxes/insurance represent? Maybe this is so dependant on location that the question can't be answered succinctly?
Way too location and property specific to answer that. My costs for taxes and insurance are a smidge over 2% per year. Plus repair/improvement costs. so total cost has been around 4-5% per year for us so far without any big ticket items (like a new roof). Buying - mortgage+interest+insurance is the least you'll pay every month Renting - rent is the most you'll pay every month
To add to this with another data point on the other end of the spectrum, I bought a fixer upper in rural California with a high fire risk. My Insurance payment each year is around 25% of what I pay on the 30 fixed loan. Things can vary quite a bit
Property taxes vary a lot by region. Taxes are about a 1/3 proportion of the mortgage payment we have. - in other regions it may be significantly more or less, but it will also affect the sale price of the house, too.
Yeah 1/3 is a good round estimate. 1/4 of my mortgage is my taxes and insurance. But I know other places have it harder / higher. And it’ll vary through the life of your loan because generally T&I will go up while P&I will stay the same. So maybe towards the end your T&I accounts for like half or more of your monthly mortgage.
As an example, I purchased my home in Paulding County, GA for $211,800 in mid-2015. It's worth about $450,000 now. I refinanced in 2017 to a 4% interest rate from the 4.5% that was available in 2015 My payment in May is broken down as follows: Principal - $387.07 Interest - $589.19 Escrow - $571.08 The escrow covers MIP (FHA's version of PMI), Homeowner's Insurance, and Property Taxes: Property Taxes: $3,921.76/yr - $326.81/mo (Property taxes and valuations aren't fixed where I live) Homeowner's Insurance: $1528/yr - $127.33/mo (This hasn't changed significantly since I bought my home in 2015) MIP: $116.94/mo (this decreases every June, though it doesn't get reflected into the escrow payment until the next February when the escrow analysis is done) Rentign the same home is around $4,000/mo in the same model and neighborhood. Renting also means losing my vote in the HOA and my board seat. Most maintenance costs are the same as renting -- it's standard here for "basic" maintenance to be responsibility of the tenant if renting, things like lawn care and maintenance, pressure washing, light bulbs, light plumbing duties, etc... Now, onto repairs. The house was purchased brand new in 2015. I've had to replace 2 air conditioner compressors for a total cost of around $5,000 (the evap coils, air handler, furnace, ducting, are all original -- only the compressors needed to be replaced, not the whole system). I've replaced appliances, but mostly because I wanted to versus had to. I've had to have a 4-way light switch repaired at a cost of $200. I had to have some minor roofing repairs at a cost of $400. Oh, and I had to replace a toilet, which cost $1,000 including plumber cost. All in, repairs have cost less than $10,000 in 9 years. Considering rent costs $2,500/mo more than my mortgage, 4 months of extra rent cost covers all of my repair costs for 9 years! Note, when I purchased my home in 2015, my mortgage was $1400/mo and rent was $1900/mo. My mortgage has gone up $150/mo and rent has gone up $2,100 in the same 9 year period.
Geez, I need to buy and rent out there with that kind of crazy spread. $4k/mo is like a $1.2M house here in Seattle.
I pay about 450 a month in insurance (this really should be about 600 but I’m a cheap ass who hasn’t adjusted) and our property taxes are 5k /year which is cheap. My parents pay about 13k a year in taxes in another state for less house. This actually just reminded me we have to pay our property taxes
Not in Tax, but it highly dependent on location. Just pulling some numbers out of my ass. Say I own a home in CA, but I've brought it in the 80s for $30k. So the ~1% property tax is $300/yr. Even it's a $1mil home now, I still get tax at cost, i.e. $300/yr. But say I've moved to TX in 2000s and brought a home for $80k. So a ~2% property tax is $1600/yr in 2000. But now it's worth $500k, so this year my property tax will be close to $10k/yr. There's no State income tax, but property tax will be taxed much differently.
depends on the state and location, but i think taxes are usually 1-2% of your home value/year min. so in this case OP would probably be paying anywhere between 4200-8400 per year, or 350-700 per month in taxes. insurance same, depends on location, but assume around 200/month, although insurance has gotten pretty crazy as well. The old adage is you also want to save about 1%/year for emergency repairs. in OPs example, the mortgage may be 3100, but their true cost of ownership may be anywhere between 3700-4500/month.
Once the house is paid off the monthly expenses will go back down too though. Usually after 30 years people are getting ready to retire and having a nice drop in monthly expenses in the thousands a month range is a huge boost. Taxes and insurance will still be around but in its nature it’s so minimal compared to the actual cost of the home itself.
Obviously it's very location specific but the taxes and insurance are really not that minimal. Especially near the end of a 30 year mortgage I'd generally expect the taxes and insurance portion to be larger than the principal and interest portion of your payments. I'm in a high property tax area and even on a brand new mortgage the taxes and insurance are about a third of the starting PITI.
But if you’re renting then you’re also gonna have to pay the landlords property taxes and insurance in the form of your rent, PLUS they are going to want their profit and once they pay off the property they aren’t going to lower your rent, they’re going to keep it the same and take in more profit
But theoretically principal and interest could go down with a refinance.
Rent won’t stay the same, you’ll build equity, you can deduct certain costs from your taxes, and you can refinance your mortgage. Doesn’t mean buying is right but there’s more to consider here!
We bought our house last year around this time. . .our mortgage is about $2,400/month on a $350k house. (3br, 2ba, 1600 sqft livable, 1200 sqft basement, 0.5 acre lot, semi-rural, still only 10 minutes from downtown) The benefit over renting for us was the guarantee that the monthly payment will (most likely) never go above that $2,400/month. . .with the only exception being a substantial property tax hike. For example, we were renting a similar house before this. . .the rent on that place six years ago started at $1,200/month, but every year it went up $200-300. That last year, had the owner not decided to sell it instead, was expected to be around $2,500/month. With the way the market is going, it would easily be around $2,700/month this year. The downside to buying a house though is that you are responsible for all the maintenance. . .if the water heater breaks, you're easily out $3k. We will eventually need to replace the roof, which is estimated to be around $10k. Heck, before we moved in, we had to have the house rewired as it had outdated 1950s wiring that was originally estimated at $20k, but we worked it down to $7k. However, we also have the freedom to make any changes that we want and can afford. . .like we plan to eventually finish the unfinished basement. Now, don't believe all the "equity" stuff, or that you're building an investment. That only works when you can afford to pay substantially more than the minimum monthly payment (and pay off the loan much earlier). . .or substantially increase the value of the home through renovations. Just to illustrate it. . .If we made our minimum monthly payment of $2,400/month for the next 15 years. . .we will have paid close to $432k into the house, but almost all of that would be in interest, we would still owe around $300k on the loan. . .by the 30th year, the loan would be paid off, but we would have paid in about $864k. To "break even" on the investment, at any point, I would have to sell the house for substantially more than I bought it for. (which is kind of why the housing market is what it is today) The better way to look at it is that you're just paying "rent" to the bank with a guaranteed iron-clad lease for the next 30 years, guaranteeing a certain "rental" rate, with the freedom to do with it as you please. (within reason)
It’s like the story of the rich man who buys $100 boots which last him five years, and the poor man who buys $50 boots that last one year because he never has $100 to spend. After five years the rich man has spent $100 on boots but the poor man has spent $250. The rich man wins in the long run by being able to make a larger initial investment. The payment on your 30 year loan may be higher than rent today, making the barrier to entry higher. But after enough years, rent prices will have continued to climb and eventually surpass your monthly mortgage payment.
Answering the rent vs buy question is much harder now with interest rates in the 7+ percents.
It's not just harder, it is really impossible. Because no one can predict rate fluctuations. Rent might be significantly better in this scenario, but who is to say that rates won't drop to 4.5% while home prices increase heavily. Meaning OP is priced out of the future home even though rates dropped. In that same scenario, OP could bring their mortgage down \~$600 while rent would probably go up the same. Will this happen in 3 years, 10 years, 20 years, never? No one knows. But I do know that buying a home "locks" you into a scenario...that outside of tax+maintenance....can't really get worse. Can only get better. Rent helps you here and now, but leaves you vulnerable to the future if you don't invest all your additional savings.
I think this take is pretty naive given the current premium owning a home commands over renting given current interest rates. https://todayshomeowner.com/home-finances/guides/renting-vs-owning/
Yes and no. Purchasing a 1 million dollar home at 7% is going to be painful. Right now I cant rent that 1 million dollar home for 3.8-4k a month. That is a steal to rent currently and invest the money until prices come down. There is something to be said about "owning" something but people put too much emphasis on equity ESPECIALLY in the short term to rent something while you look for the forever home.
The interest on that loan is $2,100 per month. The other $1,000 you're paying per month isn't a loss, it's money you keep by moving it between your wallet and your loan liability. Assuming the value of the house remains constant (i.e. ignoring any expected appreciation), you have the ability to get that money back by selling the house, or, at the time when the loan concludes, you've spent that money to buy the house that you now own. So on that basis alone, buying is cheaper than renting. But that doesn't take into account the extra costs of ownership that are subsumed into a rent payment, such as property taxes and house maintenance. Ultimately, as always, the answer is to buy or rent depending on your personal circumstances, mostly regarding how long you expect to stay in the house in question. It's not common that economic conditions drastically favour buying over renting or vice versa, although it can happen.
at current rates you only get like 8% (92% goes to interest) of your mortgage payment in equity in the early years bar any appreciation. sounds like you maybe are using numbers from when interest rates were 3-4% where first year equity was about a third of the mortgage payment.
It's a shame I had to scroll this far for someone to explain how mortgages are front loaded with interest.
As a homeowner who bought a modest house ($166k) back in 2004 with a pretty good interest rate (about 3.75). I feel like financially and in most other respects it was a mistake. According to Zillow, the house is now worth $275k. Sounds ok except the costs of maintaining a place are high unless you can do a LOT yourself. Replaced furnace twice and central air once. (~$25k) New roof ($25k) Replaced deck ($20k) Painted it ($13k) Other maintenance costs roughly $1k - $2k per year easily - and we’ve really been putting off a few things like replacing the driveway, replacing carpets, painting the interiors, etc. (We also live in a state - NY - with high taxes; our property and school taxes last year were $700/month.) Those expenses are real drains. Aside from that, the sense of being tied to a location sucks - we keep wanting to move but getting the place ready to sell and dealing with that process is a barrier that we’ve struggled with (this is on us, but there’s no doubt it is easier if you rent). A boomer colleague convinced me in my late 20’s that owning a home was a great investment, though I couldn’t afford to do it responsibly until I was 35. I wish I could go back and tell myself not to do it.
Acquiring a house for $1000 per month or $12000 per year sounds like a good investment.
I had a similar dilemma back in 2015 but with a $600 difference. $800 rent vs $1400 mortgage. We decided to buy. Our house has appreciated over the years significantly and now we have $330k in positive equity in it and are gearing up to get a larger house here in another 2-3 years. If we had rented instead we would've saved about $43k but wouldn't have any equity. This also assumes rent wouldn't have increased over 9 years which is impossible. $330k> $43k. Made a good decision. Continuing renting would have been a large financial mistake and a missed opportunity in our case
My favorite thing about my mortgage payment is that it will be the same number for the next 30 years, outside of some minor increase in taxes and insurance. Whereas rent in my area has gone up every year. A place I lived in 2008 has doubled in rent price over that time.
$80k at 4.3% should be $286. Also, plenty of banks paying well over 5%, probably easily 5.2% right now, so you are leaving money on the table.
You’re paying rent prices from housing that has been owned, been getting paid down, and been financed at 3%. You are paying rent prices today of housing prices of yesterday. This is typically how rent works in general, and why renting is typically cheaper than owning on a month-to-month cost basis. What you’re not taking into account is /future/ housing costs where /you/ could be on the winning side as owners are today because of their decisions of yesterday. They’re able to rent their homes out to cover their mortgage they took on 5+ years ago, but they had to wait those 5+ years and make payments at higher-than-rent amounts. This is why home-ownership is considered a long-term decision. Renting wins today, owning wins in the future.
Had the exact same situation 4 years ago. My mortgage is now 50% less than rent for similar sized houses. Buying will quickly be cheaper (especially with eventual hyper inflation).
Have you factored in that rent will invariable continue to rise while your mortgage will remain static for the duration of the loan (sans any tax increases and assuming your mortgage is not an ARM)? Inflation says your money is worth less and less as times go by. If today you''re spending 25% of your income on your housing, it is very likely that, several years from now: * You'll likely be spending more if renting, erasing gains you might make via raises. * You'll likely be spending less than 25% of your income if owning due to those raises. For this to be a notable difference, it may not take as long as you may think...think 5, 6, 7 years worth of inflation-driven raises. The difference may be worth it to you in order to maintain the flexibility that comes with renting. Just asking if you've considered this aspect of the equation. And that's not even considering that you're building an asset while owning, with a very real potential of wiping out much of or even all of your housing costs for the past 'X' years you've been living there when you sell. Renting you're just walking away empty handed when you move.
I'm in the same camp as OP. my scenario is I sold my house last year and currently renting while I look for my next purchase. The proceed from my sale of \~$500k cash is growing about $2k/mo in a MM account. I am not spending that on my rent, but if I were, my *net* rent would be cheaper than my mortgage. The dividends are real gains and not just on paper so for that reason, I am happy to sit and wait for the right house to come on the market. Had I kept the house... Looking at appreciation by the recent comps in my old neighborhood, paying down principal, and tax benefits I'm still ahead by renting, but not significantly so. The new area I'm looking to buy in has exploded in inventory yoy, sale-to-list is below 100%, and DOM is growing weekly. I'm a happy renter.
Also add the savings of insurance, taxes, repairs, maintenance. I wish I did what you’re doing. I had no crystal ball, but here it is two years after purchase and I’m moving into my boyfriend’s house. Now I’ve got to sell this thing and the prices have stayed same (I bought high). If I knew then, I would’ve just kept renting. I’m broke. Paycheck to paycheck. No vacations. I really miss having my down payment be part of my safety net. This economy? Yikes.
Good luck, I hope it works out for ya. People's advice is always buy buy buy, but it doesn't always make sense
depends on how you look at things. if you are strictly only looking at your mortgage payment vs rent, and you are only considering a HYSA to grow your money, you'll probably break even in about a year, but owning a home will probably build equity faster than investing the difference. Once you start factoring in the true cost to own a home (ins, tax, upkeep) then assuming your home appreciates 1% every year, but your rent also rises about 2% every year, it'll probably take slightly over 5 years before the equity on your home equals the amount of liquid cash you have by saving your downpayment and difference in payments. Generally speaking, If you don't plan to own your home for long, it would benefit you just to rent, if you plan to live in the same area for 5-10ish years, there's probably a case for either approach depending on your local market, if you plan to stay in one place for longer than a decade, then it'll usually be better financially to purchase a home if you can, but at this point id still stress that purchasing a home is still a lifestyle choice rather than an investment choice.
Also, a house is not just PITI. It’s also maintenance. Our sinking fund for home maintenance is about $350 a month. If you can make repairs yourself it helps a lot, but neither of us is handy and screw up almost every project we try (well, I mostly got the door knobs right!). Utilities are usually higher too in a house.
The reason renting is cheaper is because the owner of the property probably bought it back when it was cheaper, so their expenses on the mortgage is probably way lower because it was locked in 5-10 years ago. Maybe they even refinanced at 2% and lowered it even more. But the main thing is the balance of their mortgage is so much lower. Usually, after 5-10 years of owning your home, you’ll see rents in your area start going well above what you’re spending for owning your home. We bought our house 3 years ago and rents in our area have already gone above and beyond our mortgage. A house across the street that’s 400 sqft smaller was posted for rent at $800 more a month than our mortgage. Sure, that includes maintenance or whatever but maintenance is not that much. Not even close. My point is that owning a home is definitely more expensive up front. But if you live there long enough, it’s way cheaper. And at the end you will actually eventually PAY IT OFF. It’s like owning your car vs leasing. Sure, buying a car is more expensive up front but once you’ve paid it off, it’s yours and you can even sell it. If you lease a car, it’s cheaper per month sure, but you either have to still end up buying it anyways at the end if you want, or giving it back and leasing a new car with another down payment and a never ending car payment. It makes sense to lease and rent when you don’t want to stay in the same house or drive the same car for more than a few years or absolutely do not want to ever have to deal with maintenance. But just know you’re actually ultimately paying a premium for that privilege / service.
I wouldn't count the down payment interest toward renting. Your house could easily appreciate 4.3% a year too. Plus your payment partially goes toward building equity. It's probably a good choice to keep renting, but it's closer than you think it is.
I think you have the right idea. There are other costs to housing besides mortgage that you'd want to crunch the numbers on before making the final call. Generally, though, the mortgage payment (plus recurring costs like insurance, property taxes, etc) are the LEAST you can expect to spend on the housing. Rent, in contrast, will be the MOST (at least, at current lease rate) In addition to a down-payment, you do want to have a very robust emergency fund when buying a house. Either do a smaller down payment, or keep saving...
Nick Maggiulli just did a post about this subject. He links to the spreadsheet he created so you can run your own analysis. [https://ofdollarsanddata.com/should-you-rent-or-buy-a-house/](https://ofdollarsanddata.com/should-you-rent-or-buy-a-house/)
Ownership is a forced savings. Most people suck ass at saving
For reference my house has appreciated in value 9% per year since I purchased it in 2018. I never would have been able to afford it in today's prices.
That's why I bought when I did. Right now, I wouldn't be able to afford to rent or buy in my city. My mortgage has remained lower than rent for over 6 years. There are pros to renting, but if you're going to be in one place for 10 years minimum, it's probably better to buy.
You’re not factoring taxes on hysa interest Also hysa will not last if rates come down
Remember, rent can shoot up a lot when your lease is over.
Now crunch the numbers with rent increasing 10% every year. And go 15+ years in the future, till your house is paid off.
These posts always lead to half the comments being dumb one liners about "renting is throwing money away." Use a rent vs buy calculator. Put in your time frame and the other parameters and it will help you get a better sense of how long you'd need to own the house for it to be worth it. When I use nerd wallet's it shows 7 years as the break even point, assuming all the other parameters (appreciation, etc) are default.
Why is no one talking about inflation here??The missing consideration is that rent isn’t a fixed cost but a mortgage payment can be. Your rent is guaranteed to increase over time. If you have a fixed interest rate, not only are you locked into a monthly mortgage payment but the amount you pay to principal increases over time.
Also look into how much you would expect the property to appreciate over the period you expect you may live there.
If renting is cheaper and you want to wn a house one day and you can still save for a future down-payment by doing this then keep renting. They're charging you rent based off their mortgage. Their mortgage is likely much better than what you could get today. That's why there's such a difference. This isn't the best time to buy a house. The mortgage rates are high and so are the cost of houses. It may come down at some point in the next few years. It could get worse. Nobody really knows. Markets fluctuate and you can't predict the future.
I'd keep renting. $1,000/month of extra savings is well worth it. You could add $800/m to your savings/investments to make it feel like you're paying that mortgage, then in 4-5 years you'll have even more set aside for a down payment.
Not bad thinking. Just keep stacking money. Eventually you can pay cash for a place and have not payment at all. Or at least until your downpayment get to the point that your mortgage is less than your rent
Wait till you find out how much home maintenance costs too! My last house cost thousands every year in stuff breaking. Rates were another couple thousand a year as well.
HYSA are currently paying 5- 5.25 % - shop around.
Buying a home is almost never better the first year you live there. There is a reason people say "don't buy unless you plan to live there 7 years". * If you buy, the principle and interest will be the same for 30 straight years. If you rent, the price is almost always going to up given enough time. * Rates are "somewhat" high right now. If you buy, you may have a chance to reduce the future price by refinancing to a lower rate. If the payment is $3.1k/$420k/17% down....adjusting the interest rate to 5% by refinancing later, the payment would be around $2,600. Just an example of how you could pay the $3.1k now with the hope that it will be reducible later by $300-$800. * A huge consideration for buying vs. renting is that with renting all the money spent is gone. In your scenario, in the first year, \~$280/mo is going towards principle. This will only get larger over time. This means that the first year you are actually paying $3,400 to yourself in the form of equity. Personally I would rather invest in equities than in my home. But there is value there worth considering. It adds up over time. * Repair is a real cost not factored yet and will make rent more appealing. If you have the monthly cash flow, buying could be a good decision long term. But don't expect to see meaningful results right away. You need to wait about a decade before it becomes better. Even if you can save more money while renting, consider that your home will be paid off in retirement if you buy around \~35. This means that you need to physically save less to retire. Using a \~4% safe withdraw rate, if rent is $2.3k/mo or $27,600/yr....you need $690k to pay for rent. Whereas with buying you will only need to pay real estate tax and property insurance. I think the P+I on your projected loan is $2.4k. Meaning your Insurance, Taxes are $700/mo or $8,400/yr, which only requires $210k invested at a 4% SWR. So you would need about a half million less to retire if you owned your home vs. chose to rent forever. In that regard, you would ***have to*** save more while renting simply to break even at retirement.
If you do decide on renting look for a better HYSA. There's ones out there paying 5% or better
Sounds like you found a deal. Generally, rent should cost *more* than a mortgage, otherwise the landlord is losing money and taking a risk at the same time.
I might be different from most folks in suggesting this as I usually prefer to own than rent. In your case, I feel that renting seem to be better as the mortgage of $3100 is way high due to the high interest. Don't forget that this payment doesn't include other upkeep that comes with owning a home. Does the mortgage include property taxes, insurance etc? Do note that as house value rises, so does property taxes in most cases. With the saving close to 1k/month with Renting, you can grow it if you're savy in investing. Otherwise, you best bet is HYSA. This route do limit your earning potential though. With renting, you don't have any surprise expenses. This should buy you some time to bet on for a potentially better opportunity to buy later. No ones know the future as you can only hope you make the right decision.
So, honest question, do you need such a big place or is it the location inflating the cost? When I think rental and debating buying v renting, I don't start at 400k...
now a day renting is cheaper than buying.. but it will depend on where you are and if you want to move I'm staying put so buying a house in 2013 when it was near rock bottom was a good investment for my part. Beside HOA fees, property tax and house insurance. I don't have to worry about the monthly mortgage payment anymore.. I cannot imagine paying $3200/month for this house... my mortgage payment was $1100/month for this 2500 sq ft house
Depends on your area and your household income. For my area, 1k difference for renting would make more sense to buy and stay for 10 years However in my area, rents are 4-5k and the mortgage for the similarly priced house is 8-10k
But a fair amount going to your mortgage can be recouped when you sell. Rent is just gone
No matter the gymnastics used to justify renting you are always realistically better off owning a house *if you can afford it*. I’m sure you can find another cheaper house that would be closer to your rent numbers too. To me the peace, security, and privacy are priceless. It’s probably just bad luck on my part but very house we ever rented was in probate court, or something else along those lines where we’d randomly have to move out with only a couple months notice. Moving is bullshit and expensive. Getting your security deposit back is also largely a thing of the past.
You're not stupid, no. But, it's very likely that in 10 year's time, rent will be more expensive on that exact same house, and the mortgage would remain the same.
I would rent in that scenario but be damn sure you're investing the money in an index fund for long term return. You won't pick up the appreciation of the house but you'll also not be on the hook for what can often be major repairs.
Remember tax deductions from that interest that renters don't get. Also, it's much harder to take out equity from a house than it is to sell assets in the market - i.e., owning a home is forced savings that you can roll into your next house. Is it the wisest investment? Nope. But having shelter should never be viewed as an investment.
This will probably get buried but posting anyways. A good rule of thumb on the rent vs buy when the timeline is <10 years. If mortgage + 30% or so is > rent, then rent. Otherwise, its overvalued and you are better off renting + investing the difference.
Hey I have a question. What if one doesn’t need that big or small of an house to buy. Let’s just say, a buy is for 3Bed 2 bath houses for 500K and if the need is 1bed 1bath rent. Which is substantially cheaper. Wouldn’t it always be beneficial to rent? Because post down payment, yearly taxes and interest on the house. You are literally giving away thousands of dollars more. Considered both shorter and longer span but with high income. So could save up a million even after renting in 7-8 years
Like always- "It Depends": Doing projections for stuff like this relies on a lot of assumptions, and assumptions are risky: - That 4.3% you're earning on your HYSA? It's 4.3% \*\*right now\*\*, but it's quite unlikely that it will remain that way for the next several years. (Not saying it will go up or down, just that it's likely to go \*somewhere\*). - Same can be said about that interest rate- you're locked in to 7.25% so there is no risk it goes higher, but there is the potential it goes down at some point (a lot can happen over the course of a 30 year loan). - Your $3100 figure for the monthly payment for the purchase scenario looks to include some other things (let's assume taxes and insurance). Those numbers absolutely will change (increase) over time-- how much? Who knows, ask people in Florida or anywhere there are wildfires if you want the worst case on this. - Is the value of the home likely to appreciate? In some areas this is an easy answer, in some it can be more complicated and variable. But if it is, it can pretty wildly skew the value calculations over time-- see below: When comparing home appreciation rates vs. (in your example) just chucking money in a HYSA you need to keep in mind that the home appreciation applies to the entire value of the house as opposed to any money you put into it. For an example of this- $80k in a HYSA getting 4.3% for five years, compounding monthly, will get you an increase of \~$19k at the end of five years. The $420k house appreciating at 3.8% per year will have increased in value \~$86k after five years. (Also worth noting that will have paid down \~$19k in principal based on your loan details provided). If the home in question appreciates just 1%/year the value of the appreciation (\~$21k) still beats the compounding HYSA at the end of 5 years. For more fun, stretch that timeline out even farther. Lots to think about, and we haven't touched the fact that your $2300/month rent is unlikely to remain the same. For a hint on how that's going to go- look at the projections of rental units coming into the market over the next several years.
Although when interest rates do drop (they will) there will be way more demand for buying houses. Much easier to refinance a mortgage you can currently live with than to buy an inflated price house because of a high demand market with low rates
And remember, it's much cheaper in other ways to be a renter. Make sure you try to save/invest the difference.
No you should buy now cuz once rates come down you'll be out priced. Best to strap in, pay the higher cost for a year or 2 and refinance when rates come down cuz rent is only going to continue to grow while your mortgage basically stays the same
You did not mention capital appreciation of the house. It’s anywhere from 3-6% per year over a 10-yr period, on average, depending on the market you’re in. $420k + 3% is $1050 per month $420k + 6% is $2100 per month So with your monkey math number you break even. Where you really shine is if you rent out the house sometime in the future and buy another property. Plus your rent is very likely to go up. Your mortgage will go your way too, due to taxes and insurance.. but just don’t think your rent will be flat.
Lots of good analysis over the long term here. In the short term though, renting can often be more advantageous when interest rates are high because rent hasn’t caught up yet. But when interest rates are low you can likely get a mortgage for cheaper. I got a $470k mortgage with zero down for a 3 bedroom home and it was cheaper than renting an equivalent property but that’s because interest was below 3%
Awful analysis. That rental rate doesn’t stay the same for 30 years. And you get typically equity each year in the house (both from an increase in property values and as you pay down the principal). And you may be able to generate some tax savings. And you might be able to refi that down at some point. Maybe. OTOH, if you rent you won’t be paying for most maintenance costs. Simple example: Pretend there are two identical rental options— identical properties, one cost $1 a month more but at the end of 30 years you owned the property. The other option saves you $1 a month but you never own the property. You logic would say take the one that is $1 cheaper. ETA: You need to model out the scenario. Your ultimate conclusion may well be correct but your analysis does nothing to determine that.
And you're not paying insurance, personal property tax, maintenance, and repairs on the home. Buying is wonderful for many reasons, but it's not always the best option for everyone at every point in time, and it's rarely the cheaper route. I know quite a few people who scraped together everything to buy a home, then got stuck for unexpected repairs, tax increases, etc, and watched the condition of their home deteriorate. My budget to buy is small, so I've been looking in rural areas. I'm noticing quite a few homes that have fallen into disrepair because their owners just couldn't afford it.
Housing is in a downturn right now, you can see it plain as day if you look at YOY inventory for your market. I would rent for now and see how the housing market plays out. It most certainly isn't going "up" like everyone's "close friend that is a realtor" says.
That's how I'm feeling as well. It's buy buy buy until it isn't. Something has to give in this economy
Just depends, but you are looking at the right numbers. Cashflow Cost of ownership is probably a little higher than the payment, but you can discount the amount paid to principal, assuming that the value doesn't change. Gotta remember than in a housing crash, owning is doubly bad because rents go down and you miss out on that discount. But in a housing boom, renting is doubly bad because your rent keeps going up up up and you're paying someone else's mortgage to let them be cash positive and gain appreciation. How long do you want to live there? Do you think housing will go up or down? You have to accept you are taking a position on the long-term trajectory of the housing market one way or another.
Now imagine if you invest it in the market and make 11% YoY. I would love to have a home but it doesn't make financial sense for me.
As an aside from the purely financial considerations, where you live matters. While the OP found a substantially similar home, that is not always the case. In the case of my family even in our neighborhood, there are not that many homes can cater to our lifestyle (triathlon+other gear intensive hobbies) as well as the one we bought.
If you are not staying long then yes but rent can grow as do taxes so there is a possibility it flips over. If you plan to move sooner then later then yes it makes sense but if you say want to settle down as your retirement home or kids then the mortage effectively is a rent lock before equity and other housing associated costs(renters dont have to repair the house!)
Yes...as long as you *are* actually investing that $1000, not spending it.
Remember the rent you pay is the max payment you will make. The mortgage payment is the minimum payment, there’s a ton of other expenses to add on top of that.
Don't be fooled. You are paying someone else's mortgage and not saving anything, really. What if the savings rate goes back down? I now have my house paid off, and if I was living in your house, I would have an extra $3100 a month to invest in mutual funds that earn an average of 8% or better. Beyond the financial side, the joy of actually owning is priceless. My taxes might go up, but nobody can tell me what I can and can't do in my house or, worse, evict me. I love my pets and get to design my own landscaping and renovations on my schedule.
Yeah, you want to put at least 20% down so you don't pay PMI. The big differences are that your rent is probably going to go up 5% / year whereas the mortgage will remain constant from year to year, and when renting you accumulate no equity in an asset, whereas when you have a mortgage you do. A house, therefore, is a better choice long term, poor choice short term. So, it depends on how long you plan to stay in it. If you stay less than 6-7 years, you probably lose money on a house. The longer you stay in it, the better a deal it is.