RENT VS. BUY
The decision of whether to RENT or BUY a home often
begins with a decision about lifestyle.
Renting provides mobility and for anyone who can't envision themselves
staying in the same home or community for 5 to 7 years, renting is most likely
the best option.
However if you are ready to make the move to home ownership what follows are some considerations in the rent vs. buy debate.
Home Ownership- Affordability
In many communities, a monthly mortgage payment may be
lower than the average monthly rental rate.
Home owners can lock in a mortgage rate and their monthly payments.
Renters on the other hand may be subject to increasing rents, depending on
market conditions. Personal finance experts* suggest monthly rent or monthly
mortgage + taxes + home maintenance costs should equate to between 25-28% of
household monthly income.
The price- to- rent ratio is a good indicator of market
conditions and the favorability of renting or buying a home. This ratio represents the price of a house
divided by annual cost of renting a similar home.
Example:
Home Price: $500,000
Rental (monthly): $2000
Rental (annual): $24,000
Price-To-Rent Ratio: 21
A price-to-rent ratio above 20 suggests renting as the
preferred alternative. A price-to-rent
ratio of below 15 indicates homeownership may have more benefits.
Calculate for yourself
The Advantages To Owning
One of the advantages of homeownership is the ability to
deduct certain costs associated with home ownership from federal income
tax. Most homeowners itemize their
deductions. This allows, under current
tax laws, the following deductions:
- Home mortgage interest
- Property real estate taxes
- State income taxes
- Personal property taxes
- Most moving expenses
Consult a tax professional for an accurate and up to date
understanding of the full tax advantages of home ownership in your community.
Loan term equity is another distinct advantage of home
ownership. A house is an investment as
well as a home. Over time the value of
the house may increase depending on market conditions. To gain a more complete understanding of the
history of home values in your neighborhood consult an ERA® agent.
Other Factors To Consider
- Is the commute realistic and/or affordable?
- To purchase a home will your
savings be drained? Can you continue to
save money (contribute to 401K, college savings plans etc.) once you have a mortgage to pay?
- Have you factored
in maintenance costs of a home? The general rule of thumb** is to budget 1% of
the purchase price of the house for annual maintenance.
- In addition to the down payment
have you factored in the closing and the moving costs of associated with a home
purchase.
- Do you have an exit strategy if
necessary?