First Time Homebuyers: Two Ways to Compare Renting vs. Owning a Home

One of the hottest topics in housing is whether it’s better to rent or buy a home. The answer always changes based on market conditions, so it’s handy to use a rent vs. buy calculator to do comparisons on the fly.

But you should also know how rent vs. buy calculations actually work so you can feel confident in deciding what’s right for your budget and your family. Here are two easy ways to do this.

How long before owning is cheaper than renting?

You need to understand is how long it takes for buying to become more financially advantageous than renting. The threshold you cross when buying becomes more favorable is called the breakeven horizon.

This is a calculation created to incorporate all possible buying costs and benefits such as the down payment, closing costs, mortgage payment, property taxes, insurance, utilities, maintenance, and tax benefits, as well as all renting costs for the same home. Calculations also incorporate home value and rental price appreciation.

Breakeven horizon is the year when buying costs become less than or equal to renting costs, when accounting of all of the factors noted above.

According to the most recent quarterly data, the breakeven horizon is less than two years in 72 of America’s 100 largest markets. When it comes to making an investment as large and as long-term as a home purchase, this is a very compelling breakeven period.

The latest report allows you to look at local markets so you can see what the breakeven horizon is for you, and the tables also include median rents for quick reference.

Checking the numbers

You need to understand is how rent vs. buy math works for you personally. You do this by calculating the monthly costs of home ownership, subtracting tax benefits, then comparing the final figure to the rental cost of a similar home in the same neighborhood.

Let’s assume you have a credit score of 750, and a $300,000 home purchase price with 10 percent down (that’s $30,000) for a 30-year fixed mortgage. Current rates are around 3.25 percent.

In this scenario, a mortgage calculator quickly tallies your total monthly housing costs as follows:

Mortgage payment of principal and interest $1,175
Property taxes $300
Private mortgage insurance (PMI) $133
Homeowners insurance $67
TOTAL monthly housing cost


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Post Category: Home Buying, Mortgage & Finance, Property Taxes

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