Renting vs buying - Which Choice is for You?

There are many things to consider when buying a home. Since it is likely that the purchase of a home will be the most expensive purchase of your life, you will want to consider several things before you even start to look for a home.

If you are currently renting, you need to know about the possible advantages of home ownership, and if they apply to your current situation. Are you financially ready to make such a large investment? How expensive of a home can you afford? Is the current market environment favorable for buying a home?

Renting Vs. Buying

Compare the cost of owning and renting the same home. This is simple enough to do. Just take the monthly mortgage and other housing costs and compare it with the cost of renting that same property. Remember to figure the tax savings by taking the cost of the mortgage payment plus property taxes and multiplying that by your tax rate. This will give you a fairly good idea of your tax savings each month. Subtract those savings from your monthly housing costs if you were buying and compare that with the rental rate. If they are very close in monthly expense it is usually a good value to buy.

This can also be a good way to compare the current housing market. It will tell you if the current housing is a fair value, over priced or under priced. Just remember that in some very desirable areas it will almost always cost more to buy then to rent. If the additional expense is more then 20 to 30% you should be cautious. Be particularly cautious if you plan on moving again in the next 3 to 5 years.

The Advantages of Home Ownership

It should cost you less to own a home then to rent. There is a fairly simple calculation that will tell you this:

Take your monthly rent multiply by 200 = purchase price of home

($___________rent per month X 200 = $_________________ )

Example: $900 X 200 = $180,000

In this example, the payment on a $180,000 home would be comparable to a $900 monthly rental payment.

In addition to the current cost of rent vs. purchase, you must also take into consideration the future cost. As a renter you are exposed to future rent increases. It is reasonable to expect an annual increase of 4% per year to your rent.

There are many advantages to home ownership. The value of a home usually increases during the years that you are paying your loan down. This increase in equity is building up the wealth you accumulate in your home. Even without this expected increase in value, paying on a mortgage over 30 years can guarantee that you will own your home free and clear when you retire. This reduction in monthly housing expense is something many retirees look forward to. If you choose to trade down after retirement to a less expensive home, you can use the difference in value to free up a lot of extra income you currently have in your home. The home equity you are building in your home can also be borrowed against at some future time for college expenses, vacations, remodeling the home or almost anything else you might need the money for.

Another benefit to home ownership is that you are not subjected to the intrusion of a landlord.

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