To buy or to rent, that is the question. Now, most of us are fully aware that a home is one of the greatest assets you’ll own in your lifetime. You don’t have to do much digging to find that top benefits of homeownership include tax deductions, appreciation, equity, stability, and the freedom to alter/improve/decorate your own home as you see fit. So with these benefits and more, why are there still so many renters?
The three most common reasons renters choose to rent are creditworthiness, down payment, and freedom. Creditworthiness will affect the ability to secure a mortgage, as well as dictate the mortgage rate. Even if one has stellar credit, it’s often difficult to stack up a pile of money to be used toward a down payment on a home. While renters are writing rent checks with their hard-earned money, it can be challenging to set aside enough money to put 10-20% down, on the purchase price of a home. Lastly, in terms of freedom, renting tends to provide certain freedoms, while limiting others. Renting does offer the freedom to pick up and go without the burden of waiting for a sale to close, it often limits the freedoms one has to decorate, update, and/or modify even the color of the walls.
With this pro and con analysis, one could think both renting and buying are on equal playing fields in terms of their respective positives and negatives. A recent study by Trulia’s Chief Economist Jed Kolko proves this assumption to be wrong. 45% wrong, that is. Kolko conducted an in-depth survey to get to the bottom of just how much cheaper buying is than renting. The study was based on the following assumptions: the ability for one to receive a mortgage rate of 3.5%, the average length one remains in the same home is 7 years, and that one is in the 25% tax bracket, (and in turn, receives the associated home ownership tax breaks for the bracket). Upon crunching the above numbers, the outcome across all 100 metros in the USA was unanimous: homeownership pays off in a big way. After all, on a national average rents are climbing faster, more steadily, and at greater rates than the sales price of the average home.
To test out Jed Kolko’s formula for yourself, and play around with your own parameters and assumptions, read the entire article here.
(Warning: You may want to dust off your calculator, get out your notepad, and brush up on your math skills beforehand!)