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Choosing Between Renting vs. Buying

Updated March 5, 2017 . AmFam Team

Deciding to buy or rent isn’t an easy decision, but we’re here to help you ask the right questions to figure out what the best route is for you to pursue.

The “buy vs. rent” question isn’t always an easy one to answer. Investing in a home is a huge step — it can be a good financial move for a number of reasons. But renting has its perks, too — what to do? Your finances will of course impact the decision, but other external forces can come into play as well. Your area’s cost of living and average cost of homes vs. rental prices for similar properties should be contrasted against one another.

Because there are so many factors that can weigh heavily on your decision to rent or to purchase a home, we’ve put together these tips to help you understand what works best for you.

Calculating the Cost of Renting vs. Buying

Though buying a home is a great investment, the monthly costs can often add up to more than rent. But that doesn’t mean you shouldn’t buy! Decide how much you can realistically afford to pay each month and do the math on whether that would cover a monthly mortgage payment on your ideal home or if renting would be more financially feasible.

When deciding this, don’t forget to consider the kind of home that would allow for an advantageous resale. Sure, you can buy a low-cost home with a lower mortgage, but it might be hard to make money or even break even when you go to sell it — not such a great investment.

Once you consider these factors and know what you can afford, add up the approximate monthly payment, utilities, homeowners insurance and property tax payments, then compare it all to the cost of rent — which will likely go up every year or so — utilities, renters insurance and any other payments related to having an apartment. Perhaps you can afford a home in a neighborhood that fits your needs. Perhaps renting gets you a home in a better location with nicer amenities — which is more important to you?

Other Considerations When Deciding to Rent vs. Own

Of course, your personal finances weigh heavily when paying either a mortgage or a rental fee. But as a renter, you may not be aware of the overhead required to keep a home in habitable condition. And then there are the financial conditions of your local economy that can really impact whether you can afford to purchase a home in a given area. Look at some of the ways that your decision to rent or buy is impacted by external factors:

Your Location

In areas with high population densities, simply locating a place to rent can be a challenge. Climbing housing costs can sometimes push you out of a once-affordable neighborhood. When this is the case, you may need to widen your search area or consider purchasing a home somewhere else.

Market Competition

When home prices are predicted to remain on the rise it can be hard to find affordable homes to buy. As home prices increase, buyers face greater competition for fewer homes, and that drives real estate costs up.

Mortgage Rates

As mortgage rates shift, so also does home-buying affordability. If adjustments are made to slow inflation and interest rates are raised, lenders’ mortgage rates will likely be impacted by that move. And when short-term interest rates are on the rise, you’re likely to find your money doesn’t go as far as it used to.

In today’s economy of climbing interest rates and escalating real estate prices, many are finding themselves unable to come up with the funds to purchase a home. Buying and selling a home can be more difficult in economies like these.

Your Personal Debt

The amount of discretionary cash — the money available after all debts are paid — that you have month-to-month depends greatly on your personal debt burden. After student loan installments, credit card payments, auto loans and other monthly payments are made, you may not have much left over.

After you buy a home you’ll also have to pay for property tax and insurance on the home too. And because you’ll need to have funds available to make emergency purchases after buying a home, renting may be a cheaper option for you. You may find yourself needing to pay for a $10,000 roof — are you financially prepared for maintenance costs like these?

Your Local Cost of Living

Income tax rates vary state to state. And property taxes can differ greatly from one neighborhood to another. And the truth is, some areas are simply more expensive to live in than others. If you chose to purchase a home in an area where the cost of living and local tax rates are high, you may not find too many affordable homes for sale.

Still Undecided About Renting vs. Buying?

By now, if you’re wondering how to decide if renting or owning is best, you’re not alone. With so many variables in play, it’s a tough call. Try narrowing down your decision by answering a few key questions.

Are you ready to stay in one place for at least five years?

If the answer is yes, then chances are investing in a home would be a good move. It takes about five years to gain a decent amount of equity in your home, so you should be able to sell it for more than you paid and fund your dream for the next home. Be sure you keep that return on investment in the front and center as you move through the decision-making process.

If the answer is no, renting is probably your best option. Use this time to start saving for a down payment, so you’re financially prepared when you’re finally ready to settle down.

Do you have a down payment ready?

If you do, then you’re one step closer to buying a home. Most mortgage lenders will expect at least a 20% down payment if you want to avoid paying PMI, but depending on who you go through, you can get as low as a 3% down payment. Just remember, the lower the down payment, the more risk you are to the lender, so you’re likely to find more fees and a higher interest rate.

If you don’t have a down payment ready to go, then your best move may be to put off buying and kick-start a new savings plan, which will give you more options in the future.

How much can you afford to pay each month?

Though buying a home is a great investment, the monthly costs can often add up to more than rent. But that doesn’t mean you shouldn’t buy! Decide how much you can realistically afford to pay each month and do the math on whether or not that would cover a monthly mortgage payment on your ideal home.

Are you ready for the upkeep that comes with homeownership?

If you are handy or have the means to set up an emergency repair fund, you might be ready to take on the leaky faucet, roof repairs or sewer line breaks.

If you’re not into fixing things up, you may be interested in buying a property that doesn’t need as much attention, like a condominium or townhouse, but renting could still be your best option.

Could you use a tax break?

If your earnings put you in a bracket where being able to deduct mortgage interest and property taxes will help you out, you may want to consider buying a house. If you’re still getting money back every year, then perhaps a tax advantage won’t make a very large difference and renting is still your best option.

Here for All of Your Renting and Homeowner Needs

Whether you decide to buy or rent, your American Family Insurance agent (Opens in a new tab) is here to help you review potential costs for homeowners or renters insurance. They can help to make sure your assets never go unprotected.

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