Buying A House Could Be More Cheaper Than Renting

by Charles on February 27, 2012 · 10 comments

in Home, Real Estate, Tax

I bought my house nearly 6 years ago in 2006. That was when the housing boom was almost at its peak when home values were much overvalued. Even so, people were buying homes as if they were the bargain of the year. At the same time, the rental market suffered greatly as more and more people were buying. The housing market subsequently crashed and the rental market is starting to gain momentum.

I know isn’t the most accurate resource but to use, but it’s one of the best that’s available to us for use as a reference for free. I use it every month to track the market trend of my home and homes around my neighborhood. One of the newer feature of this site is the assessment of rental value. I entered my home address and discovered that the monthly rent estimate is quite higher than the estimated monthly mortgage. According to this resource, it is more costly to rent than to buy a home by almost 40%! That’s crazy! Who would be crazy enough to rent when you can buy for cheaper? Something’s got to give, right?

zillow estimate

Mortgage Payment Dissection
The mortgage payment consists of several factors. It’s not just about the principle and interest as you may assume. We have to account for property taxes, home insurance premiums, and PMI or HELOC loans on top of the interest and principle from the mortgage. In my county, property taxes are about 1.1% of the assessed home value. My annual home insurance premium is around $600. I don’t have any PMI because my down payment was greater than 20% of the purchase price, but that could be another around $300 per month. Let’s add them up:

  • Principle and Interest = $1529
  • Property Tax = $313
  • Home Insurance = $50
  • Private Mortgage Insurance = $318 (from PMI Calculator)

That’s a total of $2,210 per month as a home owner. That’s almost $100 more than the estimated monthly rent on the same property. So, this now suggests that renting is cheaper than buying!

new home

Tax Deduction
One of the biggest benefit of making a mortgage payment is that the bulk portion of the payment is tax deductible, especially if the loan is still in its early stages. Depending on the nature of the mortgage loan and the interest rate involved, the interest portion of a typical 30 year fixed loan can be around 70% of principle and interest payment.  In this example, that would be around (0.7 x $1529) $1070 every month. This amount is tax deductible. Additionally, the property tax is tax deductible as well. In this example, that amount is $313 every month. So, the total tax deductible amount every month is $1,383. If you are in the 25% tax bracket, that could mean $346 back to you every month. You can increase your withholding allowance accordingly to take home more money from your paychecks.

Now, let’s go back to the above comparison between renting and buying. We estimated that to buy, the total monthly cost would be around $2,210 as opposed to $2,116 for renting. With the tax deduction accounted for, the total monthly cost would drop to ($2,210 – $346)  $1,864, almost $250 less than rental cost.

Down Payment
This entire example assumes a 3% down payment which is required for an FHA loan. A 3% of $341,700 loan is pretty significant amount of money. It’s $10,000 in cash that a typical renter may not have to take advantage of buying a home. In that sense, this example is flawed to a bit as we are not completely comparing apples to apples. But you get the idea. Considering all things, the monthly cost of buying a home can be more affordable than renting. But at the same time, there are plenty of other items that increase the unforeseen costs of home ownership.

Make Smart Decisions
When making this decision to buy or rent, cost should not be the only factor to consider. Consider other factors when making your final decision such your living situation, amount of savings you have, the quality of the neighborhood and location, among others. There are certainly benefits for both renting and buying. If you’re looking for a longer term living, buying may be a more feasible option as you build equity on your home. If you’re looking for a shorter term living, then renting may be a better option, as you can always rent a smaller space, save money and then buy later.

Do you regret buying or renting your current home? Share your experience with us.

Photo: new home prior to moving in, Charles

Shaun @ Smart Family Finance February 27, 2012 at 7:13 AM

I think you also have to consider the trade-off of maintainance. I know my own home has proven to be much more work than I expected.

I also think people forget that when they buy a house, they are usually doubling or tripling their living space. People usually don’t compare apples to apples. They compare the 1,800 square foot house to their rent payment for the 525 square foot appartment.
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Dr. Dean February 28, 2012 at 5:34 AM

There are so many factors to consider when purchasing a home. Before even considering price, one needs to look carefully at your personal situation. Those cost estimators you mention don’t take these factors into consideration. When you finally work through all the factors of whether buying is right for you, then cost comes in. PF Blogs like ours are great tools to help with this process.
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shanendoah@the dog ate my wallet February 28, 2012 at 2:33 PM

Houses in our neighborhood do rent for more than my mortgage. It can seem ridiculous to rent instead of buy, but there are other factors.
Some people just don’t have the ability to save a substantial down payment while they are paying the higher rent. And banks have gotten much pickier about requiring that down payment right now than they were during the boom.
In addition, there is maintenance. When you rent and the water heater goes out, the land lord is responsible for replacing it. When you own, you are. There are all sorts of little, every day type expenses that come with being the homeowner that don’t exist when you’re a renter.
At the same time, there’s a freedom that comes with being an owner- you can paint the walls any color you want, you can have red carpet, you can have pets, without having to get someone else’s say so. (Your exterior freedom might be limited by an HOA.)
Overall, rent vs buy is so much more complicated than just the numbers.
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maria@moneyprinciple February 29, 2012 at 3:34 PM

Just like with most things PF the decision whether to rent or buy is not, and cannot be, purely financial one; it is a choice of life style. What if you would like to be able to move quickly? What is you value the freedom not to bother with maintenance, taxes etc.?
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UltimateSmartMoney March 1, 2012 at 7:24 PM

These days, many people cannot even qualify for a loan that large even with a good credit. It’s now a big problem for potential home buyers.
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John@MoneyPrinciple March 8, 2012 at 5:40 PM

Ah – tax deductible it may be in the US but not over the pond. This was abolished back in the late ’80s I’m afraid and even then it was only on the first £30k of the mortgage, another change that ISTR dates back to the late 70s or perhaps earlier. But it doesn’t seem to have stopped people buying houses.

Mind you the logic of making the interest payment on a loan to buy your house has never been entirely clear to me because at least in the UK you don’t pay a tax on the profit you make when you sell it.
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Julie @ Freedom 48 March 8, 2012 at 6:53 PM

I think renting is better upfront in that it can be cheaper and you’ve got less stress and responsibility – but at the end of the day – even 30 years later – you walk away with nothing.

Owning may be more expensive on a monthly basis and can be a huge headache at times with repairs and maintenance – but paying off that mortgage is incredible. Being able to sell the house to help fund your retirement is essential!
Julie @ Freedom 48 recently posted..6 Questions to Ask Before Making a Purchase

Taline March 10, 2012 at 12:07 AM

Owning my home and my rental properties has been a much better option for me than renting and having no rental properties.

Even if I had no rentals, owning my home has allowed me to keep much more of my hard earned money (since I’m at a high tax bracket).
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Robert @ The College Investor March 11, 2012 at 9:41 PM

I own my home and I’m happy I do. Would I rent instead, probably not. But I may have purchased a smaller home than what I did.
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