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 Zillow.com 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?
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!
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.
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