A new year, and your lease is going to end (or you’re already month-to-month and wondering what to do). Should you buy or rent your next home? Whether to buy a home is a very personal decision; it’s never strictly a financial decision but an emotional one, too. Deciding whether to rent or buy isn’t as simple as simply comparing rent and mortgage payments. There are pros and cons to each option.
The financial benefits of buying include building equity for your future (the American dream) and possible tax benefits. But owning your own home can also provide you with a sense of security, pride of ownership, and an extension of your personality. Whether you are a green thumb looking to put down roots or want to show off your flair for design or art, ownership allows you to express your individuality. This doesn’t come without responsibilities, but for many those responsibilities are far outweighed by the financial and emotional benefits.
The New York Times has a fun tool that can help with the financial side of the equation.
Looking at the Austin market, the number of available rental properties has been declining, causing rents to go up. And interest rates are at historic lows. Even looking simply at out-of-pocket costs, buying could cost the same per month as renting – or even less!
Here is a comparison of two South Austin homes that were for sale, 2207 Stone River and rent, 901 Cloudview, as of this writing. Both of these 3 bedroom, 2 bath South Austin homes are within a mile of each other, with nearly identical square footage and lot size.
The rental was offered at $1800 per month; the home for sale was offered at $ 265,000. This example assumes a rental deposit of one month’s rent as an up front cost of renting, and assumes that the purchase would be with an FHA loan with a 3.5% down payment, a 1% origination fee, and a 30-year mortgage at 4.5% (although we are currently seeing interest rates lower than that!), with a contribution to closing costs paid by the seller.
|Down Payment plus closing costs||$17,569|
|Principal & Interest||$1,318|
|Private Mortgage Insurance||$181|
|Home Owner’s Insurance||$88|
In this example, it costs you $3,625.00 to get into the rental, with monthly expenses of $1,825, while it costs just over $13,000 more to get into your own home (there ma
y be down payment assistance available to help cover some of this cost), with only a slightly higher monthly cost to own your own home. And if you are able to obtain a mortgage with no private mortgage insurance – either through a credit union program, lender paid private mortgage insurance, or because you can put 20% down – your monthly costs will be even lower. Click here to view the detailed PDF of estimated closing costs.
And this is just your out of pocket expense. You will also see potential tax benefits because your mortgage interest and your property taxes may be deductible on your federal income tax returns. Assuming that you are in a 25% tax bracket, in this example you will save $2,710.00 per year in taxes, or approximately $225.00 per month in additional savings. Tax savings calculator link.
Buying instead of renting maybe right for you, if you:
- Have reliable income and good credit.
- Can afford at least a 3.5 percent down payment or qualify for one of the many Down Payment Assistance Programs avalible.
- Want a chance to build equity and be eligible for homeowner tax breaks and credits.
- Have adequate cash reserves to weather the unexpected, such as illness or job loss.
- Plan to stay in your home for a minimum of 3 years.
If you have any questions about how this would work for you, let one of the Moxie Ladies take you out for coffee and to see if buying is a good fit for you as you plan for 2016!