To rent or to buy? That is the question many people ask themselves at some point in their lives. Whether you just got married or moved out of your parent’s house, it’s natural to look for the most favourable option. And while for some, renting an apartment is the perfect solution, others prefer buying a home. But which one should you choose?
Let’s look at the question strictly from a financial perspective.
Interest rates are a major factor in any decision to rent or buy. The interest rate plays a role in both costs, so we decided to look into it separately.
Rent: This is an interest-free option as you do not ‘borrow’ money in order to pay for your home. You will have to pay your landlord’s mortgage and taxes, but no interest is added for that payment.
Mortgage: When you decide to buy a house, you are borrowing money from the bank and then you have to pay it back with some added interest payments. Depending on how much money you borrow, the interest rates can vary from 2% to 6%.
Let’s look at an example. If you borrow $100,000 at a 5% interest rate, after 30 years, you will be paying $1,821 per month in principal and interest payments. That means the total cost of buying a house will be about $3,500,000.
When renting, the only thing you will have to pay is the rent.
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What Does It Mean?
Renting: This option is cheaper than buying one in the long run. However, whether it is affordable or not depends on your situation and income. For example, if you are living in a high-cost city like New York City or San Francisco, where average rent prices are $3,000 per month, this option might not be affordable at all. You could be spending up to 70% of your salary just on rent!
Mortgage: As with any other loan, the interest rate is the main factor determining how much you will end up paying for your home. If you choose to buy a property as soon as possible and get a 30-year loan at 3%, then your monthly payments will be low enough for you to afford them.
However, if you want to stretch it out for 40 years (which is the maximum usually allowed) and take a loan at 6%, then you could find yourself struggling with higher payments every month. Remember that there is also property tax and insurance to take into consideration. And the property tax varies from state to state.
The next thing we should consider when comparing the two options is maintenance costs. While they don’t come into play when renting a single-family house or an apartment, they are a significant factor when buying one. Both repairs and home improvements fall into this category.
Rent: This doesn’t cost anything extra. The only exception could be if there is something wrong with the apartment itself – for example, there was a burst pipe that caused big damage to the floor and walls of the apartment below yours. Your landlord will most likely cover the repairs; however, it is possible that your rent will increase as well. Also Read: How to find an apartment in San Francisco
Mortgage: Buying a house means having additional maintenance costs such as home repairs and home improvements. These costs can be very high compared to renting – and because they occur over time, they are easily forgotten about. If it takes half a year for your air conditioner and furnace to break down, you won’t notice it right away.
Over time these charges add up and become significant. Therefore, it’s important to plan ahead and save some money so you won’t be financially ruined when it’s time to make repairs.
Property Taxes & Insurance
Property taxes and insurance are another common cost associated with buying property. They are more predictable than maintenance costs because they don’t come as often or as randomly as repairs do. Moreover, they are easier to budget for because they are paid once every year or two.
Rent: Property taxes and insurance don’t apply when renting a house or apartment. Again, if something goes wrong with the building itself or someone else breaks something in it, your landlord will take care of it if he/she has insurance coverage for that particular damage.
Mortgage: When buying a property, property taxes and insurance premiums can constitute between 2% and 4% of your annual mortgage payment. In New York City and Chicago where property taxes are sky-high, this number can reach up to 10%. Of course, these costs depend on many factors such as location and value of the property and the insurance company that provides homeowners insurance for it.
The Bottom Line
Rent is a fixed monthly expense, while a mortgage also comes with other expenses – maintenance and repairs, property taxes and insurance – that can be more of a challenge to budget for.
Buying a home is an investment, and if done right can be a rather lucrative one. When renting a home, you have more flexibility. You can up and move on a whim because you’re not tied down to a mortgage.
There are pros and cons to both options. It ultimately depends on what kind of commitment you are prepared to make. The housing market does experience volatility. So, if you choose to buy, choose wisely.