A big decision, many ask whether to rent or buy a home; the answer is complex. The cost of buying a home are complex compared to leasing. Would-be home buyers need to ask a lot of questions. You need to ensure they cover a lot of factors. Buying a home is often more affordable than renting, but depends on many things.
One thing you need to realize, is you must buy smart. As Realtors, my business partner and I advise buyers to not max their mortgage. Most bankruptcy in the U.S. is filed over a mere $300 cash flow issue.
Instead of buying at your limit of $300,000, buy at $250,000. A difference of 50k on a 30-year mortgage at 5% APR saves over $300 per month. It depends too on if you’re paying PMI or private mortgage insurance.
You need to consider the costs upfront and future cost of renting vs buying a home. One process that can help you is making a rent or buy a home, pros vs cons sheet. Tally the expenses of both. One great point of buying is equity gains.
Home owners making their scheduled mortgage payments enjoy better credit scores. Did you know home owners get better auto and other insurance rates? Some are tempted to buy in blind belief that buying vs renting a home is better. It can be, but only if you purchase smart. Being smart requires some strategic thinking about home buying. A lot of Realtors chase commission checks. We’d rather see you successful.
Let’s break it down and compare renting vs buying a home.
Renting vs Buying a Home
Ask yourself in your renting vs buying a home comparison, what are initial and future costs? Make a comparison spreadsheet, like Excel, to tally your expenses.
Buying a home – Initial Expenses
The Down Payment. Initial deposits on your mortgage can range from 0% to 25% or higher. Even with low or no down payments, other mortgage lending fees can apply. USDA and VA home loans are 0% down, but the fees add up to a small down payment. Talk to a lender. You can contact us for details on home loans too. What is the best home loan for me?
Earnest Money. What is earnest money? A lot of first time buyers ask us this question. $500 is the usual amount. It’s a good faith sum for the seller. You get these funds back at closing.
Home Inspections. Home inspection costs vary depending on the size and type of property. Expect to pay $300 - $500.
Home Appraisal. The national average cost per MortgageNewsDaily.com is $200-$400. In some states the cost exceeds $500.
Closing Costs. This expense runs home buyers an average of $3,500 - $5,000. We excel at getting our clients closing costs covered. See our reviews and work with us! Closing costs include several expenses. Title service, lender’s title insurance, mortgage lender origination fee, gov’t recording charges and tax servicing fees.
Home Warranty. A policy that protects your property, don’t dismiss this coverage. A good home warranty costs an average of $350 - $600 per year. Make sure you shop for a quality policy. Do some research about how claims are paid. Look for reviews!
Home Insurance. This is one policy it pays to shop for. Looking at premiums vs coverage and claims history can cost you. Home insurance costs differ with property and location. According to the Federal Reserve Bureau, the average cost of an annual premium for home owners’ insurance is between $300 and $1,000. Most home buyers can estimate the cost of a policy. Divide the value of the home by 1,000, multiply the result by $3.50.
Buying a Home – Monthly and Ongoing Expenses
Mortgage Payments. This monthly expense includes “PITI” or payments, interest, property taxes and insurance.” If under 20% down on your loan, you need to add PMI. PMI is Private Mortgage Insurance. This premium protects mortgage lenders in case of borrower default. Once your loan-to-value ratio is right, PMI can be dropped.
Our mortgage calculator includes PMI and average property taxes.
One expense we'd like to mention, a budget for maintenance and repairs. A new roof once a decade, lawn care if you'd don't like to mow, incidentals. A good home warranty can cover most to nearly everything. Again, shop around.
Now that we’ve mentioned calculating a home loan. Let’s compare renting vs buying a home; buying a $250,000 home vs leasing an equivalent single-family home.
Two adjacent homes in West Chester, Ohio. Both 4 bedroom, 3 bathroom single-family homes, same square footage.
Let’s use an FHA home loan, 3.5% down. The down payment is $8,750. Add $1,500 for other initial expenses mentioned earlier. Let’s say your Realtor negotiates to get your closing costs covered like we do. Your initial expense is $10,250. Your mortgage amount financed is $241,250. The monthly payment on a 30-year term with $14 per $1,000 of assessed value and PMI is $1,675.
The adjacent home for lease is $1,950. If you pay the mortgage down and drop PMI your monthly mortgage payment become $1,295. That’s a difference of $655 or $7,860 per year. If you put 20% down, you’ll avoid PMI altogether.
If you’re leasing a home, you have a security deposit which is like a low down payment. You need to consider what utilities you pay, and what the landlord pays. For home buyers, is there a monthly or annual HOA?
If you buy a home, you’re building equity. If house values go up, so does your equity. If you upgrade or buy another home, you can use your former home as a rental income property. Equity can also be borrowed against for home improvement or emergency. You can sell your home at a profit when the market is right. Renting a home yields nothing.
We hope this paints a clearer way to calculate renting vs buying a home for you.