We all must live somewhere. But whether we choose to rent an apartment or buy a home, or perhaps arrange for some hybrid between the two choices, there are economic concepts that we need to look into to decide what’s the better use of our money.
Unrecoverable Costs
Both renting and buying a place to stay come with unrecoverable costs — those expenditures that we can never get back. Rent is an unrecoverable cost, and whatever we lose out of a security deposit is also unrecoverable. Once we pay these costs, that’s the last we’ll ever see of that money.
When buying a house, the fees we pay to the title company that handles the legal documents, the real estate brokerage commission, mortgage insurance and property taxes are all examples of unrecoverable costs, too. Like when we pay rent, every dollar that we pay in taxes, home insurance, mortgage insurance and even some basic home maintenance is simply a part of the cost of living, and we’ll never have a chance to use that money again.
Building Equity
Unlike renting, buying a place to stay gives us a chance to build equity. In simple terms, equity is the value of an asset like a home, minus the expenses.
If we buy a home and pay a monthly mortgage payment toward our home loan, we’ll eventually pay enough toward the principal amount of the loan that if we ever decide to sell it, we can get that money back. Many people who’ve built equity in a home that they sell use that recoverable amount — their equity — toward buying a new home, possibly a bigger and better home that accommodates a growing family.
Additionally, home equity can also be used as collateral to get a bank loan for such needs as home improvements, debt consolidation or future education expenses.
Appreciation
Another concept to understand when considering whether renting or buying a home makes better sense for our specific needs is appreciation. The value of the dollar tends to decrease over time, but the price of an asset such as a house will rise so that the amount of work that it takes to get that house remains about the same.
Also, any improvements that we make to a house, like adding a deck, remodeling a bathroom, or adding a room, can sometimes raise the value of the house so that if we decide to sell it, we can usually sell it for what it originally cost use plus the amount of value that we’ve added to it.
Other factors also affect the home’s value. Generally, the increase in a property’s market value over time, driven by factors like supply and demand, inflation, economic growth, and improvements, often allow us to sell for a profit, or just increase our equity if we don’t sell.
Break Even Point
When we look at how much we spend over time for either a rent payment or a home loan payment, there is a point at which we can compare our totals and see an advantage to home buying. That point is our break even point, when we’ve paid enough on a new home that the payments that come afterward start to build our equity and give us more financial benefit than renting.
Waxahachie Break Even Point
In Waxahachie, a homebuyer can find a 2- to 3-bedroom home for as little as $300,000.
If the buyer qualifies for a 30-year F.H.A. loan with a 4% downpayment, realtor fees of 3% and an annual property tax rate of around 2.54%, the monthly mortgage payment for a $300,000 home will be around $2,700 per month.
For rentals, a 3-bedroom home in Waxahachie will cost around $2,000 per month.
Although the monthly expense for renting is less than for buying, at about 6 years of mortgage payments, a homebuyer could reach the break even point and begin to gain a financial advantage over renting through appreciation in the home’s value and the building up of equity.
NOTE: 6 years is an estimate based on the stated assumptions, not a guarantee. Also, if interest rates are higher, rents rise more slowly, or home prices don’t appreciate as expected, the break-even point could take longer.
Other Considerations
Renting is by far a much easier option to begin. The security deposit can be as low as $1,000 – $2,000, as opposed to the downpayment and closing costs of buying, which can be as high as $30,000, or more for pricier homes.
The money that is expected at closing will need to be saved ahead of time, and that precludes many people from buying a home until they can build up enough savings.
There are, however, loan arrangements that can lower your downpayment — or even eliminate it. Veterans can qualify for 0% downpayment loans, and first-time homebuyers can qualify for as little a 3.5% downpayment, which is less than the 10% required by most conventional loans.
So, Which Is Better?
For anyone who plans to live somewhere for 5 years or less, renting is often the cheaper option.
For those who want to stay put in the same place and build equity for 6 years, 10 years or more and who have access to cash in a savings account or to downpayment assistance options, buying often makes more financial sense.
Free Consultation
This is a very broad look at the question of whether renting a place or buying a home is better financially, but everyone’s specific situation is unique and requires a deeper analysis.
As a licensed real estate agent, I can help to put you in touch with the right lenders, search for a suitable home or apartment, and guide you in either buying or renting.
Call or text me anytime for a commitment-free consultation, or fill in your contact information below.
