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Real Estate

Rent or Buy: Which is Cheaper?

When you add up the cost of a down payment, closing costs and home maintenance, buying can appear to be more expensive than renting. But according to Trulia’s Rent vs Buy report, buying a home is 37.7% less expensive than renting. The report—which evaluated 100 of the largest metro areas in the U.S—was based on the assumption of a 30-year fixed-rate mortgage, a 20% down payment and the homebuyer living in the home for at least seven years. 

The financial benefit of buying varied by market. For example, if you purchased a home in Miami or West Palm Beach, FL, after seven years you would have spent about 53.2% less than a renter in the same market. If you purchased in Honolulu or San Francisco, the amount you would save after seven years isn’t as significant as the previous two markets (about 20% cheaper than renting).

How Rates Affect Mortgages and Home Prices

Lower mortgage rates motivate many to purchase and refinance because they’re able to take advantage of a cheaper mortgage payment. Lower rates also reduce how much borrowers pay in interest over the life of the loan. Mortgage rates are predicted to increase in 2017. But even with a rise in mortgage rates, rates will still be historically low. Therefore, buying a home will likely remain the cheaper option for the foreseeable future. 

Mortgage rates would have to nearly double or hit 10% for renting to become cheaper than buying, says Trulia. Interest rates haven’t been in this range since 1989-1990. Plus, rising mortgage rates are usually offset by lower home prices. When rates increase, the number of homebuyers decrease. And unfortunately, when there’s too much supply and not enough demand, home prices fall. 

Other Benefits of Buying

Not only is buying cheaper in some real estate markets, it’s also financially rewarding than renting. Yes, buyers have higher upfront costs when acquiring a property compared to renters. But unlike renters, buyers also benefit from tax advantages. These include first-time homebuyer tax credits and mortgage-related deductions to reduce their taxable income. Most importantly, homebuyers earn equity as they pay down their mortgage balances and their properties appreciate in value. This equity maximizes their net worth.

Bottom Line

Can’t decide whether renting or buying is the right choice for you? Use a rent vs. buy calculator to compare costs. Buying a home is an excellent long-term investment, but you need to understand your costs before jumping into a purchase. If you feel now’s the time to buy, apply for a home loan today.