Owning vs. Renting: A Side-by-Side Comparison with Real Numbers

Choosing between owning and renting is more complicated that one might think. To help you better weigh the options, here’s a comparison with real data points, acknowledging the pros and cons of each approach.

Owning

Potential for appreciation: While past performance is not indicative of future results, the national average home price appreciated 3.5% over the past year according to CEIC US House Prices Growth. This translates to a potential $17,500 increase on a $500,000 home.

Tax advantages: Depending on your income tax bracket and property value, deducting mortgage interest and property taxes (up to IRS limits) could save you thousands. Let’s assume a 25% tax bracket, a $300,000 mortgage with a 5% interest rate, and $5,000 in property taxes. Your potential tax savings could be:

• Mortgage interest deduction: $300,000 x 5% = $15,000 x 25% = $3,750
• Property tax deduction: $5,000 x 25% = $1,250

Total potential tax savings: $3,750 + $1,250 = $5,000

Mitigating Upfront Costs: While the initial investment in buying a home can be significant, several programs and financing options can help:

• Down payment assistance: Many government and local programs offer down payment assistance to first-time homebuyers, reducing the upfront financial burden.
• FHA loans: Federal Housing Administration (FHA) loans allow for lower down payments (typically 3.5%) compared to conventional loans.
• VA loans: Veterans Affairs (VA) loans offer no down payment for qualified veterans and active-duty military personnel.

Hedging Against Inflation: Historically, home prices tend to keep pace with inflation, offering a hedge against rising living costs. While not guaranteed, owning a home can potentially protect your investment from the eroding effects of inflation, unlike rent, which typically increases alongside inflation.

In fact, since 1963, inflation has risen 896%, while housing prices have risen by a staggering 2,350%.

Cons:

• Even with assistance programs, owning requires more upfront investment compared to renting.
• Less flexibility: Owning ties you to a specific location, making relocation more challenging.
• Market fluctuations: Property values could decline, impacting your finances.
• Responsibility for repairs: You cover all maintenance and repair costs.

Cities Where It Is Cheaper to Buy than to Rent

The research team at Today’s Homeowner compared the costs of owning and renting and found there are still many places in the U.S. where buying a home is cheaper than renting over a 30-year period. Here are the top 5:

1. Nashville, Tennessee
2. Chula Vista, California
3. Miami, Florida
4. Baltimore, Maryland
5. New York City, New York

You can check out their full list here. The article also contains a list where renting is cheaper than buying.

Renting

Pros:

• Lower upfront costs: You only need a security deposit (typically one month’s rent).
• Flexibility: You can easily move if your needs change.
• Predictable monthly costs: Rent payments are typically fixed (except for potential annual increases), simplifying budgeting.
• Less responsibility: Landlords handle repairs and maintenance.

Cons:

• No equity building: Rent payments contribute to the landlord’s wealth, not yours. You don’t benefit from appreciation.
• Limited control: You have limited control over renovations and modifications.
• Potential for rent increases: Rents can increase, making housing costs unpredictable in the long run. The national average annual rent increase is currently 3.2%. On a $1,850 monthly rent, this translates to a potential increase of $59.80 per month in the next year.
• Renting does not hedge against inflation: As inflation rises, your rent is likely to increase as well, potentially exceeding your income growth and straining your budget.

Financial Comparison:

It’s crucial to remember that this is a simplified comparison, and individual circumstances and market conditions play a significant role. However, considering the potential $17,500 appreciation and $5,000 tax savings on a $500,000 home over a year, owning could offer long-term financial advantages compared to the predictability and lower upfront costs of renting.

Additionally, owning can potentially mitigate the impact of inflation, while renting typically experiences increases alongside inflation.

Seek Professional Advice:

Consulting a financial advisor can help you analyze your specific situation, considering factors like your income, savings, career plans, and risk tolerance. They can help you determine which option aligns better with your long-term financial goals.

Ultimately, the decision to rent or buy is a personal one. By carefully evaluating your priorities, financial situation, and future plans, you can make an informed choice that best suits your needs.

And of course if you are looking to buy or refinance Embrace Home Loans^® is ready to work with you right now, just give us a call. We’ll be happy to review your situation from every possible angle.