There’s a question on a lot of people’s minds right now as far as whether it’s better to rent or buy.
There are challenges to both in the current environment. For renters, monthly rents are stubbornly high.
For buyers, interest rates have gone up dramatically, while home prices aren’t seeming to go down much off their record highs.
There’s also a limited inventory of both rentals and homes to buy.
It’s not an easy time for renters or buyers, and so you may be in a situation where you’re wondering which is more expensive.
Along with the basics of things like monthly rent or your monthly mortgage, you have to figure in those expenses you might not think of, which can vary a lot depending on where you live.
For example, renter’s insurance in Mississippi is going to be cheaper than in California, but a factor regardless. For homeowners, there are maintenance costs and possibly repairs. There are a lot of things just below the surface impacting the expenses of renting and buying, and they should be considered as you are thinking about overall affordability.
An Overview Of Renting
If you rent a home, there’s a misconception that you’re throwing your money away each month. That’s not necessarily true. You need a place to live, and you’re not building equity, but when you own a home, not all of your costs are actually going toward equity.
When you rent, you have the peace of mind that comes with knowing what your costs are going to be every month. This gives you a chance to plan and budget easily, and sometimes when you rent, the landlord includes other expenses in your cost of rent, like your utilities.
When you’re a renter, one time when you might not be able to predict your expenses is if your lease is set to be renewed. Your landlord might increase your rent every time, and depending on where you live, these increases can be fairly steep.
Of course, one of the advantages of renting is that you have the flexibility to move if your lease ends and it’s no longer in your budget. On the flip side of that, you could also have to suddenly move if, for example, your landlord decides to make a change or raise the rent to the point that it’s more than you can afford.
What About Homeownership?
When you own a home, there are benefits that you can see and also intangible benefits. You get the chance to customize your living space, and you can also have the sense of stability and perhaps pride that comes with owning something.
With that being said, there are costs that come with homeownership that you don’t have to worry about when you rent.
For example, property taxes, trash pickup, and water and sewer are things you have to pay for when you own a home. You might have to pay for landscaping services, pest control, and, if you have a pool, cleaning services.
You’ll pay for homeowners’ insurance and maybe flood insurance that’s required by your lender, depending on where you live. In some areas, you’re also required to pay for earthquake insurance. Your mortgage insurance can account for almost all of your monthly payments when you’re just starting out with your mortgage.
It can often take as long as 13 years before the payments you’re making on your mortgage are actually going toward your principal balance if you have a standard 30-year loan.
These costs listed above can seem extensive and don’t take into account the unpredictability of repairs and maintenance. If you have a roof leak, for example, you could spend more than $10,000 replacing it.
What A New Report Says
A recent report from the summer of this year found that housing costs have outpaced rental costs. That report found it’s more expensive monthly to own a home than it is to rent one. The report was released by John Burns Real Estate Consulting, an advisory firm in California.
That report found that as of the middle of 2022, having a mortgage costs $839 more per month than a lease. That was a difference that was almost $200 higher than at any other time in 20 years.
A year before the release of the report, the difference between owning or renting was essentially flat, according to data gathered by the firm.
Because of the imbalance, the senior manager of research at the firm writing the report said many would-be buyers are now pushed out of the market. They have to rent simply because buying isn’t an option.
The cost of owning at the time of that report was 31% higher than renting. The differences were even greater in certain metro areas that have seen some of the largest pricing increases in housing.
In the Raleigh-Durham area in North Carolina, for example, ownership costs were 42% higher than renting in April of this year. In Nashville, the gap was 40%. In Denver, it was 38%, and in Tampa and Phoenix, it was 35%.
The report used data from April 2021 to April 2022. To calculate rental costs, the researchers looked at single-family listings and then added in the cost of renter’s insurance.
The determine homeownership costs, they set a purchase price as a default that was 80% of the median price of area homes. That’s typically what’s used as a starter home proxy. They used a 5% down payment and a 30-year-fixed-rate mortgage scenario.
The calculation included principal and interest, as well as taxes and insurance, and mortgage insurance and maintenance costs.
Of course, by next year, the situation could change drastically because even though home prices are staying somewhat high, there is a definite chill in the housing market.
The takeaway is that buying is generally going to be more expensive than renting, but you still have to figure it out based on your own situation and needs.