Low mortgage rates have made the question of whether it is better to rent or buy a home tantalizingly difficult to decide. By reducing the interest expense involved, low rates have helped level the playing field between buying and renting in many cases, and a rent vs. buy calculator can help you see how the numbers stack up. However, there is more to the decision than just crunching the numbers.
While not the only consideration, knowing how the costs compare is a valuable starting point in deciding whether it is better to rent or buy a home. A good rent vs. buy calculator can help you recognize the various expenses involved in buying a home, such as mortgage principal and interest, closing costs, property taxes, and homeowner's insurance. It can also account for benefits of home ownership, such as the potential tax deductibility of mortgage interest and possible price appreciation in the home.
On the other side of the equation, a rent vs. buy calculator can show you how the costs of rent and renter's insurance will add up over the years, and can also figure out the extent that will be offset by the potential for investment income on money not invested in buying a home.
By netting out the costs and benefits of both renting and buying, this kind of calculator gives you a comparison of the financial implications of renting and buying. Again though, there is more to this decision than the numbers, so after you've looked at those numbers you should also look in the mirror to see how some personal considerations factor into the decision.
Regardless of how the costs stack up, here are some personal considerations that might affect whether it is better to rent or buy a home:
- Is your job situation stable? It is all well and good if the numbers show you can afford a mortgage on your current income, but that is less relevant if that income may go away or change significantly in the near future. The more secure you are about your job – or at least about your marketability if you have to find another job – the more confident you can be about buying.
- How is your credit? If you have a so-so credit score, you may have to pay a higher interest rate on your mortgage loan. If you have the discipline to work on improving your credit, it might pay to hold off on buying until a better credit score will earn you a lower mortgage rate.
- Are you ready to settle down? There are upfront costs involved in buying a home, as well as costs involved in selling a home. The less time you spend in the home, the more prominent these costs will be relative to the long-term benefits of ownership. So, unless you are ready to commit to a home for several years, you may be better off continuing to rent.
- Are you more concerned with immediate cash flow or building long-term wealth? In many cases, a rent vs. buy calculator will favor buying because it will reflect the build-up of equity over time. However, the opportunity to build equity in the long run is less meaningful if you are going to struggle to meet your mortgage payments from month to month. If you can comfortably meet those payments, then long-term cost/benefit comparisons are more relevant. If immediate cash flow is tight, then the more affordable current option might well be the right choice.
- Are you a take-charge or low-maintenance type? Both home ownership and renting bring certain quality-of-life advantages. People who want the freedom to make improvements and generally use their residence the way they choose will prefer the control of home ownership. However, with that control comes responsibility, such as maintenance and repairs. People who don't like dealing with such tasks may prefer renting.
In deciding whether it is better to rent or buy a home, use the numbers as a starting point but then think through how your personal considerations would affect your home ownership experience. Once you've considered both the financial and personal implications, you will be ready to make an informed decision.