To Buy or Rent: That Is the Question

The decision to buy or rent a home is generally based on three factors: cost, investment, and personal preference. Initially, home ownership may be more expensive, due to the upfront costs associated with buying a home, such as closing costs and a down payment. But in the long run, homeowners build equity and save on taxes.

Homeowners can deduct mortgage interest and property taxes, which may represent considerable savings in regions where property taxes are high. While renters miss out on these tax savings, they generally need less cash on hand for emergency repairs or general maintenance, which can be expensive for today’s homeowner. Renting also offers more flexibility for those who anticipate relocating for work or other reasons.

The following calculations may help you decide whether you should buy or rent:

  1. Write down the purchase price and financing terms for the house or condominium. Include the down payment, closing costs, and any points.
  2. Estimate your “gross monthly” costs as a homeowner, including utilities, maintenance, and repairs.
  3. Calculate your “net monthly” outlay. This is computed by taking into consideration any tax savings received by deducting mortgage interest and property taxes.
  4. Project what the proceeds would be after selling the property in five, ten, or twenty years.
  5. Calculate your total rent for the same period.
  6. And last, compare the two sets of figures. What would your financial results be if you saved the money you would spend on a down payment, closing costs, and points (assuming a reasonable growth rate)? What is the difference between your rent and the “net outlay” as a homeowner?

While the above method offers a rough comparison, you also need to determine all of the other non-financial advantages that home or condominium ownership provides. Analyzing your short- and long-term goals can help you determine whether renting or owning best suits your lifestyle and your financial situation.


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