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Is it cheaper to rent than to buy a home?

By Robin Wetherbee

January 2019
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Originally published August 2016; updated January 2019

Is it cheaper to rent than to buy a home? The answer is, it depends on where you want to live and how long you stay in your home.

Determining whether it’s cheaper to rent than to buy a home isn’t just a matter of comparing your monthly rent check to your potential mortgage payment. You need to look at the bigger picture over time. And do a bit of math.

The bigger picture over time

Let’s start with the price tag for your home. The simple rule of thumb is to spend less than three times your gross income. For example, if your household income is $67,000, your target home price is in the neighborhood of $200,000.

Next, how much have you saved or will you be able to save to put toward your home purchase? For a $200,000 home, a 20% down payment works out to $40,000. That’s a big chunk of change. 

Some lenders allow down payments as little as 3% of the purchase price. Any amount less than 20% down will put you in a position that requires mortgage insurance (MI). MI protects the lender in the event you default on your loan. Let’s say you’ve saved $20,000. You could make a tidy 10% down payment on your $200,000 home purchase for a mortgage loan amount of $180,000.

Principal & interest payment

Financing with a typical 30-year, fixed rate loan would provide the lowest, stable monthly payment. As I write, interest rates for 30-year, fixed-rate mortgages are around 5%. For a $180,000 loan, the monthly principal and interest (P & I) payment on your loan would be $966.

See today’s mortgage rates.

In addition to principal and interest, your total monthly mortgage payment will also include taxes and insurance (PITI). 

Property taxes

The average US homeowner pays about $2,197 in property taxes a year, $183 a month. See your state’s average property tax payment here

Insurance

Homeowners insurance protects homeowners from loss due to theft, fire or other disaster. 

Homeowners pay an average of $1,083 a year – $90 a month – for this protection. See your state’s average annual homeowners insurance payment here.

The cost of mortgage insurance (MI) on a $180,000 fixed-rate loan – based on a 90% loan-to-value ratio, a credit score of 760, a monthly MI premium, 2 borrowers, a debt-to-income ratio of 35% and standard coverage required by Fannie Mae – is roughly $32 a month. (Since Readynest is brought to you by MGIC, I used MGIC rates to come up with this number.)

In many cases, MI is cancellable after your loan balance reaches 78%-80% of your property’s original value. Based on our example, you’d possibly be able to cancel after 6 years and 8 months, at which point your monthly mortgage payment would decrease by that amount.

All told, your monthly mortgage payment would be $1,271.

Monthly mortgage payment calculation table

Loan costs

You’ll also want to take into consideration the costs involved in purchasing your home and what it will cost to sell it when you’re ready. 

Discount points

You may have the opportunity to reduce your interest rate by paying discount points. A point is 1% of the mortgage loan balance. Each point you pay on a 30-year mortgage typically reduces the interest rate by 0.25%. In our example, by paying 1 discount point – $1,800, based on your $180,000 mortgage – you could reduce your mortgage interest rate from 5% to 4.75%. The reduced rate sounds good, but is it worth the money?

Here’s a break-even example:

  • $180,000 30-year mortgage
  • Cost per discount point = $1,800
  • 5% interest @ $5.36/$1,000 borrowed, 0 discount points = $964.80
  • 4.75% interest @ $5.21/$1,000 borrowed, 1 discount point = $937.80
  • Monthly savings = $27.00
  • Cost of 1 discount point $1,800 ÷ monthly savings of $27= 67 months to break even

It would take 5 years and 7 months to break even – the point at which you’d recover the cost of buying the discount point with your monthly savings. If you don’t plan on staying in the house that long, paying for a discount point might not be worth the money.

Closing costs

The fees associated with closing your loan are another factor to consider. Depending on where you live, they can include:

  • A credit report fee
  • A loan origination fee
  • Any discount points you paid
  • Attorney fees
  • A home inspection fee
  • Appraisal fees
  • Title search fees
  • Title insurance
  • A survey fee, to verify property lines
  • An escrow deposit
  • A recording fee, paid to your local municipality for the new land records
  • An underwriting fee

Closing costs usually work out to between 3%-5% of your total loan amount

In our example, 3%-5% of $180,000 works out to between $5,400 and $9,000. Break that down further into a monthly cost: Divide by the number of months in the loan term, 360 months, and it works out to between $15-$25 that you can tack on to your overall monthly cost to own.

And don’t forget…

Annual home price appreciation

Zillow cites an annual 7.6% increase in US home values in 2018 and a 6.4% increase in 2019. This factor is important because it affects the amount of equity you’ll have in your home as time goes on. 

Continuing with our example, at Day One of homeownership, you’ll have 10% equity – your down payment. With appreciation over the course of 1 year, you’ll have that amount plus the principal you’ve paid (approximately $2,600 for Year One), plus 1 year of appreciation. On your $200,000 home, a 6.4% rate of appreciation works out to $212,800. 

Equity built after one year table

Selling cost

It seems counterintuitive, but selling costs affect the net cost of owning a home. If you were to sell your house, you would need to factor between 4%-7% of the sales price of your home, depending where you live.

Rent information

In addition to your base monthly rent, you may want to consider adding these costs:

  • Application fees
  • Security deposit
  • Pet fees
  • Renter’s insurance 
  • Laundry 
  • Parking 
  • >Moving fees
  • Storage fees for the stuff that doesn’t fit in your apartment
  • An annual rent increase 

Add these all up, divide by 12 and tack that amount to your monthly rent for a more complete picture of what you’re paying. And to be completely fair, compare renting a home valued at $200,000.

So… is it cheaper to rent than to buy a home?

Based on a lot of national averages I used in the example above, it appears it’s cheaper to buy than rent a home. As I mentioned at the beginning of this exercise, it really depends on where you want to live and how long you live there. Use the considerations and resources I’ve provided to come up with your own answer to guide your decision.

Sources

Milaysi Alvarez

Buying a house is more cheaper than renting a house because various factors. You pay for rent almost equal than you pay when you buy your own house.

Kyle Nelson

You can do whatever you want to your own house.

REXEL HURST

THERE WAS A LOT EYE OPENING INFO

Constance Mims

I can afford to buy a home

Christian Camacho

Purchase home is better for your self. One goal and you have private space.

Tim

Buying a home to me is a wiser decision if you can afford it.

June Sego

Buying a home is a wise decision. With renting a home, you end up spending more money.

Shaun

Buying A House Is Cheaper By Far And More Rewarding In The Long Run Also It's Yours And You Are In Control

Marie Claire Ntawizera

It is cheaper to buy a house than to rent

Laurie

If you can afford the first and last months rent plus any deposit your landlord wants you can afford to buy your own home.

Kathy Thurman

Buying a home is cheaper than paying rent.

Ryan Duncan

It is cheaper to buy than to rent

Mgaya geofrey

To buy home is cheap than to rent the apartment. This make me to

Tenzin rinzin

Buying house is saving money in rent and having your own place to live in peace

Tenzin Rinzin

Buy house save money

Chris knapp

Buying a home is cheaper than paying rent!

Tina kimbrell

It is cheaper over time to buy a home than rent

todd stockwell

this wasv very helpful

Piedad Solano

Purchase a home, getting ready to learn how to save the most I can

David Wright

I truly believe in theory why make someone else rich on my money. House I'm buying I want as my final house and yes I want to own it. Reading articles it's cheaper to own anyway. The pride of owning your own house is something to cherish.

Megan

This was helpful.

Cheryl Alvarez

the process of home buying has been very interest ,but we are excited to go to closing!

Larry

I’m ready for homeownership!

R tucker

buying a house is a big investment for me, I have always dream of owning my home.

Vernon

I have always wanted to buy a house and now I have a family so this house is a big deal

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Robin Wetherbee has been writing for MGIC about mortgage insurance and homeownership since 1989. She and her handsome husband reside in Milwaukee’s Bay View neighborhood. They share their freshly empty nest, which she calls her “Miracle on 34th Street” house (if you’ve seen the 1947 movie, you’ll know exactly what she means) with their big old black cat, Max Rayfield Gilhooly.