One of the hottest topics in housing is whether it’s better to rent or buy a home. The answer always changes based on market conditions, so it’s handy to use a rent vs. buy calculator to do
comparisons on the fly.
But you should also know how rent vs. buy calculations actually work so you can feel confident
in deciding what’s right for your budget and your family. Here are two easy ways to do this.
Checking the numbers
The first thing you need to understand is how rent vs. buy math works for you personally. You do this by calculating the monthly costs of home ownership, subtracting tax benefits, then comparing the final figure to the rental cost of a similar home in the same neighborhood.
Let’s assume you have a credit score of 750, and a $300,000 home purchase price with 10 percent down (that’s $30,000) for a 30-year fixed mortgage. Current rates are around 3.25 percent.
In this scenario, a mortgage calculator quickly tallies your total monthly housing costs as follows:
Mortgage payment of principal and interest $1,175
Property taxes $300
Private mortgage insurance (PMI) $133
Homeowners insurance $67
TOTAL monthly housing cost $1,675
Next you calculate your tax benefit. As a homeowner, you get to deduct your mortgage interest and property taxes.
To calculate annual mortgage interest, you multiply your $270,000 loan amount by your 3.25 percent rate to get $8,775. To calculate annual property tax, you multiply your $300,000 home price by a national average of 1.2 percent property tax to get $3,600.
The sum of $8,775 in mortgage interest and $3,600 in property tax is $12,375 in deductible costs. Based on the income needed to qualify for a $300,000 home, your tax bracket is likely around 28 percent.
To get a quick estimate of annual tax savings, we multiply $12,375 by 28 percent to get $3,465.
Next we divide $3,465 by 12 months to get a monthly estimated tax savings of $289.
Then we subtract $289 from your total monthly housing cost of $1,675 to get estimated after-tax cost of $1,386.
Finally, you compare this estimated after-tax housing cost of $1,386 to market rent for a comparable home in the same city. Be sure to compare properties of the same size, quality, and location to ensure your analysis is accurate.
How long before owning is cheaper than renting?
The second thing you need to understand is how long it takes for buying to become more financially advantageous than renting. The threshold you cross when buying becomes more favorable is called the break even horizon.
This is a calculation Zillow’s team of economists created to incorporate all possible buying costs and benefits such as the down payment, closing costs, mortgage payment, property taxes, insurance, utilities, maintenance, and tax benefits, as well as all renting costs for the same home. Calculations also incorporate home value and rental price appreciation.
Break even horizon is the year when buying costs become less than or equal to renting costs, when accounting of all of the factors noted above.
According to the most recent quarterly data, the break even horizon is less than two years in 72 of America’s 100 largest markets. When it comes to making an investment as large and as long-term as a home purchase, this is a very compelling break even period.
The latest report allows you to look at local markets so you can see what the break even horizon is for you, and the tables also include median rents for quick reference.
Take all this data into consideration when making your rent vs. buy decision.
from Zillow Porchlight http://www.zillow.com/blog/compare-renting-vs-owning-home-201408/