Should You Rent or Buy a Home?

Markets Motley Fool

Homeownership was once the cornerstone of the American Dream, but times are changing. More U.S. households are renting today than at any point in the last 50 years, according to a Pew Research Center analysis.

Continue Reading Below

For many people, the comforts of home include a well-funded bank account -- and in some circumstances, renting can be more financially savvy than buying. Ask yourself these questions as you make long-term housing decisions. You might find that renting is the better option.

1. How long do you plan to stay?

Whether renting or buying a home is the best financial choice usually comes down to one thing: timing. Finding an affordable home (and later making a profit on it) depends heavily on how long you plan to keep the property. According to Zillow (NASDAQ: ZG), for instance, the current home listing price in Bothell, Washington, is $698,448, and the average rental price is $2,500. Assuming a 20% down payment on a home purchase or a 5% annual increase in rental price, you'd need to own the home for at least two years before it becomes the better option.

Keep in mind that not every market is booming. In fact, two-thirds of U.S. homes still haven't returned to their pre-recession values, according to a Trulia report, and owners looking to cash out may have to wait until 2025 before securing a profit. Carrying debt is something of a risk, and a 12-month lease gives you the freedom to move and adjust your housing expenses based on your current needs and income level -- two things a fixed mortgage can't deliver. Do your homework and use a comparison calculator to help you understand the costs of buying and renting.

2. Do you know all the costs?

Continue Reading Below

Comparing rental prices to mortgage payments is a good start, but it's also important to consider the hidden costs associated with each. For renters, the "cost" is the lack of home equity and the inability to claim housing-related tax breaks.

For example, suppose you're a homeowner who lives in New York and falls within the 28% income tax bracket. If your mortgage is $200,000 with a 4.5% interest rate, you qualify for $3,585 a year in tax deductions. That said, you'll also deal with expenses that don't impact a renter's monthly budget, including:

  • Homeowner's insurance: Protecting your home from damage comes at a price, and while insurance rates vary, the rule of thumb is to divide your home's value by 1,000 and multiply the result by $3.50. If you home's value is $200,000, for instance, you'd pay around $700 per year, or $58 per month, for coverage. Renter's insurance, meanwhile, is usually less than $20 per month.
  • Private mortgage insurance (PMI): If you have less than 20% equity in your home, expect to pay PMI, which is usually between 0.50% and 1.2% of your loan value. For example, 1% assessed on your $200,000 mortgage would add $200 to your monthly housing expenses until you built up at least 20% equity in your home. 
  • Property taxes: A typical household spends $2,127 each year on property taxes, but you could pay much more depending on location and community benefits.
  • Maintenance: Homeowners shell out nearly $170 per month on average for regular maintenance and repairs, and that's not including big-ticket items like a roof repair, a new HVAC system, and other needs that can cost four or five figures. 

In this scenario, owning that $200,000 home costs $7,267 a year in extra expenses -- more than double what you'd save in taxes. As a renter, you won't need to worry about adding these fluctuating expenses to your budget, and your landlord may even pick up the tab for your utilities, saving you even more compared to the average homeowner. Consider the hidden costs to learn whether those big tax breaks are worth it. 

3. Are you "throwing money away?"

It's often said that renting is "throwing money away," but building home equity isn't the only way to watch your money grow. There's no denying that property can be a valuable asset, but on a month-to-month basis, owning a home is still more expensive in all 50 states, according to a 2017 NerdWallet analysis, and an inflated budget can seriously impact your ability to save for retirement.

According to the Economic Policy Institute (EPI), the average American has less than $5,000 in savings, and couples between age 50 and 55 only have about $125,000 earmarked for their golden years. That's not nearly enough to fund a long and financially secure retirement, and lower monthly costs can help you divert funds into catch-up 401(k) and IRA contributions, liquid savings, and other investments. For instance, if you're 50 and can save $500 a month in housing-related costs, investing it at a 7% return will yield almost $169,000 by the time you reach age 66. 

Over the course of several years, you'll likely come out ahead by owning rather than renting. However, if you have reason to doubt your ability to keep up with the costs of homeownership, or if purchasing a home would leave you unable to save for the future, then renting could be the more responsible choice for now.

The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

Sarah Szczypinski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares). The Motley Fool has a disclosure policy.