How to Determine If Buying or Renting is More Cost-Effective

Most renters dream of transitioning from renting to owning homes. For some, it is more financially responsible to buy. While leasing an apartment is cheaper in the short term, buying a home is most likely the largest investment and asset a person ever owns. The tricky part is determining when is the best time to switch from being a tenant to a homeowner.

Consider these four factors before breaking a lease to purchase property.

Use Math

Using the Breakeven Analysis Methodology structured by Zillow, prospective house hunters can mathematically calculate the number of years at which buying becomes more cost-effective than renting. To determine the cost of owning a home, individuals should find the total sum of their down payment, closing costs, mortgage, property taxes, insurance, maintenance and renovation, utilities, as well as condo or community fees. However, even with all costs included, the home hopefully sells for a profit down the road. Renting costs are made up of deposits, broker fees, monthly payments, utilities and insurance. It is more advantageous to own a property when the purchase cost is less than or equal to the total sum of monthly rent costs. Online tools are great for those who want or need to determine if they should begin searching for a home to buy. Zillow calculates how many years, on average, the breakeven horizon occurs in major cities.

Observe Market Trends

The housing market has fluctuated immensely throughout the past 10 years. Observe the times of year houses sold for less than their original listing prices to get the best deals. If homes in a neighborhood have consistently sold for less than their estimate value, it’s probably a good time to buy. However, areas in trending neighborhoods are going to be inflated and homes are going to cost more than they typically would. Homes centrally-located or close to water are typically steep in price. Keep location-related price variances in mind; some neighborhoods are always going to be more expensive, regardless of the time of year or popularity.

Assess Finances

Individuals should not buy a home if they can’t afford it. Bad credit leads to a significantly more difficult process of trying to obtain a mortgage. The likelihood of being approved for a low rate is compromised by negative credit history. Work on improving a credit score prior to applying for a mortgage. Then calculate the monthly cost of owning a home. The higher the down payment, the lower the monthly mortgage cost and the faster a person owns their property outright. These calculations may affect how prospective buyers save for their down payments or stretch budgets to afford more expensive homes.

Look Ahead

Anticipating a baby? Planning on traveling for an extended period of time? Desperately need a new car in the next year? These are all factors to take into account when deciding on the right time to purchase a home. Work with a financial planner to create a strategy. Prospective homeowners can confidently rent while taking the appropriate steps to prepare to own properties.

Obviously, the decision to buy or rent differs on a person-to-person basis. There are many factors in play within a home purchase, but these four are good starting points.