Rent or Buy: Making the Right Decision

Street signs show "Rentt" in one direction and "Buy" in anotherRent or buy? It’s a question that everyone in the market for housing faces at some point. For years in the not-too-distant past, many would shoot down the idea of home ownership with a quick, “I can’t afford a mortgage.” With mortgage interest rates continuing to hover under 4%, however, the choice deserves more consideration.

Let’s Talk Numbers

To compare apples with apples, we need a few numbers.

Apartment rentals in Anne Arundel County can fall anywhere between $900 and $1,500 a month. For our purposes, we’ll pick a number in the middle, say $1,200.

Current home rental listings in the Magothy River area of Anne Arundel County run about $2,100 per month. That’s for a home with 3 to 4 bedrooms and 2 to 3 full baths.

The base monthly mortgage for a $312,500 home at 3.85% interest on a 30-year fixed loan with 20% down is $1,172 (Your loan is for $250,000.).[1]

Of course, there are additional expenses associated with both rental and home ownership.

For the apartment and rental home dweller, there is renter’s insurance. There may also be additional fees for community amenities, such as pool membership and parking. Not all apartments include utilities in the rent, nor do all rental homes. If you have pets, there is likely a fee for that as well. In addition, some apartment communities now waive the traditional refundable deposit for a non-refundable “move-in fee.” It’s best to uncover all the additional expenses of rental when choosing to rent or buy.

The potential homeowner also has additional costs to consider. Homeowner’s insurance is one of them. It’s a modest portion of the home’s value. A home purchaser will face the ongoing costs of utilities, home maintenance, and lawn and garden care. But, unlike the renter, a homeowner enjoys both tax benefits and accrued home equity.

An Investor’s View

“My home is an investment.” We’ve all heard that, and it’s true. Owning a home is an investment in money and time. And like a retirement savings account, it works best as a long-term investment. Despite recent ups and downs, home values have historically risen year over year.

On the other hand, you may find a suitable rental that is hundreds of dollars in total monthly cost below that of a mortgage payment in the same market. You could make the case for investing those savings in an IRA or other investment vehicle. But that, too, requires discipline and commitment. Without them, the opportunity might be squandered on dinners out and lattes.

Beyond the Numbers

So you’ve crunched some numbers. Before reaching out to a real estate agent, rental manager, or mortgage lender, consider the non-financial factors. There are a few.

What are your long-term goals? If you plan on staying in the same area for at least five to seven years, that’s a plus for home ownership. That will allow time to smooth over any ups and downs in the real estate market. If the need for short-term mobility is a factor, rental is a better option. Family, marriage, career—they’re all considerations.

And then there’s the question of preference. For many, owning a home is a goal, a dream, in and of itself. It provides a sense of security, substance, and stability. In the final analysis, with all things being relatively equal, the choice between renting and buying may come down to one question: Am I ready to buy a home?

 

[1] Monthly Mortgage Payment Calculator, The McDowell Team, Keller Williams Realty: http://mcdowellteam.yourkwagent.com/atj/user/AdditionalPageGetAction.do?addlPageName=mortCalc

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