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One of life’s age-old questions persists. Is it better to own or rent your home? Unfortunately, the answer isn’t as cut and dry as it once was in the current housing market.
Conventional wisdom says it’s more affordable to own than rent. However, it all depends on your local price-to-rent ratio. This ratio represents the cost of buying a house outright versus renting for a year.
In many rural and suburban locations, conventional wisdom holds. But if you live in a major city like Chicago or Los Angeles, you’ll come out ahead by renting. Here’s a breakdown of why your choice to rent or buy a home might not be so clear-cut.
Is It Still Better to Own Than Rent in the Current Housing Market?
The answer depends on your local real estate market conditions. In some markets, the cost of buying a home makes more sense than renting. You can use the following ratio to help make your decision:
The price to buy a home outright versus the annual cost of your rent.
Let’s say the average sale price of a typical single-family home is $350,000. However, the average monthly rent in your area is $2,000. That’s an annual cost of $24,000.
In this case, it would take you 14.6 years of rental costs to afford a home mortgage-free. However, that’s assuming rent prices and home prices remain the same. With this kind of time frame, they probably won’t.
Additional Factors
The price-to-rent ratio isn’t the only factor to consider. The time you plan on spending in the home or local area is also essential. So even if the price-to-rent ratio indicates you should buy a home, it may not make sense.
Stability
For example, you know you have to move around for your job. The average time you spend in one city is two to three years at best. You usually need to stay in a home for five to nine years to see a good ROI.
Therefore, it’s going to make more sense for you to rent. However, closing costs and selling hassles won’t make buying worth it.
Monthly Payments
You may get more space for your money when you buy rather than rent. Buying might be better if you stay in an area for five years or more.
Hypothetically, $2,000 in monthly rent payments will get you a one-bedroom apartment with 700 square feet. But the same mortgage payment will get you a five-bedroom home with 3,000 square feet. So, consider how much space you need and balance that with your budget.
Maintenance and Upkeep Costs
You don’t have to budget for maintenance costs and emergencies when you rent. Furnace went out last night? That’s your landlord’s responsibility, and those expenses are on them.
However, when you own a home, you must set aside money for these things. Here are a few things you have to budget for as a homeowner (on top of your mortgage):
- Lawncare and landscaping
- Exterior maintenance, such as painting and gutter cleaning
- Appliance and plumbing repairs
- Interior design upgrades
- Appliance replacements, including HVAC systems and stoves
- New windows
For maintenance and upkeep costs that seem overwhelming, a personal loan from Simple Fast Loans may help cover the cost. If you’re approved for a loan with SFL, you can receive the money as soon as the next day to ensure, as a homeowner, you are able to keep up with the maintenance and upkeep of your home.
Changing Interest Rates
The affordability of homeownership is partly tied to current mortgage interest rates. When going rates are lower, you can generally afford higher sale prices. That’s because the cost of borrowing (and your monthly mortgage payment) is lower.
When interest rates are at historical lows, this tends to stimulate more homebuying. But when they start rising like they are now, homebuying activity usually cools off a bit. As a result, increasing interest rates can price some people out of the market in markets where home prices remain high.
What if Home Prices Are Rising in My Area?
Because average home prices are going up in your market, it doesn’t mean you should own rather than rent. There’s often the temptation to beat increasing costs before they go too high. However, this strategy can backfire if you can’t afford the home.
Rapidly increasing prices could signify a housing bubble that’s about to burst. If you buy something you can’t afford when costs are high, you’ll take a loss when you have to sell it at lower prices. Not good!
Instead, think about your situation rationally. For example, is your current residence not meeting your needs and getting worse by the minute?
Can you reasonably afford a mortgage payment and all the costs of homeownership? Do you see yourself remaining in your next home for at least five years? The answers to these questions will determine the right time to buy.
Making Your Decision in Today’s Housing Market
Today’s housing market is, undoubtedly, an expensive one. Data shows home prices are increasing faster than rents. But that doesn’t mean rents aren’t also going up, as indicated by a 10.9% jump in October 2021.
The decision to buy versus rent has always been complex, involving careful analysis of needs and affordability. That being said, in many markets, renters are starting to come out ahead of homebuyers regarding affordability.
The costs of buying a home far outweigh those of renting when it would take many decades to save for a home. Renting is also better when you won’t be living in an area for too long or when the costs of homeownership are beyond your means. Keep renting!
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