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Most people assume that buying a home is cheaper than renting a home because of the affordability of mortgage payments. While this may be true at the surface, there are many underlying costs that you have to consider before ultimately determining which route is cheaper. The cost of insurance, property tax, maintenance and more can add up over the years, no matter how inexpensive your home may be. You have to be prepared for these costs if you are going to buy.
Let's take a look at the true cost of buying and renting a home so you can know which steps to take in the future.
As a whole, renting a home does cost more per month than buying a home because landlords usually try to make more than what they are paying every month for a property. You may rent a house for $1000 a month when the owner only pays $600. This is not always the case, but that is how the system is supposed to work. That is why people are more interested in buying versus renting. They feel they can get more out of their money.
It takes several years for a homeowner to actually start making money on a rental property. According to the National Realtor's Association, it takes 6 years for a homeowner's monthly payments to be higher than a renter's. After tax savings though, it only takes 3 years. Once this timeframe has passed, homeowners continue to pay less than renters for their property. This is when the appeal kicks in.
Everyone forgets about insurance until moving day. Then a whole new set of costs hit the table. If you're a renter, carrying insurance won't be that bad. Most renters can find policies for $30 a month or so to protect up to $50,000 in property damage. The more coverage you get, the more money you'll spend. No matter what you need though, you shouldn't have to pay much for it.
Homeowner's insurance is a different story entirely. It has to cover both your belongings and the home itself, so it costs more to maintain. Renter's insurance only protects the items inside of a home, not the structure or the land. That part of the cost is passed on to the property owner. A study from the Insurance Information Institute in 2010 showed that the average premium for homeowner's insurance was $909, while the cost for renter's insurance was only $185. That can certainly add up over time.
When you rent a home, you don't pay property tax on it. In fact, you don't pay much at all, other than the cost of your rent itself. As of 2010, the national median real estate taxes in the U.S. were $2,043 a year, per data from Tax Foundation. That is approximately 1.14% of a home's value. Of course, a higher valued home would carry higher property taxes. You have to think about this in addition to the costs highlighted above.
One of the great factors in being a renter is the fact that you don't have to worry about maintenance. All you have to do is call the landlord when something is broken or malfunctioning. When you're a homeowner, all of those costs fall on you. A report from the University of Illinois suggests that you should budget 1% to 2% of the purchase price of your home for annual maintenance. If you bought a house for $300,000, expect to pay $3,000 - $6,000 every year to keep it running. If you have an older home or a project home, you'll need to budget even more than that.
Note that you will most likely have large costs during the first year or two of owning your home, as that is when most homeowners make significant and necessary changes. New roofing, new appliances, new flooring and more can quickly increase your yearly bills.
Crunching the Numbers
To get an accurate feel for the cost differences here, let's create a scenario to work with. The median purchase price of a home in 2010 was $221,800 (U.S. Census). The average rent rate should be .9% of the home's value that for the same home (BankRate.com). We'll assume the homeowner pays 3.5% interest on the loan (HSH) for 30 years, with $22,000 down (roughly 10%). Here is how the numbers will add up annually:
- Rent: .009 x $221,800 x 12 = $23,954.40
- Renter's insurance: $185
- Total: $24,139.40 a year
- Mortgage*: $986.10 x 12 = $11,833.20
- Homeowner's insurance: $909
- Property tax: .0114 x $221,800 = $2,528.52
- Maintenance: .02 x $221,800 = $4,436
- Total: $19,703.72 a year
*Average mortgage payment calculated through CNN Money Mortgage Payment Calculator.
What These Numbers Mean
Even though all of the initial signs point towards renting, it turns out that owning a home is still more affordable in the end. You will have to get past those first few years of your loan before seeing substantial savings, but once that happens, you could actually make money renting to someone else. Sure, there is a level of stress in owning a home that does not come with renting. When you consider the rewards though, it's easy to justify the headaches.
Buy a home, and you'll be able to feel pride in the fact that you are putting money toward something of your own. You'll never get that in the renter's market.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
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