The decision of whether to RENT or BUY a home often begins with a decision about lifestyle. Renting provides mobility and for anyone who can’t envision themselves staying in the same home or community for 5 to 7 years, renting is most likely the best option.
However if you are ready to make the move to home ownership what follows are some considerations in the rent vs. buy debate.
Home Ownership- Affordability
In many communities, a monthly mortgage payment may be lower than the average monthly rental rate. Home owners can lock in a mortgage rate and their monthly payments. Renters on the other hand may be subject to increasing rents, depending on market conditions. Personal finance experts* suggest monthly rent or monthly mortgage + taxes + home maintenance costs should equate to between 25-28% of household monthly income.
The price- to- rent ratio is a good indicator of market conditions and the favorability of renting or buying a home. This ratio represents the price of a house divided by annual cost of renting a similar home.
Home Price: $500,000
Rental (monthly): $2000
Rental (annual): $24,000
Price-To-Rent Ratio: 21
A price-to-rent ratio above 20 suggests renting as the preferred alternative. A price-to-rent ratio of below 15 indicates homeownership may have more benefits.