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.
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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.
Example:
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.