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Financial Comparison of Renting Versus Buying a Home

Financial Comparison of Renting Versus Buying a Home

    There are a lot of factors that go into deciding if you should rent or buy a home. Some are personal such as how much you value housing flexibility as compared to certainty and control. Other considerations are financial such as how the cost or renting a home compares to the cost of owning. Buying a home involves a greater financial commitment including your down payment and closing costs and additional ongoing expenses such as property tax, homeowners insurance, property maintenance and upkeep and other housing expenses.

    Evaluating the renting versus buying on a financial basis can also be challenging because your housing expenses can change over time. For example, your monthly rent payment usually increases over time as compared to a fixed rate mortgage payment that remains constant. Or your mortgage tax deduction benefit decreases over time as you pay less interest expense as you pay down your loan balance.  So while you may benefit financially from renting today, looking out over several years may suggest that owning a home is more rewarding.

  • Rent Versus Buy Financial Comparison
  • The example presented in the chart below takes these changes into account and provides a financial comparison of renting versus buying a home over a ten year period.  In many cases when analyzed over a short period of time – one or two years – renting a home can save a person money on a monthly basis when compared to buying a home.  However, when you factor in increases in rent over time as compared to a fixed loan payment, as well as the mortgage tax benefit, in the medium or long term, buying a home can make more sense financially and save you money on a monthly basis as compared to renting.

    The example compares the cost of a 30 year fixed rate loan with a 4.0% mortgage rate to rent payments that increase annually. The example shows renting and buying a home on both a monthly and an annual basis over a period of ten years to account for changes in rents and other inputs. The comparison includes property tax and homeowners insurance expenses, which are extra costs only homeowners pay as well as the mortgage tax deduction, which is only available to homeowners.

    From a financial standpoint it is important to not only compare your rent to your mortgage payment but to compare your rent to total monthly housing expense which includes property tax and homeowners insurance in addition to other housing-related costs. This is a more accurate approach to compare renting and buying financially because monthly housing expense reflects the total cost of owning a home and not just your mortgage payment.

    In the example, renting is less expense than buying in year one but when you factor in rent increases, by the second year the monthly rental payment is more than the mortgage payment.  The example shows the benefits of having a fixed rate mortgage, with an interest rate and monthly payment that do not change over the life of the loan, as compared to paying increasing monthly rent over time.  By year three, total monthly housing expense is less expensive than renting when you factor in the mortgage tax deduction benefit.  In year ten, the financial benefits of owning a home are substantial on both a monthly and annual basis mostly because the rent has increase significantly as compared to the mortgage payment which remains constant.

    The chart represents one specific example and your personal rent versus buy financial analysis varies depending on your monthly rent payment and future rent increases, your mortgage size and type as well as your personal income tax rate and the property tax rate in your area.  The mortgage rate is another very important factor in the analysis because the higher the rate, the more expensive buying is as compared to renting. 

    The comparison also focuses on the monthly cost of renting versus buying and does not reflect changes in property value which can provide tremendous financial benefit, and risk, to homeowners. Forecasting changes in home prices can be highly challenging, however, so to be conservative in your evaluation you should consider property appreciation financial upside.

  • CalculatorUse our BUY VERSUS RENT COMPARISON CALCULATOR to determine if buying or renting a home makes financial sense for you
  • Finally, it is important to emphasize that the financial analysis is only one component to determining if you should rent or buy a home.  There are many non-financial considerations such as housing flexibility, lifestyle, risk tolerance, employment stability and family situation that may be more important inputs to your decision making process.  Additionally, as the comparison below illustrates, the financial impact of renting versus buying changes over time so a lot depends on how long you plan to live in the home.

    For example, if you are planning on expanding your family in the next couple of years then renting may make more sense in the near term. That way you can avoid paying closing costs twice and you can save for a larger down payment. But if you have established roots in a community and know you want to live there for many years, then buying a home is likely your best option. Review the example below to understand the financial comparison of renting versus buying and then determine the option that best fits both your financial and personal objectives.

  • Year
  • Monthly Rent Payment
  • Monthly Mortgage Payment
  • Monthly Difference Between Rent and Mortgage Payment
  • Annual Difference Between Rent and Mortgage Payment
  • Monthly Property Tax and Insurance
  • Total Monthly Housing Expense (MHE)
  • Monthly Difference Between Rent and MHE
  • Annual Difference Between Rent and MHE
  • Monthly Tax Deduction Benefit
  • MHE Less Tax Deduction Benefit
  • Monthly Difference Between Rent and MHE + Tax Benefit
  • Annual Difference Between Rent and MHE + Tax Benefit
  • 1
  • $1,800
  • $1,820
  • ($20)
  • ($240)
  • $480
  • $2,300
  • ($500)
  • ($6,000)
  • $330
  • $1,970
  • ($170)
  • ($2,040)
  • 2
  • 1,890
  • 1,820
  • 70
  • 840
  • 480
  • 2,300
  • (410)
  • (4,920)
  • 325
  • 1,975
  • (85)
  • (1,015)
  • 3
  • 1,985
  • 1,820
  • 165
  • 1,974
  • 480
  • 2,300
  • (316)
  • (3,786)
  • 371
  • 1,979
  • 5
  • 65
  • 4
  • 2,084
  • 1,820
  • 264
  • 3,165
  • 480
  • 2,300
  • (216)
  • (2,595)
  • 316
  • 1,984
  • 100
  • 1,202
  • 5
  • 2,188
  • 1,820
  • 368
  • 4,415
  • 480
  • 2,300
  • (112)
  • (1,345)
  • 312
  • 1,988
  • 200
  • 2,399
  • 6
  • 2,297
  • 1,820
  • 477
  • 5,728
  • 480
  • 2,300
  • (3)
  • (32)
  • 308
  • 1,992
  • 305
  • 3,660
  • 7
  • 2,412
  • 1,820
  • 592
  • 7,106
  • 480
  • 2,300
  • 112
  • 1,346
  • 303
  • 1,997
  • 416
  • 4,987
  • 8
  • 2,533
  • 1,820
  • 713
  • 8,553
  • 480
  • 2,300
  • 233
  • 2,793
  • 299
  • 2,001
  • 532
  • 6,384
  • 9
  • 2,659
  • 1,820
  • 839
  • 10,073
  • 480
  • 2,300
  • 359
  • 4,313
  • 295
  • 2,005
  • 654
  • 7,854
  • 10
  • 2,792
  • 1,820
  • 972
  • 11,669
  • 480
  • 2,300
  • 492
  • 5,909
  • 291
  • 2,009
  • 783
  • 9,400
Monthly rent increases 5% per year
Reflects $380,000 fixed rate mortgage with 4% interest rate
Difference between monthly rent payment and mortgage payment
Difference between rent and mortgage payment over the course of the year
Mothly housing expenses that renters do not have to pay
Mortgage payment plus property taxes and homeowners insurance
Difference between monthly rent and total monthly housing expense
Difference between rent and total monthly housing expense over the course of the year
Monthly benefit from interest expense income tax deduction. Declines slightly over time
Monthly housing expense less tax deduction benefit
Difference Between Rent and monthly housing expense less tax deduction benefit
Difference between monthly rent and monthly housing expense less tax deduction benefit over the course of the year

    If you are thinking about buying a home, we recommend that you compare quotes for several lenders to find the best mortgage terms.  Contact multiple lenders in the table below to request loan terms and learn more about the programs they offer.  Shopping for your mortgage enables you to find the lender and loan that best meet your needs.

  • Rate Details*
    Loan Program:  
    Monthly Payment:  
    APR:  
    Rate:  
    Points  More Info:
    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
     
    Total Lender Fees:  
    Loan type:  
    Property Value:  
    Loan to Value:  
    Credit Rating:  
    Date Submitted:  
    Monthly Housing Payments
    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
    (Estimated)
    Property Tax More Info
    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
    (Estimated)
    Homeowner Insurance More Info
    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
    (Estimated)
    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
    (If Any)
    Total Monthly Housing Payments
    Lender Fees
    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
    (If Any)
    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
    (If any)
    VA funding Fee (If any)
    Flood Fee
    Other Fees More Info

    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

    Total Lender Fees
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Rates as of December 11, 2018
    • Lender
    • APR
    • Loan Type
    • Rate
    • Payment
    • Fees
    • Contact
    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • Learn more about the decision to buy or rent by watching the video tutorial below.

  • FREEandCLEAR Mortgage Instructional Video

    Should I Rent or Buy? Instructional Video

  • Sources

    Rent Versus Buy Financial Considerations: https://www.consumerfinance.gov/ask-cfpb/what-are-some-of-the-financial-considerations-when-thinking-about-buying-or-renting-a-home-en-119/

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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