I’m often asked the question, “Should I buy or rent a home?” To answer that question, it is my job to keep informed of what’s happening with Real Estate here in Central Florida and in general. The decision to rent or buy a home is the most important financial decision most people will have to make and the answer largely depends on your own personal situation.
I recently came across an article on Trulia “Rising Mortgage Rates Narrowing Buy vs. Rent Gap” by Jed Kolko, Chief Economist. According to this study, although the gap is narrowing, buying a home in Orlando is still 41% cheaper than renting despite rising home prices.
You may be wondering how buying can be so much cheaper than renting when home prices and mortgage rates are climbing. The key reason is that both mortgage rates and home prices are rising from very low levels and are still well below their long-term historical norms.
In summary, this is how the data was calculated for this study: They calculated the average rent and for-sale price for an identical set of properties. They estimated prices and rents for similar homes in similar neighborhoods in order get a direct apples-to-apples comparison. They did NOT just compare the average rent and average price of homes on the market, which would be misleading because rental and for-sale properties are very different: most importantly, for-sale homes are roughly 50% bigger, on average, than rentals. Then they calculated the initial total monthly costs of owning and renting, including maintenance, insurance, and taxes. Next they calculated the future total monthly costs of owning and renting, taking into account price and rent appreciation as well as inflation. They factored in one-time costs and proceeds, like closing costs, down-payment, sales proceeds, and security deposits. Last they calculated the net present value to account for opportunity cost of money.
To compare the costs of owning and renting, they assumed people get a 4.8% mortgage rate on a 30-year fixed-rate loan with 20% down; itemize their federal tax deductions and are in the 25% tax bracket; and will stay in their home for seven years. Under these assumptions, buying is 35% cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. We also look at alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years that one stays in the home. The full methodology is available on their website at: http://info.trulia.com/rentvsbuy. The interactive Rent vs. Buy map shows how the math changes under alternative assumptions.
In addition to the financial benefits of buying a home, you will have stability, you can personalize it and take pride in home-ownership. A home is an investment that benefits you in the long run. Paying rent every month is an investment in someone else’s real estate and often an unstable investment; The homeowner could decide to sell his or her home, move back into their home or go into foreclosure if they are facing financial difficulty, which would force you to find a new home and go through the dreaded moving process, again. And although you pay a significant amount of interest on your mortgage, there are substantial tax benefits at the federal and state level. In Florida you can also receive a tax break for homesteading (see our recent blog post on Homestead Exemptions).
So, despite the fact that buying is generally a better bet, deciding to buy or rent a home is a huge decision for most and needs to be a decision that is not made lightly. All aspects of both scenarios should be considered carefully. If you do, however, think buying is the right decision for you, the last quarter of 2013 might just be the time to do it; as rates on fixed-rate loans are still appealing and many financial institutions are also a little more lax with their loan qualification requirements this year. I would be happy to discuss your situation with you, can recommend trusted lenders and help find you “your perfect home”!
All my best,
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