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Renting Versus Buying: Which is Best for You?

Living Insights

The renting vs buying debate has always included the same considerations: home price, length of time staying, interest rate, type of mortgage, growth rate, taxes, closing costs, HOA fees, maintenance, and other hidden costs.

Initial Costs

Depending on the type of loan, the initial costs for buying a home can run into the tens of thousands of dollars. Items such as down payment, points to close, and inspections are just a few of the initial costs potential homeowners find themselves paying up front. If the choice comes down to available cash to put down for these items, renting is a better option. In addition, renting often only has one initial fee, a security deposit.

Recurring Costs

Homeowners find that there are monthly and yearly recurring costs when owning a home. Mortgage payments, maintenance fees, property taxes, homeowners insurance, monthly utilities, and homeowners association (HOA) fees are just a few of the recurring costs that can stretch a budget to its maximum.

When renting, the monthly rent and renters insurance are usually the only costs. However, there may be additional fees such as parking or storage fees depending on the location.

Opportunity Costs

Opportunity costs are the costs of doing one thing over another. A person can buy a new car, but the opportunity costs of this purchase may mean that they give up going on their dream vacation. In home ownership, opportunity costs refer to the initial money (down payment, closing costs, etc.) spent on the home that could be invested elsewhere.

One argument for home ownership is that renting is somehow throwing money away. However, if a person puts down $100,000 as a down payment on a home, then they lose their opportunity to invest that money elsewhere and see a return greater than the one they will see in 30 years when they sell their home. Opportunity costs are determined for both the initial home costs and recurring costs.

Net Proceeds

After several years, a homeowner may decide to sell.  Was their initial purchase a good one? The net proceeds are the money received from the sale of the home, less any closing costs such as agent commission (normally 6% of the sale price of the home), any remaining mortgage balance payable to the mortgage company, and any taxes to be paid from the profit if not reinvested into another home. Any negative total means that there was enough profit to cover the costs of the home and all recurring expenses.

For renters, the return of the initial security deposit will be the only return seen when the lease is up, or they decided to move.

Since each situation is so different, buying involves many varied and complicated decisions versus renting. There are many online calculators that help determine whether it is better to buy or rent. Take the time to research each one and determine which fit is best for you.

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