“Should I rent or should I buy?”
With home prices across the country hovering at historic highs and rents spiking as we come out of the pandemic, this question is more complex than ever.
Whether you are thinking about trading up from a starter home, looking for a vacation property or downsizing into retirement, here are four financial questions to consider as you navigate this complex (and pricey) housing market.
1. What’s my time frame? The longer you plan to hold on to the home or vacation destination, the more financial sense it makes to buy. If you don’t see yourself keeping a house for at least three years, it may not appreciate enough to justify the transaction costs of buying and selling. In this case, renting may make more sense.
2. What’s the true cost of ownership—and can I afford it? You have to build more than just the principal and interest payments on your mortgage into your budget; there are also property taxes and insurance. And plan to spend 1% of the home’s total value annually on maintenance.
The question becomes: Can I afford to buy? A simple rule of thumb is to add up the monthly principal, interest, taxes and insurance payments, then divide by your monthly gross income. If your total housing costs are greater than 28% of your income, you may be stretched too thin—renting (or buying a less expensive home) is the safer call.
3. Will I save on taxes? A mortgage interest deduction is often touted as a reason to buy. But keep this in mind: Before tax laws changed in late 2017, homeowners could deduct interest on mortgages worth up to $1,000,000 (people with mortgages issued before year-end 2017 can continue deducting up to that amount on their taxes). Now that’s down to $750,000 for newly issued loans. What’s more, you must itemize your taxes to take advantage of any mortgage interest deductions. Due to those same 2017 tax-law changes, many owners don’t see any benefit to itemizing because of the increase in the standard deduction to $12,550 for single filers and $25,100 for spouses filing jointly in 2021.
4. What are my opportunity costs? This question is one you may not think to ask yourself, but it’s how financial planners analyze decisions like these: If you invest your down payment in the stock market instead of using it to buy a house, what rate of return could you reasonably expect? Or, what if you simply deposit that money in the highest-yielding savings account you can find? Likewise, if you could rent a similar property for less per month than your total monthly costs of ownership, how much would you gain by investing the excess savings every month? It pays to do your homework and look at home ownership through an investment lens.
Click here for a rent-versus-buy calculator.
Of course, the rent or buy question goes beyond just the financials. Some people value the flexibility that comes with renting. Others feel more connected to their community when they own their home. We’ve focused on the financial side of renting versus buying, but don’t discount the emotional aspects of this decision.
If you have any questions about what’s best in your specific situation, please contact your wealth management team. As The Planner You Can Talk To, we are happy to help.
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