Is There Really Much Difference In The Monthly Cost Of Buying And Renting?

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Is There Really Much Difference In The Monthly Cost Of Buying And Renting?

Rising house prices and recent interest rate hikes means that it is now cheaper to buy than rent, over a 25 year period, according to Abbey. The staggering results are different across areas of the UK and America but accountants say the difference between buying and renting is getting closer all of the time. The combined effect of interest rate rises and house price increases have slashed the gap by 76 per cent! That was in 2007. Today in 2012, interest rates have stayed low for the past 4 years and are forecasted to stay low for at least another year. Housing prices fell dramatically and are just now beginning to show signs of life in some areas. How has this affected the monthly cost of buying and renting?

It turns out that when you compare the cost of carrying a mortgage at prevailing interest rates vs. renting a home in 2012, the cost to own a home is 45% less than it is to rent. Why is this the case? Well it really depends on the assumptions you make, your life style and your plans to stay in the home for a longer period. Studies we read showed that if a person is planning to stay in a home for seven years or longer, it is far more economical to stay in a home than rent. There are many variables that can impact your decision to rent or own. We have listed the most obvious ones here:

  • Length of time to spend in your home
  • Current mortgage interest rate
  • Down payment
  • Rent for a similar home
  • Tax rates
  • Tax deductions allowed on your income tax
  • Upkeep required on the home
  • Rate of inflation over the seven years

We will discuss each of these in a bit more detail. The analysis has been completed by various accountants and bears up under these assumptions, however if you vary them a great deal then the conclusions may not apply. For example, if you live in a home for less than 7 years, let’s assume for 2 years, it may be cheaper to rent. Also taxes vary a great deal in some cities and tax deductions also vary in terms of what you can write off.

Length of time to spend in your home – appears to be a significant factor and seven years seems to give the best results in terms of savings for the homeowner. Shorter times lean more to the renter while the longer you stay in a home past 7 years clearly favors the homeowner.

Current mortgage interest rate – interest rates are very low at the moment. This favors the homeowner. As rates increase the cost of ownership increases and begins to turn the business case towards the renter. However for the next few years interest rates are forecasted to stay low.

Down payment – the larger you can make the down payment the better off you are. The cost of interest will be lower and you will get your down payment back in most cases when you sell your home. When you rent there never is any return on the rent you have paid.

Rent for a similar home – When you compare rent, always compare to a similar home that you would buy.

Tax rates – vary all across the country, by city, county and state. Use the rates that are current for your community in which you live.

Tax deductions allowed on your income tax – include property taxes and interest costs. These deductions can save you a great deal of money.

Upkeep required on the home – include some level of upkeep when comparing renting vs. owning for repairs and maintenance

Rate of inflation over the seven years – with a mortgage you will be protected from inflation, while rents will increase making the cost to rent more expensive as time goes on.

Owning your own home vs. renting appears to be the more economic step to take based on the accounting analysis.