Buying a home isn’t the life-changing investment many people think it is: Home prices usually only increase at the same pace as inflation, according to Time. Nonetheless, buying a home can still save money over renting a pad. As with any other investment decision, the devil’s in the details, so you’ll need to consider several factors to determine if homeownership is cheaper than renting for your lifestyle.
In a Nutshell
Buying a home will save you money in most cases. As of the winter of 2013, buying a home in each of the 100 largest housing markets was 44 percent cheaper than renting, according to a Trulia study. Those savings, which hinge on claiming all deductions and staying in your home for at least seven years, vary significantly by local housing markets. If you’re looking for a place in San Francisco, you’ll save about 19 percent over renting, but homebuyers save a whopping 70 percent over renters in Detroit, the nation’s most buyer-friendly metropolis.
Factor: Interest Rate
Your credit score can tip the scale toward making renting more affordable, however, as much of the savings for homeowners hinges on low rates that the best borrowers receive. If you don’t have the credit history to score a killer rate, it can be cheaper to rent until you build up your credit history: Purchasing a home with a 5.5 percent mortgage rather than the 3.5 percent used in Trulia’s example makes owning a home in San Francisco 2 percent more expensive than renting, according to the Denver Post.
Factor: Tax Breaks
It’s hard to imagine a homeowner being so lazy as to claim a standard deduction on her income taxes instead of itemizing -- forgoing the hefty deduction that comes with mortgage interest. It’s probably a no-brainer, but you’ll need to take all the deductions homeowners receive to make homeownership more affordable than renting.
Factor: Duration of Ownership
Closing costs and other fees you pay up front when you purchase a home might make owning initially more expensive than renting. The longer you stay in your home, the less those upfront costs impact your savings. Trulia’s model relied on homeowners staying put for seven years. Those who stick around longer could reap more savings, while rolling stones may come out behind when compared to renters.
Factor: P/R Ratios
Housing and rental markets evolve with time, but you can perform your own tests to determine if buying or renting is cheaper in your area using price/rent ratios, or P/R ratios. To do so, compare very similar properties, one a rental and one for sale. Multiply the monthly rent by 12 to get the cost to rent the unit annually, then divide the purchase price by that number. The lower the P/R ratio, the more savings you’ll see as a homeowner. When P/R ratios top 20, it’s usually cheaper to rent, according to Time.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.