While Pew Research has found that more people are renting today than any point since 1965, there are many factors that are impacting this trend. When considering buying vs. renting, here are the questions you need to ask yourself:
- What are your goals (financial, career, family, etc.)?
- Are you more interested in a flexible living situation or would you prefer more stability?
- Do you have resources to afford repairs and up-keep of a new home?
- Can you afford to buy? If so, how much can you afford?
- Do you plan on living somewhere long-term?
The answers to these questions will help direct you towards the right solution for you. There are also figures and projections that will help you understand the short-term vs. long-term financial impact of buying a home. Let’s look at a simple scenario that explores the costs/gains of buying vs. renting in Oakland County, Michigan.
Let’s imagine you have worked with a mortgage lender and have been preapproved for a loan of $230,000. If you had the option to rent or buy a house at that value here’s how that would impact your finances from a monthly payment perspective.
According to the data above pulled together by MBS Highway, the monthly costs to live in that house in the first year are roughly about the same. However, the average increase in rent is about 3% in Oakland County, pushing the monthly payment to $2,032 by the time you’ve been living in the rental for 9 years. If you were to stay in that home for 9 years, you would save $25,880 by buying given the rises in rent.
On the other hand, in the first year you would have the up-front investment of the closing costs and the down payment depending on your situation. While the initial investment might be difficult, if you can afford to do it, the long-term return is far greater.
With forecasted appreciation of about 3.27% each year, your home will improve in value over time. In this scenario, you’re looking at a roughly $77,256 increase in home value after 9 years. Furthermore, amortized loans allow your monthly payment to be put towards both the interest and principal, meaning over time you are building equity to the sum of $38,695 after 9 years.
So from a buying perspective, let’s do a little math – $25,880 in increased cash flow when buying plus $77,256 in home value appreciation plus $38,695 in equity and you’re looking at $141,831 gained 9 years after buying a $230,000 house. Subtract your projected initial closing costs and the cost to sell, and you still end up almost $120,000 when buying vs. renting.
Even if you were to put 20% down, you would be projected to recoup that investment after just 6 years of living in the home. Additionally, if you were to put 20% down, you would also benefit from the most competitive interest rates available, potentially gaining even more over time.
Of course, every situation is unique, but this helps to visualize the long-term gain of buying a home in Oakland County. The takeaway is fairly simple, if you can afford to buy, then now’s the time. After all, there is a cost of waiting to buy as home values increase that can reach thousands and tens of thousands of dollars.