With rental deposits significantly lower than most down payments — not to mention the costs of maintenance and upkeep to consider — the rent vs. buy equation can seem like a tough one to solve. But while saving up for a down payment, or worries about the cost to maintain an HVAC unit, can be intimidating, the full picture can look much different. In fact, those extensive numbers say something else entirely.
Market conditions and rising rents in areas across the country caused Trulia’s Rent Vs. Buy Report to lean strongly in favor of buying for a large segment of the population. Of course, your decision should be based on your personal financial situation (and your ability to stay in your new home for a while), but there are a few key reasons why you may want to sign mortgage paperwork instead of a lease. Whether you’re looking at a home for sale in Columbia, SC, or Palm Springs, CA, here’s the latest info on what you should consider.
1. Rates are still offsetting higher prices
Even with home prices inching up from last year, they don’t wash away the huge cost savings lower mortgage rates offer. In fact, according to Trulia’s report, for households putting down 20%, with plans to stay at least seven years, buying is on average 37.7% cheaper than renting. This is only a 0.5% increase from 2015. Rates would need to increase well over 100% to wipe out the cost savings of buying. Such an aggressive rate hike is highly unlikely.
2. Buying trumps renting in more than 100 metro areas
If you think buying is cheaper only in smaller, less densely populated cities and towns, reality says otherwise. In fact, it’s cheaper to buy than rent in more than 100 U.S. metros. Topping the list are cities including Miami, FL, Houston, TX, and Charleston, SC. These areas all offer a cost savings of more than 52% in comparison to renting. While the margins are slimmer, buyers can still see cost savings in areas like San Francisco, CA, and San Jose, CA, where the differences are 25.9% and 18.6%, respectively.
3. There’s no guarantee of stable rental rates
Nationwide, rents have increased 3.5%, which is a slower pace than real estate prices, but it’s not insignificant — and the amount can vary drastically depending on a variety of factors, making rising rental prices an unpredictable part of your financial picture. On the other hand, once rates are locked and paperwork is signed, you can expect to pay the same amount over the course of your mortgage. The only changes could be due to property taxes, insurance rates, or if you opt for an adjustable-rate mortgage over a fixed-rate mortgage.
4. You can build equity over time
This tried-and-true reason to choose homeownership doesn’t depend on market conditions. One of the biggest benefits to buying a home is the ability to build equity over time — equity that can be tapped into later. While home equity shouldn’t be considered a replacement for other forms of saving, it can act as forced savings for those who have trouble putting money away. A monthly rent payment will disappear into the hands of a landlord, but a mortgage payment builds equity that can be used to purchase another home later or provide additional funds in retirement.
5. Tax breaks favor homeowners
Another financial benefit extended to homeowners comes in the form of tax deductions. The early years of paying a mortgage consist in large part of paying down interest, but this expense is tax-deductible. Property tax is also deductible, as are as mortgage points and private mortgage insurance (PMI). Another big tax benefit occurs upon the sale of a home. If you profit on the sale of other types of investments, you are required to pay a 15% capital gains tax. But if you lived in your home two of the last five years before selling, the amount you earn on the sale isn’t taxable.