Posts Tagged ‘Buy vs. Rent’


Home Ownership – Buy vs. Rent

by Ziva Beck in Home Ownership

To Buy or Rent is the question. With mortgage rates historically low and real estate prices down from their highs you might ask yourself – Is now the right time to buy a house? The answer depends on your personal circumstances.

We bought our house before our second daughter was born. We needed a bigger place and were looking for a 3 bedroom apartment. There were fewer choices available for 3 bedroom apartments and the rent prices were relatively high. At the same time, interest rates were getting lower and real estate prices were lower than a few years before. It was the right time for us to buy a house and settle down.

How do you know when is the right time to buy for you?

First, you need to figure out if you can afford to buy a house. You need to have a stable income to afford the monthly payments and expenses and you need to have enough money saved for the down payment and closing expenses.

Buyer’s closing costs can vary and typically are in the 3%-4% range from the purchase price. It is recommended to have at least 20% as a down payment. It is possible to buy a house with less than 20% down payment. In this case, you will have to pay Private Mortgage Insurance (PMI) which can vary from .3% to 1% from the mortgage amount depending on the percentage of the down payment and credit rating. For example, if you have a good credit rating and plan to have a down payment of 15% then your PMI payment will be about .31% or $31 per month for every $100,000 borrowed. If your down payment is 10% then your PMI is about .52% or $52 for every $100,000 borrowed.

Monthly payments include mortgage payment, property taxes, private mortgage insurance and home insurance. The calculator at the bottom can help with specific mortgage payment scenarios (it doesn’t include PMI payment calculation).

Here is an example of monthly payments –


In addition to closing costs and monthly payments, there are costs associated with renovations and maintenance. When we initially bought our house we have painted all the rooms and replaced the carpeting. Over time, we had to replace our roof, buy a new washer/dryer, buy a new refrigerator, replace the water heater and central air condition unit and remodel 2 bathrooms. We are also looking to replace the windows and remodel the kitchen. If you live in the house long enough, it is safe to assume that at some point you will have to do most of the renovations. This cost doesn’t exist when you rent and requires additional savings either upfront or gradually that can amount to several hundred dollars per month.

Another question to ask is how long do you plan to stay in the house. There are closing costs when you buy a house and when you sell a house. For example on a $350,000 house you can spend $30K-$40K in buying and selling closing costs alone. So if you plan to move away in the next 5-7 years it might not be a good idea to buy now.

NY Times has a good Buy vs. Rent calculator that helps to take many factors into consideration including extra cost for utilities like heating and hot water when you own a house and lost opportunity cost if you would invest the money in the stock market – If your rent is low it appears to be more advantageous to continue to rent.

Besides financial reasons, there are psychological considerations of knowing that you own your home and you can make any renovations you want and you can live in that house for as long as you want. These factors can play an important role in the decision to buy vs. rent.

So, go ahead and figure out for yourself if you are ready to buy a house!