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Renting vs buying: Which costs more today?

Gina Pogol
The Mortgage Reports contributor

In this article:

How much more would it cost to buy or rent? If you’re considering renting vs buying a home today, you may be surprised by the costs in many markets.

  • Renting usually entails first and last month’s rent, plus a deposit
  • Buying involves minimum down payments ranging from zero to 3.5 percent
  • Motivated home sellers and some programs may even pay your closing costs

It’s possible to buy a home with literally nothing out-of-pocket, depending on your location. Renting often costs more. In addition, rents can rise, while fixed mortgage rates don’t. Finally, homes tend to increase in value.

Verify your new rate (Apr 20th, 2019)

Landlords charging more than lenders?

Through most of history, it has cost more upfront to buy than to rent. There’s the initial down payment, and closing costs can be expensive, too.

But a reversal is underway.

Rents and move-in charges are rising, while down payments are dropping. Today, your landlord may charge you more to move in than your lender.

Move-in costs skyrocket

If you’ve looked for an apartment lately, you may have noticed something.

The rental market is strong, and the competition fierce. In a “down” market, you can find landlords who will practically let you move in for free to keep units from going empty.

But as the economy expands. unemployed people find jobs, employed people find better jobs, and everyone’s looking for housing. No more couch surfing with friends, and parents are reclaiming their basements.

According to Zumper.com’s 2018 Rent Report, a two-bedroom home had a nationwide median price of $1,442 per month.

Based on that price, here’s what you can expect to pay to move into an apartment:

  • First and last month’s rent: $2,884
  • Security deposit (equal to one month rent): $1,442
  • Application/credit check/background check fees: $50-100
  • Pet deposit: $500

The total cash needed to move into an apartment could be up to $4,926. Not cheap by any measure.

Upfront costs of buying a home

A rent vs buy calculator might show you that buying in your neighborhood costs less upfront and / or over time then renting. Today’s mortgage down payments range from zero (for USDA and VA home loans) to 3 percent (for Fannie Mae and Freddie Mac programs) to 3.5 percent (for FHA loans).

Related: The USDA home loan

For eligible U.S. military member, the VA home loan is a good option. Like USDA, it requires no down payment and comes with some of the lowest rates of any loan product.

Related: 10 best benefits of a VA mortgage

You can even use FHA as a zero-down loan, if you receive a financial gift for the required 3.5 percent down payment. And Fannie Mae’s 97 percent loan allows buyers who meet income-eligibility guidelines to get in with just 3 percent down. And many programs allow you to receive down payment assistance or gifts.

Assuming that you want to buy a $200,000 property with 3 percent down. Under most programs, a seller is allowed to pay some or even all of your closing costs. So all you’d be coming up with is $6,000. And that’s to own your home, not put money in your landlord’s pocket.

Then there’s the increase in value

While there is no guarantee that your home price will increase, most experts put typical gains at about 4 percent per year. Would you rather have your mortgage stay the same while your property value increases? Or would you prefer to see the landlord gain the appreciation and possibly raise your rent as well?

A good rent vs buy calculator should help you compare the upfront costs of renting vs buying, and factor in the long-term implications of value increases, tax deductions and mortgage rates.

Tips for reducing upfront costs

There are several ways to cut your closing costs — lender credits, motivated sellers, and government programs, for starters.

You can request a lender credit. In this arrangement, the lender pays all or part of your closing costs for you. The lender raises your rate slightly above market rates, and credits you the extra profit generated from doing so.

Related: The “no-cost” mortgage

Even with a higher-than-market rate, you still end up with a very affordable home loan. Mortgage rates are currently very low.

A lender credit could bring your upfront costs down by about 1% of the loan amount, or $4,000. That brings costs of ownership within the range of upfront rental costs.

But there are ways to reduce costs even further.

  • Request a seller credit for closing costs
  • Get a gift from a family member, borrow from your 401(k)
  • tap the hundreds of down payment assistance programs available nationwide

Related: Complete guide to down payment assistance in the USA

Get creative. There is a good chance you could own a home for less money out-of-pocket than it takes to rent. If the down payment and closing costs are all that are keeping you from buying a home, compare real upfront costs.

Owning a home may not be as expensive as you think.

Verify your new rate (Apr 20th, 2019)