Buy or rent: an age-old debate
Is it better to buy or rent a home? The answer depends on many factors. These include your market, the local housing supply, your financial means, and interest rates.
New data show that buying costs less than renting in most markets. When that’s the case, the choice becomes obvious: it often makes more sense to buy than rent.
To help you decide, crunch the numbers and review your goals. Think about short- and long-term plans, like growing a family and building wealth. And talk to experts who can help you weigh the pros and cons.Verify your new rate (Nov 15th, 2019)
What the research found
A new report by ATTOM Data Solutions had some notable findings:
- Buying a home is cheaper than renting in 54 percent of markets reviewed. More precisely, purchasing a median-priced home is more affordable than renting a three-bedroom property in 240 of 447 U.S. counties.
- Markets where renting was costlier than buying include Dallas, Miami, San Antonio, Detroit, Philadelphia, Tampa-St. Petersburg, Cleveland, Pittsburgh and Saint Louis.
- Yet 64 percent of Americans live in markets where it’s cheaper to rent than buy. This was true in 14 of the country’s most populated counties and in 30 of 39 counties with a population of 1 million or more.
- Markets, where it’s more affordable to rent than buy, include Los Angeles, Chicago, Houston, Phoenix, San Diego, Miami, New York City, Seattle, Las Vegas, San Jose, San Francisco and Boston.
How to decipher the data
Daren Blomquist, senior vice president for ATTOM Data Solutions, says these findings provide pros and cons for both options.
“It’s still more affordable to buy than rent in the majority of markets,” he says. “But 64 percent of the population live in markets that are more affordable to rent than buy.”
Buying remains less expensive in most markets for a key reason.
“There are still a plethora of smaller markets where home price appreciation has remained slow and steady during this housing recovery,” says Blomquist. “But those tend to be the markets with less opportunity for finding a job. These are also markets where folks are often more transient. This causes them to rent more often. And that puts more upward pressure on rents.”
Where rents make sense
Meanwhile, renting is a better bargain than buying in the best job markets.
Enter your home purchase price, and use the slider to select down payment percentage.
For 0% down payment, you may qualify for the following mortgage loans:
The USDA loan is the best-kept secret in the mortgage market. It requires zero down, plus credit guidelines are loose. Eligibility is location-based. Many rural and suburban neighborhoods across the U.S. are USDA-eligible. This loan is perfectly suited for first-time and repeat buyers, and you don’t have to have a high income to qualify.
VA home loan
The VA home loan is available to home buyers with eligible military experience -- as little as 90 days of service in some cases. This mortgage option has no down payment requirement. Plus, no mortgage insurance is required, potentially saving buyers hundreds per month.
For 3% down payment, you may qualify for the following mortgage loans:
This loan allows entire households to contribute to the mortgage payment. The primary buyer can use income from non-borrowing household members to qualify. Income from roommates, boarders, and mother-in-law units is allowed. This loan requires a small 3% down payment, all of which can come from a gift from a family member or other eligible source.
The Conventional 97 gets its name from its small 3% down payment requirement. This program is best for home buyers who would otherwise qualify for a standard conventional loan, but don’t want to make a large down payment. Fannie Mae and Freddie Mac sponsor the program, which makes it widely available nationwide.
For 3.5% down payment, you may qualify for the following mortgage loans:
The FHA mortgage is the go-to program for more than 20% of home buyers. It requires a small down payment and is well-suited for borrowers with imperfect credit histories or lower income. This is a government-sponsored program designed to get more people into their own homes. Therefore, guidelines are flexible, and buyers often qualify when they thought they could never own a home.
For 5% down payment, you may qualify for the following mortgage loans:
Standard conventional loans come with a 5% down feature that not a lot of buyers know about. Many assume loans sponsored by Fannie Mae and Freddie Mac come with a 20% down requirement, but that’s not the case. Ask your lender about the 5% program, and enjoy the benefits of a conventional loan without the steep down payment requirement.
For 10% down payment, you may qualify for the following mortgage loans:
An 80-10-10 loan, otherwise known as a “piggyback” loan, is a mortgage option in which a home buyer receives a first and second mortgage simultaneously: one for 80% of the purchase price, and one for 10%. One loan “piggybacks” on top of the other. No mortgage insurance is required because the lender considers the 10% second mortgage part of the buyer’s down payment..
You can put just 10% down on a conventional loan, despite the popular belief that these loans require 20%. This option requires private mortgage insurance (PMI), which is typically very affordable. In many cases, opting for PMI is a better strategy than trying to come up with 20% down.
For 20% down payment, you may qualify for the following mortgage loans:
Conventional loans come with very low rates, plus no mortgage insurance is required when you put 20% down. Conventional loans are sponsored by Fannie Mae and Freddie Mac and available at your local lender. Conventional loans remain the mortgage of choice for buyers with good credit and a healthy down payment. A conventional 20% down loan can also be used to buy a second home or investment property.
For 25% down payment, you may qualify for the following mortgage loans:
Multi-unit & investment properties
You can buy a duplex, triplex, or four-plex by making a down payment of 25% or more. Purchasing a multi-unit home is a great way to get started as a landlord, whether you plan to live in one of the units or rent out the entire building. Homes with up to four units are eligible for conventional lending.
“That’s because home prices over the past five years of this housing boom have steadily been rising faster than rents. Also, both rents and home prices have been rising faster than wages,” he says.
“This has created the problem we have today where, in many markets, neither renting nor buying is very affordable. But renting there is the lesser of two costly evils, chiefly in major population centers.”
Areas buyers should target
Ask Blomquist and he’ll tell you that certain cities stand out as good bargains for buyers.
“Parts of Dallas, Miami, San Antonio and Tampa are all still more affordable to buy than rent. And those markets also have solid economies with plenty of jobs available,” he says.
But bank more on renting in areas like New York City, Seattle, San Jose, San Francisco and Boston.
“These markets have access to many high-paying jobs. Yet I would recommend caution before buying there,” says Blomquist. “That is, unless you are very comfortable from an affordability standpoint. You also need solid employment and should plan to stay put for at least five years.”
What else to think about
If you can’t quite afford to buy today, it’s okay. It can be wise to rent for a spell and try to save up for a down payment to be used when you’re ready. Just prepare to make sacrifices and live within your means.
“If affordability is an issue, renting creates much less risk than stretching financially to buy a home. Certainly home ownership is a worthy goal I would recommend for most people,” he says. “But it’s not always the right time or market conditions to buy.”
Yet if the costs are close, remember the perks of owning.
“There are benefits to home ownership that may outweigh the fact that it might be a bit less cheap than renting in some markets. Those include building home equity and income tax deductions. There’s also the freedom that owning provides,” Blomquist says.
If you don’t want a landlord dictating your decor, pet or gardening choices, homeownership might mean more to you than just the wealth you might build. But it’s also a “forced savings” that can pay off in the future. According to Harvard University’s Joint Center for Housing Studies, homeowners build on average 15 times the wealth of renters, and most of that does take the form of home equity.
To help you choose, answer these questions:
- Do you plan to move in less than five years? If so, “renting is likely a better option,” notes Blomquist. “That’s because the upfront costs of owning may not be regained by the benefits if you own for less than five years. Also, there is more risk over the short term that home prices may not increase.”
- How much income would you need to put toward housing if you purchased? “If it’s above 45 percent, it may be better to rent. This is true even if renting also requires the same percentage of your income,” he says. “Ideally you want to spend no more than 35 percent of your income on housing. But that is not practical in many markets.”
There may be exceptions — for instance, in an expensive rental market, you may plan to keep your house after you move. The income could cover the ownership costs as you build equity. And the tax treatment of rental property is very favorable.
Another option is buying a multi-unit home, occupying one of the units, and let your tenants offset your ownership costs. You can even use an FHA loan for this, with 3.5 percent down. Or plan on getting a roommate to make your home more affordable.
What are today’s mortgage rates?
Current mortgage rates have climbed recently, but are still highly affordable, especially when compared to the rent increases in many markets. And once you have a fixed-rate mortgage, you don’t have to worry about annual increases. Those who expect to keep the property for just a few years can shave their rate down by choosing an ARM fixed for three, five, seven or ten years.Verify your new rate (Nov 15th, 2019)