The decision to buy or rent is a tough one for many people. There are several factors to consider when determining the better option, such as your location, how long you plan to stay in the home, and the up-front and hidden costs of homeownership, just to name a few.
When simply comparing the cost of rent versus a mortgage payment, it's generally cheaper to own than to rent in most parts of the U.S., although there are some exceptions. However, rent is pretty much an all-in-one-payment, aside from a small payment for renter's insurance if you need it.
On the other hand, homeownership comes with several other expenses that you need to take into consideration. For example, the cost of homeowner's insurance and your property taxes will most likely be included in your monthly payments, and as any homeowner from a high-tax state like New Jersey can tell you, this can be a large amount of money.
In addition, you'll pay maintenance on the home, and this expense can vary tremendously from year to year. In one year, nothing may need fixing. The next year, your air conditioner could die on you. When you're renting, things like that are your landlord's problem, but as a homeowner, you need to budget for these expenses.
You'll also pay closing costs when you buy the home, and you'll also have to pay a real estate agent a commission when you sell the home.
On the positive side, owning a home has several potential tax benefits. The interest you pay on your mortgage, as well as your property taxes and any mortgage insurance premiums you pay, may be used as tax deductions if you itemize.
Which is best for you?
As you can see, this isn't an easy comparison. There are too many variables involved, and every situation is different. Fortunately, you can use a financial calculator like this one to compare the financial implications of buying vs. renting your next home.
However, keep one thing in mind
It's important to remember that this calculator only analyzes your buy-or-rent decision from a financial standpoint. It doesn't consider your personal preferences or life circumstances, which are important factors to consider.
For example, if it makes good financial sense to buy a home, but you don't have a stable career just yet, or you simply want the freedom to move whenever you want, then it's probably a good idea to remain a renter for the time being.
On the other hand, your local market may have a shortage of rental properties that meet your needs -- in fact, in the neighborhood I live in, it should theoretically cost about the same to rent a home as to buy one, all things considered. However, there are seven houses listed for sale right now and none listed for rent. If you have your heart set on a certain neighborhood or school district for your next home, then the local market conditions might make your decision for you. Here's a thorough look at this, as well as some other potential reasons to own a home.
The point is that the financial implications of buying and renting are important, but they are just one piece of the puzzle that should be considered along with the other ways buying or renting will affect your life.