When many people start thinking about buying a home, they usually get excited about figuring out how big a house they can get and use online mortgage calculators to help them estimate monthly payments at a specific interest. What many of these calculators don’t include, though, are additional costs. We often forget that homes need to be maintained — by the owner. Other costs come into play as well, from property taxes to insurance to upkeep. Additionally, when many people move, they do so into a larger place. This often requires that you spend more in utilities, and you may have additional expenses, such as buying furniture, yard maintenance, and more.
The following infographic from CreditLoan.com offers a sobering look at how much it can cost to own a home. It also compares renting to buying, and your costs in each case:
You can experiment with your own set of numbers at New York Times.
There are a number of financial experts that recommend you plan to live in your home for five to seven years if you buy. This infographic backs that up by showing that it takes five years for a home purchase to be “worth it.” It also brings up the point that sometimes it isn’t always better to buy.
There is also debate over whether or not a home purchased as your residence is truly an investment, and in many cases, by the time you add up the costs and interest, you are unlikely to get it all back, even with tax advantages and if your home increases in value.
Before you run out to buy a home, it is a good idea to carefully consider the costs. You want to be able to afford your home, since it is a Major Financial Commitment. If you are thinking about “upgrading”, you need to factor in potential losses from selling your home. My husband and I have just decided not to buy a new place, even though we have found some screaming deals, because the time, hassle and loss involved in selling this home are so great.
Finally, consider other options before you buy a home. You might be able to take the difference in cost between buying and renting and invest more every month. There are those who maintain that they don’t mind renting the same home or apartment for years. They don’t have to take care of maintenance, and they can invest the savings and end up with more in the long run.
Wisdom from Our Readers
Many of our astute readers have pointed out that all of the factors are not present on this infographic. So we’d like to take a moment to point them out, as you might expect, whether buying or renting makes more sense for you depends on a number of individual factors, including your local housing market. Here are some of the other points that readers have made about what is missing from the infographic:
- Tax Deduction: This infographic didn’t figure in the fact that you can deduct your mortgage interest from your taxes. This is an itemized deduction that can lower your taxable income. Realize, though, that your interest payment goes down as the years progress, so the benefit you get from this diminishes. Property taxes can also be deducted on your tax return, and that can be a benefit of homeownership.
- Appreciation: Your home may not always appreciate in value. Indeed, a recession can set you back a long way on the path to appreciation. Whether your home truly appreciates in value depends a great deal on your local market.
- Home Improvements: It’s important to note that even though home improvements can add value to your home, it is not an increase that equals 100% of what you spent. If you spend $1,000 on home improvements, your home may only increase in value by $700 or $800. Rarely do improvements add to the value of your home to the amount you spent on them.
- Private Mortgage Insurance (PMI): This infographic leaves off PMI. If you don’t put 20% down, you have to pay for private mortgage insurance, and that adds another cost to home ownership.
- Rental Utilities: Unfortunately, the infographic fails to take into account that many renters have to pay their utilities. This is a cost of renting that needs to be considered, as does the difference between how much utilities will cost in your new home.
- Investing the Difference: If you can rent for less than a mortgage, it is possible to the difference into another investment. Indeed, since by the time you pay interest and pay for increased utilities and maintenance on a home, it is possible that you will not actually, dollar for dollar, break even on your home — even if it does appreciate in value. Some maintain that you are better off investing your money in bonds, index funds or something else likely to offer better returns.
As always, you need to run the numbers for yourself, since situations are different, and market conditions vary.
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Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own blog at Miranda Marquit.
Thanks for this unusual look at the matter and help to bust an old myth.
I would love to buy my own home at the moment buy i know i will be moving soon so renting is a better option at the moment. Nice post.
The numbers that they used there for a home is scaled pretty low to make the case for buying a home. The assumptions that a lot of people also ignore is that a home is not going to up in value as a guarantee. The breakeven point can be in decades, not years. I recently did a series on the myth about owning a home and with my own personal experience, can show that even with 10 years in a home, we barely made breakeven. This is with buying in the last recession, at what seemed to be the bottom… Read more »
I really like how you broke down the differences between renting and buying. I remember when I went to buy my home. Everyone said its about the same cost to rent as own. Boy, were they wrong. As you mentioned the cost of landscaping, utilities, home owners insurance, taxes taxes taxes, and all the other costs that come with a home. It was not even close to renting. But I am still glad we bought the home. Thanks for the information
What about the money saved by not paying the mortgage put in some sort of investment if renting? It’s slightly one sided if you take into account the profits made from the potential house sale and not any potential investments made while renting.
It always depends on the individual and their personal financial situation at the time. What it comes down to, is do you want to sacrifice a little now for a better return later?
This analysis assumes the value of the home will rise each year. This is the same sort of thinking that led to the financial meltdown. Banks were willing to lend to unqualified buyers because they assumed the value of the property would always go up; thus if the owner defaulted, the bank made money.
But why should real estate prices always go up?
“The assumptions that a lot of people also ignore is that a home is not going to up in value as a guarantee. The breakeven point can be in decades, not years.” @Kim – That’s a good point. The number shown is just an example. The real number will be different for everybody, e.g., depending on how much you bought your house for, where you live, any improvement you made, etc. Having lived through the recent crisis, I think we all know that appreciation is not guaranteed — however, I believe that in the long-term home value tends to keep… Read more »
If you purchase a home, you can write off the mortgage interest on your taxes. I don’t see that noted on here. In this example, that’s over $8000/year less that you pay taxes on. How doesn’t that throw off the whole analysis?
Go to the source and work it out for yourselves….
https://www.nytimes.com/interactive/business/buy-rent-calculator.html
Ok that really makes a lot of sense dude.
@Mark in MA you can deduct 1/2 your yearly rent from your state income tax. Don’t know about any other state. I would strongly recommend people run the numbers themselves. If you can get the cash together for a 15 or year mortgage, you’ll find the break even point to be MUCH earlier. Also, if you change the annual increase in the value of the house to 5% per year, which is pretty easy to do even in a flat market with a little sweat equity and not much $$$ on the right house, you’ll find the break even point… Read more »
What this infographic fails to take into consideration is that buying a home is an investment, with all the associated risks and possible benefits. In the end, whether buying a home was a good choice is something one will only know in hindsight, since markets are almost by definition unpredictable. So when buying a home, the buyer needs to be confident about the future housing market as well as about his own ability to deal with any possible losses. The nightmare scenario with buying a house is not to lose a small amount of money compared to renting, but to… Read more »
How does this change if the cost of the home is $122,000 or $322,000? What is the break even point when the cost of the home goes down or up. Obviously closing cost and down payment drop based on this, but what about the other factors at play?
C’mon now. A place with an average rent of $1500/month won’t have houses (livable ones at least) for $223,000. I live in Portland, Oregon, a place with an average house cost of $280,000 and average rent of $800. Then there’s the paltry $1200 a year for renovations? $1200 for maintenance? $1200 for utilities? WHERE? One trip to Home Depot is worth $1200. One repair costs at least $500, often far more. Utilities in a house for only $100/ month? Get real! Nice article from the National Association of Realtors. Just don’t believe it. Buying a house these days is the… Read more »
Miranda, nice article and graphics. We have been both owners and renters over the last decade. One point that I’d make is that renting offers a flexibility that ownership cannot. For instance choosing to rent in a better school district is a benefit to our children. Also renting allows us to be flexible and move relatively quickly to areas of economic opportunity. In the current economic environment, I prefer flexibility. Also I think the financial assumptions of ownership underestimate the growing burden of property taxes. Thanks for getting the discussion started.
The other reality I’ve seen as both a renter and a home owner is that you tend to spend more money on your home fixing up things, replacing things, etc. These fixes never earn back 100% of value on a house sale so they are money losing. Renters tend to upgrade and replace absolutely nothing. I know a guy who bought a brand new home with a great back yard. His wife is making him redo the backyard to the tune of $40,000.
^ Agree with MarkS. This article is totally inaccurate if you fail to include the deduction of interest and property taxes on tax returns. In your example, with about $10,700 in interest and prop taxes, you’d be saving at least $2,000 per year using just a basic 20% marginal federal tax rate. In CA, you’re probably looking at at least 30-35% tax savings, or $3,500 per year for buying a home. I’m using 30-35% tax rate in CA because most people who buy a house here in CA are at least in that tax bracket. You really should revise the… Read more »
@ Dino, I agree 1000%, in addition buying a shack vs. renting in a decent area – Hmm, I’d choose to rent. In our market (SLC) it has actually been much better to rent over the past 10 years. We have recently bought a home, but it wasn’t because we were saving money on it. We are spending almost twice as much now, and with upkeep and maint. I don’t forsee it really changing that much. All of these types of “analyis” are always skewed. Let’s see a real study, with real homes (simillar), with real costs. I’ve spent about… Read more »
Here’s my question:
Is it financially smarter to wait 3 years and pay 100% cash for a house (~ $150K) or put $30K down now and take advantage of the low home prices/interest rates?
It’s not a given that home prices increase enough in the next 3 years to keep me from saving 100% for a decent house, but it’s also a possibility. Thoughts?
I’m a little surprised at the comments. I thought this article was too conservative towards renting yet most people are complaining about the housing being unrealistic. I’m not sure about other locations, but in the Dallas area, the only rentals with included utilities are in areas likely to get you shot. My last apartment was 800 sq ft with 1 bed 1 bath, was over 20 years old and needed updating, and was renting for $850/month. If you wanted a garage, that was $200 more per month. Utilities were outrageous because they had the lowest grade/cheapest air conditioner available which… Read more »
I don’t see how this is apples to apples – why are you comparing the purchase of a house to the rental of a one-bedroom apartment? You can purchase condos and rent houses. Looking at purchase vs. rental of a house or purchase of a condo vs. rental of an apartment seems like a more fair comparison. This will even out a lot of the monthly mortgage/rental, furniture, utility, and possibly yard-care costs. Other things: – If you’re going to call out the cost of a washer/dryer, apartments in Boston don’t generally come with washer/dryer hookups so you’re stuck going… Read more »
So many people just jump into buying and assume it’s better than renting. If you do the math, unless you’re in it for the long term, renting is much better — the big assumption here is that you’re investing your money wisely and not blowing it on, say, trips to St. Kitts to see drunk monkeys.
This is especially true in NYC, where I live, with most of the property being personal (co-ops) versus real (condo).
For me, I was comparing a one bedroom apartment to a 3 bedroom house because the price was generally equivalent. At the time, I had friends renting a 3 bedroom house about 15 miles further outside of town in another suburb for $1350/month. So, just base costs were double what my mortgage is. Even factoring in property taxes and insurance, it was cheaper to buy and I didn’t even have to spend another 30 mins in my car to get to work. (My house is 17 miles from the office and it takes 40 mins with good weather and no… Read more »
The Math above is done completely incorrect. Home Cost: $223,500 Down Payment: $22,350 Financed Amount: $201,150 at 5.5% over 30 years you are looking at a monthly mortgage of: $1,368.40, which is far and above the mortgage that was calculated above: $967.75. A Monthly difference of: $400 or $4,800/year. This also doesn’t include the PMI that will be required since you are not meeting the 20% equity value in the home. Also a 1500/month one bedroom apartment? Is not going to be in the same area as a 3 bedroom house with the price of $223,500. In San Diego you… Read more »