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Rent or buy⁠—how to decide which is best for you

Should you rent or buy? The question of when to pursue homeownership—or whether do this at all—is on the minds of many people today.

Although some consumers view owning a home as an important step in achieving the American dream, others prefer renting their living spaces for the greater flexibility. In addition, some renters feel that there are too many barriers to owning a home. This is clear as more U.S. families rent today than at any point in the past half-century.

Still, 72 percent of respondents to a survey said that they’d like to one day own their home. The biggest reasons they aren’t in the market to buy a home are financial; not being able to afford a down payment or feeling weighed down by current debt.

So, how can you decide whether you should keep renting or make the leap to homeownership? Consider these factors:

Evaluate your income and financial obligations.

The general rule of thumb is to keep housing costs below 30 percent of your income. That includes housing-related expenses like insurance, maintenance and utilities in addition to your monthly mortgage or rent payment.

Of course, this isn’t a hard-and-fast rule. The 30 percent standard actually dates back to 1981 when the federal government defined families that spend more than this percentage of their income in housing to be “cost-burdened” and those who spend more than half of their gross income as “severely cost burdened.”

For some families, spending more might be necessary, such as if they live in a high-cost area like the Portland metro. Others might be able to comfortably afford more than 30 percent on their housing if they have no debt, few other financial obligations, or more discretionary income.

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Compare additional costs.

Both renting and buying homes come with additional expenses outside of the monthly payment. Consider the impact of these costs when making your decision:

Additional renting costs

Overall, additional renting costs are minimal. They generally come down to two things:

  • Renters insurance: this will help you out financially if something bad happens to your personal items.
  • Security deposit: you may get this back at the end of your lease, but it’s still a large sum of money you have to pay upfront.
  • Utilities: some rentals do not include the cost of utilities in the rental agreement.

Additional buying costs

Extra costs for buying a home are a little bit more expensive than those associated for renting.

  • Down payment: usually buyers will provide a down payment ranging from 3 percent to 20 percent. OnPoint even has a zero percent down payment option that may work for you.
  • Property taxes: these depend on where you live and are calculated as a percentage of the value of your property.
  • Closing costs: aside from the down payment, these include fees for attorneys, title search and more.
  • Maintenance: homeowners should anticipate maintenance costs to range between 1 and 1.5 percent of the home’s value annually.
  • Homeowners insurance: like renters insurance, this will offer financial protection in case of property damage.

Understand how the Tax Cuts and Jobs Act might affect you.

One of the major benefits of buying a home has long been the favorable tax breaks that come with the purchase. Homeowners can deduct their mortgage interest payments, which has softened the cost. However, the tax reform passed at the end of 2017 changed how much people could deduct.

Now, buyers can deduct the first $750,000 of mortgage debt and up to $10,000 in state and local taxes. To determine how much the new tax law would affect a rent-or-buy decision, Urban Institute compared four hypothetical families making $50,000, $75,000, $150,000 and $300,000 per year.

The researchers at Urban Institute found that for families that made $50,000 or $75,000 per year, their decision to buy would be unaffected. For these families, it still makes financial sense to purchase a home than to continue renting as long as rent stays under $1,017 per month.

But for higher-income families, the decision to rent makes much more sense, unless rents exceed $1,885 per month (for families making $150,000 per year) or $3,631 per month (for those making $300,000 annually). This is because, considering the maximum amount of state and local taxes that are deductible, they save much less via tax deductions.

By comparison, here are some apartment rental ranges for different areas in Oregon:

For a quick reference on comparing your rental prices with home prices in your area, use our rent vs. buy calculator. There are a wide range of factors that will affect your decision on whether to purchase a home or continue to rent. For a more complete picture of how to determine if buying a home makes sense for you, reach out to our mortgage team, they can help answer your detailed questions.

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Weigh other ways to build wealth.

Another commonly cited reason to buy a home is the opportunity to build wealth. When you pay rent, you’re just paying for one month of living space. When you pay your mortgage, though, you’re making an investment. With every mortgage payment, you own a little bit more of that house. As your equity accumulates, you have the option to take out a home equity loan or potentially sell the house to access your equity.

However, homeownership isn’t the only wealth-building path a person can take. If renting makes more sense for your situation, you can still build wealth through other strategies. Instead of making a down payment and contributing closing costs, your cash could be earning interest in a high-yield savings account or through strategic investments.

When deciding whether you want to buy or rent your home, it ultimately comes down to your personal financial situation and preferences. If you have questions in regards to your options, our loan officers are here to help.

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