Rent vs. buying: What your online calculator might not consider
The decision making-process when deciding between renting and buying can seem fraught with possible land mines and trip-wires. There are hundreds of rent and mortgage calculators out there to try and help you navigate the battlefield. To try and help you make the best decision for you and your family let’s take a look at a few “intangible” things that may not be included in those calculators.
Fluctuating rent costs
Michigan has seen pretty steady economic growth over that last few years, while cost of living stays relatively stable. But if you want to live in a growing, popular area you may have to face aggravating rent increases whenever you renew your lease. Grand Rapids rental rates have increased an average $500 in four years, over $100 a year. A mortgage may seem daunting, but at least you can be guaranteed a fixed cost year to year. In fact, Grand Rapids ranked third in the nation in 2015 for economic growth and stability, along side cities like Denver and Houston. But home prices have stayed relatively steady, increasing only seven percent since 2014, rather than the 12 percent increase seen for a one-bedroom rental in 2015. Kalamazoo’s rental and housing markets are more stable, rental costs have only increased two percent in three years, while home values grew about six percent last year.
Bad at Saving? A mortgage might force your hand
It can seem like a stretch, but try and think of paying off debt as increasing your savings. Imagine you purchase your dream home at 35 with a 30 year mortgage. Come your 65th birthday and you’re ready to retire, now you’re looking at payment-free housing (excusing insurance and taxes). Or you can sell and enter your golden years with a nice pile of cash. You can achieve the same thing if you’re diligent about saving every month in addition to paying your rent and expenses, but savings accounts aren’t protected and locked up in physical assets. So the question to ask yourself is if you can keep your hand out of the cookie jar for the next 30 years?
So maybe instead of a mortgage or a savings account you want to protect your future with investments. The return on stock market investments is greater than a mortgage, but the gains are taxable in ways mortgage interest and home sale profits are not. The first $250,000 in profit from the sale of a home is tax-free. That amount doubles to $500,000 if you sell as a married couple.
So far this all seems to be a pretty ringing endorsement for home-buying right? Well, here’s a positive mark for renting: sudden maintenance costs. Your rental rate will have maintenance costs built in by your landlord, so if your refrigerator dies neither of you will be in a financial lurch to pay for the replacement. However, mortgages do not account for the unpredictability of maintenance costs. There are some protections like home-owners insurance and a home warranties, but there are limitations to these kind of protections. A good rule of thumb is to be prepared to handle a sudden $1,500 to $2,000 repair or replacement on very short notice.
The decision to rent or buy your home can be a tough, personal decision with many factors to take into consideration. While there are numerous calculators (and blog posts) that offer guidance on the process, it can be very beneficial to talk with a financial professional. Our team at Consumers will always try to help you make the strongest financial decision for you.