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Buying still beats renting (no matter what the economy’s doing)

buying first house
Reading Time: 3 minutes
May 31, 2018.

Mortgage rates are rising, and new tax laws are in effect. And yet, the latest MarketWatch analysis says it’s still a better deal to buy instead of rent.

Homeownership generally pays off in 4 years, even without tax breaks

MarketWatch finds that:

  • The new tax bill President Trump signed at the end of 2017, enacted at the first of the year, significantly limits tax breaks for homeowners. The number of homeowners who claim deductions is predicted to drop from 44 to 14 percent. The standard deduction for couples has been doubled to $24,000, and local and state tax deductions have been capped at $10,000.
  • Housing prices may fall by up to 4 percent in pricier cities. Economists believe fewer mortgage tax breaks could reduce buying incentive in some areas. Because of a larger standard deduction in the new tax bill, more homebuyers now have additional take-home income to pay for a mortgage. Though mortgage rates have moderately increased, most homebuyers have more buying power.
  • Even with these considerable changes to the economy, buying a house is still a better choice than renting. Taking out a 30-year mortgage in the Washington metro area, for example, at the current 4.6 percent interest rate with a 20 percent down payment, is more affordable than renting after 4 to 5 years. This cost savings factors in a lower mortgage interest tax deduction, increasing utility costs, anticipated inflation, and rising rents.
  • Homeowners may also benefit from a home equity increase. National home appreciation rose from 4.4 percent in 2014 to roughly 6.5 percent in 2017 and continues rising.

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Loan officers say, ‘Buy now or trade up before rates rise again’

Mortgage rates are slowly rising as the economy recovers, and rents are climbing with them. According to a Zillow market report released in February 2018, the median monthly rent in the U.S. rose at its fastest pace in two years — increasing 2.8 percent within a year to $1,445 a month. American home values rose too, up 7.6 percent in one year. “Whether you’re paying rent or a mortgage, you’re paying someone’s mortgage,” Lori Richardson, Vice President at Cornerstone Home Lending, Inc., says.

Homeowners continue to receive some tax benefits, Richardson explains, along with other benefits like growing net worth by growing home equity. Richardson finds that most homeowners she lends to also see their lifestyle improve. Paying rent, on the other hand, provides all these benefits to a landlord.

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For those trying to decide between buying a home and renting in today’s market, Richardson summarizes:

  • Rents have been rising steadily since 1988. “We’ve seen a steep rise in the last few years. That doesn’t look to be slowing,” she says. A 2018 RentCafe study recently reported that millennials may have paid more than $92,000 in total rent by the time they turn 30.
  • Buying is cheaper than renting. A 2018 Rental Affordability report from ATTOM also recently found that buying a median-priced home is more affordable than renting a 3-bedroom property in 54 percent of the U.S. counties analyzed.
  • Mortgage rates are still historically low. Richardson reminds her borrowers to keep rising rates — usually a sign of a healthier economy — in perspective. Today’s rates are relatively low, hovering over 4 percent compared to more than 17 percent in the 1980s. “Even with slightly higher (but still historically low) rates, good affordability nationally, the numerous benefits of being a homeowner, and the availability of low down payment programs, it’s likely that, for many, renting is not the right avenue to take,” Richardson says.
One of Richardsons’ clients, a couple who were first-time homebuyers in their forties, had continued to rent year after year until their monthly rent reached almost $2,500. “They wanted to see if they could purchase without spending more than what they were already paying monthly for rent,” she says. “In their case, it turned out that they qualified to purchase a $500,000 home and pay less than their previous monthly rent.”

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Finding out how much house you can afford could be the deciding factor between buying and renting. As MarketWatch numbers confirmed, homeownership often becomes more affordable than renting in only 4 to 5 years. Use our free app to help make buying a house fast and easy. Then get in touch with a loan officer who can guide you through your mortgage each step of the way.

For educational purposes only. Please contact a qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.