65.8% of Americans own their home. However, that number shrinks to 52% for millennials. This number is so low because, unfortunately, the price of housing increased at an exponentially higher rate than income. The rent versus buy decision, therefore, has greater consequences for millennials. Below are costs millennials should consider when looking at the cost of renting vs. buying a home.
Cost of Renting
One Time Costs
The initial costs of renting can be quite expensive. Usually, prospective tenants must pay an application fee which can range from $25 – $200. This cost is usually non-refundable and increases the more apartments you’re interested in. The next one-time cost will be your deposit. On the east coast your deposit will be approximately one month’s rent. These one-time costs are important considerations when looking at the cost of renting vs. buying a home.
Your monthly rent is the highest ongoing cost you’ll pay when renting a property. Over time this cost will continue to increase as landlords try to keep rental income at the same or higher pace as inflation. If you’re not fortunate enough to be in a rent-controlled apartment, you could see your monthly rent increase to as high as 30%. The rule of thumb is this expense should not be higher than one third of your salary. Prudent renters should also get insurance to ensure their property is protected against unexpected disasters.
(Utilities are not included in our analysis as they are unavoidable cost whether you decide to rent or buy your home.)
Buying A Home
One Time Costs
Many people approach the cost of renting vs. buying a home underestimating how high the one-time costs will be. One time home buying costs include the deposit and closing costs. The deposit cost for home buyers may vary. The variance is driven by the type of mortgage and the credit rating of the home buyer. Deposit costs can range from 0% to 30% of the home’s value. Generally, to avoid additional fees that come with paying a lower deposit, home buyers are encouraged to pay a deposit of at least 20%. Finally, there are closing costs. These costs include fees to your loan originator, appraisal, title fees and fees for any inspection that the home buyer requires.
The ongoing cost to maintain a home can either be predictable or unpredictable. Predictable costs are your mortgage, property taxes, HOA fees and home insurance. Again, we are ignoring utilities because these are costs that you cannot avoid whether you choose to rent or buy. Your monthly mortgage payments depend on the value of the home that was purchased. The higher the home’s value, the higher you can expect your mortgage cost to be. Monthly costs will also include HOA fees and home insurance. Property taxes vary by state. New Jersey’s property tax rate, for example, is among the highest in the nation (2.47%). With median home prices being $355,700, a home buyer could be paying $8,786 per year in property taxes.
Unpredictable costs are usually overlooked when considering the cost of renting vs. buying a home. Unpredictable costs are your maintenance cost that your landlord would usually cover if you continued renting. If your hot water stops running, if your pipes break, if your garbage disposal stops working or worse if your cooling system needs to be replaced you will be responsible for all those costs.
A benefit of buying a home that you should keep in mind is the tax deduction. Home buyers are able to deduct the interest portion of their mortgage (up to a limit) from their taxable income.
As you are making the decision on how or where you want to live, always keep in mind the multiple cost of renting vs. buying a home.
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