Home > Mortgages > Rent or Buy? The Key Is the Break-Even Year

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Housing costs is often the biggest part of any American’s budget. But when it comes to choosing where you will live there is often one major question: Should you rent or should you buy? There are several factors that go into which decision is more financially prudent for you. One number that can help you figure out what is the better financial move for your specific situation is your break-even year. However, it’s also important to realize the reasons to choose renting over buying (or vice versa) aren’t always strictly financial.

What’s a Break-Even Year?

When deciding between renting and buying, you should figure out how many years you would have to live in the home for the net costs of renting to exceed the costs of buying. This reveals at what point your home’s appreciation will offset the costs it took to acquire it and when you will have more wealth than you would have if you instead rented the same property for the same length of time. The reason this is important is because buying a home comes with upfront costs like a down payment and closing costs (here’s a calculator to help you figure out how much home you can afford). Not having the money can mean renting is your only option. But even if you have the money for these costs, other factors will determine whether buying is a better move.

Driving Factors

In addition to whether you have the upfront costs needed to buy a home, it’s important to also consider the local housing market (often expressed as the price-to-rent ratio), expected home value appreciation, expected rental inflation, rate of return on other available investments (opportunity costs), taxes, how long you plan to stay in the same property, mortgage or rental agreement details and maintenance fees. You are essentially comparing the initial and recurring costs as well as the net proceeds of buying a property as opposed to renting.

Location, Location, Location

Since current and future home price, rental costs and taxes are very location-specific, the break-even year can be quite different across the U.S. A buy-vs.-rent map like this can show you the places where buying a home is better than renting one based on the number of years you plan to stay in your home. Counties with the shortest time to break even are the places you can recoup your initial investment the fastest.

While there is some difference of opinion whether renting for life or buying and appreciating equity is a better choice, this is a highly personal decision. If you have a well-planned future and money saved, you can simply calculate which option will cost you less in the amount of time you plan to stay in the same spot. However, with a less clear future or insecure finances, you have more to consider.

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