Real Estate

Is it better to buy or rent in this environment?

May 12, 2022

I am sure we have all seen articles addressing whether it is better to rent or to buy. We came across an interesting piece from the WSJ focused on this exact question. 

The premise of the article is how long it takes to break even from the recent increases in the cost of homeownership - higher home prices and higher mortgage rates - compared with what one would pay to rent a comparable home. Breaking even is defined as when the net costs of owning a home is equal to the costs of renting a home over the same period of time. 

What was interesting about their methodology - and that we found a bit inconsistent with our customer interviews is their use of a 10% down payment to purchase a home. A large share of first time home buyers shop around with a USDA or FHA financing which allow down payments as low as 3.5%. Although this product allows people to secure their home faster, there is a catch. With financing where customers put less than 20%, they are required to pay a private mortgage insurance (PMI) premium payment every month. This PMI increases the cost of homeownership, likely expanding the break even period. The unfortunate thing about this all is that this additional monthly expense could have been allocated to increase a homeowner’s true ownership stake in the house. 

According to RocketMortgage, private mortgage insurance costs anywhere between 0.5% to 1.0% of your loan amount per year. The higher the loan amount, the higher PMI cost. To illustrate, a loan of $500,000 will result in a borrower paying $2,500 to $5,000 per year in PMI. Breaking it out per month, that results in $208 to $416 per month in additional expenses.

Finally, the analysis made the assumption that renters allocate funds that would have been used to purchase a home in the stock market. Based on our conversations, a lot of the families (~70%) don't actively invest in the stock market. To circle back to the piece, we thought it was an interesting way to assess the decision between homeownership and renting. What do you think? 

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