For many young individuals, choosing to buy or rent a home is a big financial decision complicated in the present economic climate. To help consumers make this difficult choice, the New York Times has republished its well-known rent-versus-buy calculator in light of recent rising interest rates and rents. The mortgage interest deduction was modified in 2017 to consider new tax laws, and the calculator provides insightful information for both renters and prospective homeowners.
Renting makes many individuals feel bad since they think it’s a waste of money and an inferior alternative. This impression is untrue, though. According to Moody’s Analytics chief economist Mark Zandi, renting is frequently a more cost-effective option, particularly in areas where home prices are high. Beyond the mortgage, ownership involves other expenses, including broker fees, mortgage interest, and house maintenance. As the average monthly mortgage payment has increased to almost $2,000 from early 2020, renting might sometimes be a more prudent financial decision.
Many consumers have yet to fully appreciate the vast changes made to the mortgage interest deduction by the 2017 tax reform. Because of the law’s growth, many taxpayers find the standard deduction more advantageous than itemized deductions, including the mortgage interest deduction. This change is particularly significant in high-tax jurisdictions like California, Illinois, and New York, where the value of itemized deductions has decreased. As a result, many homeowners no longer need to take the mortgage-interest deduction since they may save more money by taking the standard deduction.
The calculator’s capacity to calculate the break-even mortgage rate, that is, the point at which, under certain assumptions about the economy’s direction, buying and renting become equally affordable, is one of its primary characteristics. This break-even rate currently ranges from 4% to 5%. Since the average interest rate on a 30-year fixed mortgage is 7%, renting is frequently the most cost-effective choice. This significant disparity emphasizes why, in the current market, renting can be a better option for many individuals.
Even though renting has financial benefits, owning still makes sense for certain families, especially in areas where housing costs are more affordable. More reasonably priced real estate may be found in upstate New York, Pittsburgh, St. Louis, and New Orleans. In addition, although ownership includes higher expenditures, families that are certain they will remain in their current house for ten years or more may choose it.
New construction properties offer a special opportunity to individuals who are thinking about purchasing. Developers are more prone to haggling over price than private sellers to prevent their properties from becoming unoccupied. According to Wolf Richter, a financial journalist, several developers have lowered the price of recently constructed homes, making them a more appealing choice for purchasers.
Buying or renting ultimately depends on one’s long-term goals, financial situation, and personal circumstances. The recent rent-versus-buy calculator from the New York Times helps weigh these considerations. People must, however, also consider personal life phases and market developments, such as the possibility of relocating soon. Renting may be a wise and financially reasonable decision in many situations, dispelling the myth that it wastes money.
