Renting vs. Buying: Determining What's Best For You

Joan Jensen, president and CEO of Central Credit Union of Illinois, suggests these considerations in deciding which option best meets your housing requirements.

IT'S NOT ONLY ABOUT MONEY: Before you break out the calculator and start running the numbers, first answer these important questions:

  • Do you want to be responsible for the maintenance of your residence? Or, would you prefer someone else takes responsibility for fixing the broken pipe or leaky roof?
  • Does your lifestyle require the flexibility of being able to pick up stakes and move? Sometimes we see changes on the horizon and sometimes changes come out of the blue. It may be important for you to remain flexible so you can quickly adapt to changes in your personal finances, health, marital status, job, or family needs.
  • Is it important to live in a particular neighborhood? If so, does that neighborhood have a good selection of rentals and a good selection of homes for sale? Some neighborhoods meet the needs of both renters and homeowners, but other neighborhoods play favorites. If you live in a particular neighborhood, you may not be able to choose whether you rent or buy.

BUT, MONEY MATTERS: Be sure to consider and compare ALL of the related expenses... present, future and emergency when determining affordability, including:

  • Security depositsm, Initial down payment
  • Rent increases, Fluctuating mortgage costs.
  • Home/Hazard Insurances
  • Maintenance responsibility, structure, appliances. etc.
  • Association costs, Property Taxes
  • Transportation costs
  • Equity and Tax Benefits: ownership risk and reward or no-worry renting

Buying a home is not a short-term investment. Experts say that the financial advantages most associated with ownership don't necessarily kick in for at least 3-5 years. So, it is usually a bad idea to buy if you are planning to move within a few years.

Cost Ratio: Often real estate experts recommend a rent ratio evaluation to clients torn between renting and purchasing. This simply method works by dividing the purchase price of a given home by the annual cost of renting a similar one; with the number 20 representing the dividing line between choices. A ratio above 20 suggests renting may be the best option, especially if another within the next five years is a possibility. When the ratio is 20 or lower, the case for buying becomes stronger. In many large metropolitan areas, including Chicago, today's average ratio is near 16, while as recently as 2005, it was nearly 25. With a ratio as low as 16 and interest rates remaining low, the costs of owning can be the same or less than the costs of renting.

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