If you plan to stay in Shawnee County for more than three years, it pays to buy a house, according to a personal finance website — but that may not be true in every situation.
Smart Asset, a website with articles and tools related to home buying, retirement and other personal finance topics, put together a calculator to estimate whether it makes financial sense to buy a house or continue renting. For Shawnee County, it showed a breakeven point of 3.1 years, based on an average mortgage payment of $529 for the average home price of $130,550, and an average rent of $1,078. The data came from the U.S. Department of Housing and Urban Development and the Census Bureau.
Most of Kansas skewed toward home ownership, if your situation matched the average. Buying was better than renting within five years for all counties, and only seven took between four and five years: Douglas, Labette, Republic, Lincoln, Hodgeman, Decatur and Wallace.
Rents and mortgage payments vary widely, however, and a person paying a $550 rent for a small apartment in Shawnee County would have to stay in the $130,550 home for more than 20 years buying to make more sense than renting. A more modest, $100,000 home might make sense after only eight years, however, according to the website’s calculator — though the down payment amount, the prospective buyer’s income and even his or her marital status can change the calculation due to taxes.
Chris Burk, a homebuyer counselor at Housing and Credit Counseling Inc., said most of the clients he works with are looking at inexpensive homes, so they can save money compared to renting. They should be careful to keep their housing costs to 28 percent or less of their income before taxes, and use some of the money they aren’t spending on rent to save up for inevitable increases in property taxes and insurance costs, he said.
“Most of the time, that house payment is going to be less than rent, even if you include insurance and taxes,” he said.
Potential homebuyers also should consider that they probably won’t be able to sell their house until they have built up some equity, and not buy if they aren’t confident they will be in the same area for a while, Burk said. A home is a long-term investment, he said.
Those calculations are based on comparing the cost of rent and renter’s insurance, on one hand, with the cost of a down payment, mortgage, closing costs, property taxes, homeowner’s insurance, estimated maintenance costs and the estimated costs or profits of selling the home. It also takes into account how mortgage deductions could lower your federal tax bill, effectively making it cheaper to own a home.
A.J. Smith, managing editor at Smart Asset, said most people buy a home only once or twice in their lives, so they can benefit from having more data to make a decision. Some people were “spooked” by the recession and reluctant to consider home ownership, she said, while others buy before they consider all of the costs associated with a house.
“With the tool you’re able to get super personal to your situation,” she said. “It’s going to vary depending on whether you get a little bit better rate or a little bit worse.”
The calculator assumes rents will rise 2 percent annually, and that the home’s value will grow 2 percent each year. Those values can vary widely from one area to another and over time, depending on the state of the economy.
The nationwide average was that home ownership began to make more sense after 4.5 years, but cities varied widely. For example, in Detroit, a person whose situation was in line with the averages would come out ahead in 2.6 years, but in New York City it would take 18.3 years for buying an average house to make more sense than renting, even accounting for the Big Apple’s infamously high apartment costs.
The comparisons between different areas can be a “jumping-off point” for people who are considering relocating and want to get an idea of the real estate markets, Smith said.
“It makes a big difference where you are,” she said.
To view the data or try out the calculator, visit smartasset.com/mortgage/rent-vs-buy.