This question was posted in the HTM Facebook Group recently……
“Are mortgage payments typically cheaper than rent?
I sometimes hear of people who only made a small down payment on their home, say 5%, who say they’re now paying less than what they’d pay for rent.
However, in my area, I can rent a three-bedroom SFH for around $2,000 a month. A similar home in my area would go for about $370,000 and this would end up being around $2700 a month at the moment with PMI, taxes, and insurance, after putting down a 10% down payment.
If I continue renting, I am the type to invest the difference in mutual funds and keep that down payment in a HYSA where it would make about $1800 a year.
I’d love to buy a home if it would save me money and I notice people saying that sometimes but I don’t know if they mean they bought back when interest rates were nothing or they mean you can actually go out now and find this sort of situation”
Matt & Joel’s response: There’s a lot packed into this question. It’s not as simple as saying renting or buying is cheaper (or better for your lifestyle!)
That being said, in general, in 2024, yes it’s cheaper to rent than it is to buy. That’s true in essentially every major city across the country. At least on a monthly cost basis.
You already did the math in your town, and what you concluded makes sense.
Here’s the longer answer…
Local markets vary greatly
All real estate is local.
We tend to measure the real estate market on a national level, and by state or major city. Those are the headlines you read about. But to get the most accurate comparisons you need to drill down to your exact location.
In much of California, for instance, you’d not only be hard-pressed to buy a home (the median home price is north of $900k), but you’d also be committing a LOT more money every month to housing costs.
Your mortgage, taxes and insurance could easily be double the cost to rent the same or similar home in most major cities in California.
But if you live in Memphis, Birmingham, or Cleveland you might still find that buying a home makes more financial sense. Especially if you plan to own that home for a decade or longer.
Average rent vs. average buy price
Here’s a Bankrate study comparing rent prices to home purchase prices in the top 50 cities across the country.
The priciest city right now is in San Francisco. The median rent is $3,024 a month. But if you were to buy, the median mortgage payment would be $8,486!
Right now, it’s way cheaper to rent than to buy in San Francisco.
On the other end of the spectrum, there’s Detroit, MI. Median rent is $1,395 per month, compared to the median mortgage payment of $1,423.
Technically it’s still cheaper to rent, but only by a few dollars.
As you can see, there’s a huge variation between different cities. So you can’t really ever take someone’s word when they say “buying is cheaper than renting”, or vice versa. The reality is far more nuanced.
Rates/home values
Both rent or buy costs are also heavily dependent on timing.
If you bought a house in the 2009 to 2013 timeframe and are still living in it, your locked-in low mortgage rate combined with an inexpensive sale price means that you’re paying FAR less than anyone who is renting something similar around the corner.
But if you bought in 2023, your mortgage amount is likely far higher than what someone around the corner is paying for rent.
Interest rates make a huge difference. And since interest rates climbed from the 2-3% range during Covid to over 7% last year, it made buying much more expensive. Not to mention the rapid escalation in home prices too.
High cost of owning
Payments are also dependent on how much you put down, as you mentioned. The more money you save for that down payment, the lower your monthly payment will be.
There’s been a growing divide in the monthly price difference for renters and owners. From a strictly financial perspective, renting is making more sense in much of the country.
That’s partly because of home prices and interest rates which we talked about. But it’s also because the cost of taxes, insurance, & maintenance have risen significantly too.
Home ownership can be a great personal goal! And it can potentially be a solid financial move over the long run.
But it’s not a slam dunk in the way previous generations and real estate advocates make it sound. The cost of owning is way more than people think. Sadly, buying a primary residence is usually a terrible investment.
Lifestyle considerations
It’s also true that home ownership isn’t all about the numbers.
If you’re in a good financial position, have a solid down payment saved, and home ownership suits your lifestyle goals, it could be wise to go for it even if your monthly payment will be higher than your rent.
Because it’s also true that your rent is likely to increase over time, while your mortgage will stay roughly the same.
On the flip side, the same could be said about the benefits of renting. If you enjoy the flexibility, live in a city (like San Fran) where the buying costs are completely out of control, and are saving/investing a decent portion of your paycheck, renting makes a boatload of sense.
The Bottom Line:
There’s no easy one-size-fits-all answer to whether renting vs. buying is the cheapest or best solution. It totally depends on the market, the timing, and your down payment. But hopefully we’ve given you enough food for thought to help you make a smart decision.
Also remember there’s no rush to buy! You mentioned you’re the type of person to “invest the difference” in mutual funds and continue to save your down payment cash in a HYSA. These are absolutely the right money moves to make while you wait.
Good luck and let us know if you find a place that fits your budget!
For the full verbal discussion around this question, check out Podcast Episode #847 (it’s the last question in the episode)
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