Stuck between renting and buying a home? How to calculate what’s best for you

(NEXSTAR) — If you’ve spent the last few years watching the housing market heat up from your rented apartment or childhood bedroom or any other space that isn’t your own, it can feel a bit like you’ve missed out. 

Amidst the COVID pandemic, the U.S. saw 30-year fixed mortgage rates drop to historic lows, including a stretch between late 2020 and into 2021 in which rates fell below 3%. Those low rates helped fuel one of the hottest housing markets on record.

But, if you’ve been paying attention, you also know what happened as those rates plummeted: houses were going fast, despite high prices, and mortgage rates began to climb toward the end of 2021. 

Pending home sales have since dropped, but the average 30-year mortgage rate recently hit 6.9%, the highest level since mid-December. 

The situation isn’t much better for renters. In its latest rent report, Zillow noted current asking rate rents are up nearly 30% since the start of the pandemic, as demand remains strong. 

So how do you know when it’s time to resign your lease or start looking for a realtor?

How to decide when to rent vs. buy

“There is no ‘perfect time’ in real estate,” Chris Varsek, the lead real estate agent with The Varsek Team in Illinois, told Nexstar via email.

Sure, there are some obvious benefits to both. With a home, you can customize the space, cash in on some tax benefits, and build equity. As a renter, your landlord (usually) takes care of maintenance problems, your monthly housing costs are more predictable, and you have the flexibility to move on when your lease ends.

However, it may be most important to consider the finances of it all, Varsek says.

Unless you’re flush with cash, buying a home also comes with the burden of a mortgage. Even if you’re renting, you’re still, in a way, paying a mortgage — except it’s the landlord’s mortgage, Varsek explains.

The finances of renting vs. buying

There are calculators available online that can help you determine whether it’d be cheaper to keep renting where you are or buy a home. 

Before delving into those, it’s important to consider what’s best for you. Generally speaking, experts say you should spend no more than 30% of your gross income on housing, including rent or mortgage, home association fees, and utilities, according to the National Foundation for Credit Counseling. That’s in line with the U.S. Department of Housing and Urban Development’s definition of affordable housing. 

Once you feel comfortable with your budget, you can try out those calculators.

You may want to start with this one, by Realtor.com, which helps you determine how much you can afford to spend on housing. You’ll need to enter your income as well as your debt, which mortgage lenders will also review. This calculator will then produce your buying power, giving three price ranges dubbed “affordable,” “stretch,” and “difficult.” Using those calculations, you can then turn to other calculators that will determine whether it’s more affordable to keep renting or buying a home.

Take, for example, the Realtor.com “rent or buy calculator.” This allows you to enter various variables, including your ZIP code, your desired home price and monthly rent, down payments, additional fees, and the rate of return on investments. Zillow has a similar calculator, which assumes that, if you continue renting, you instead invest your down payment. Both calculators also take into account the occasionally overlooked costs of maintenance and upkeep.

What if renting is still the best option for your budget?

If you still want to be a homeowner, but the math points to renting as being a better fit for your budget, don’t give up hope just yet. 

Varsek recommends clearing as much debt as you can before shopping around for homes. Lenders often consider your debt-to-income ratio, or DTI. You can calculate this by dividing your monthly debt (think auto loans, student debt, credit card payments, child support, or other recurring payments you owe each month) by your gross monthly income. Experts recommend having a DTI of 36% or less. 

You’ll also want to ensure your credit score is in a good place. Varsek says homebuyers should aim for a minimum credit score of 650. 

In addition to tackling your debt and credit score, Varsek encourages buyers to have at least a 5% down payment, though he notes that a mortgage broker can educate you on your choices. 

It isn’t just your finances you’ll want to have in check before becoming a homebuyer. 

“In this market, education is critical. Find a trusted local realtor that can walk you through the entire purchasing process,” Varsek explains. “A great agent should be able to field all of your questions. As they say, knowing is half the battle!” 

What could we see through 2024?

While renting costs are still high, Zillow’s rent report shows prices are softening slightly. It could be improving in some cities more than others. 

Late last year, Zumper released its annual analysis of the nation’s rental market and predicted rent prices will keep “softening,” at least through the start of this year. The company pointed to an increase in supply as new apartment buildings and complexes continue to open in fast-growing cities like Denver and Salt Lake City. Sun Belt cities, from Phoenix to Austin to Orlando, have also seen rent drop, which could be a promising sign for renters in 2024.

The same report, however, warned that if interest rates come down this year, some well-off renters could opt to become homebuyers. There could be a catch to that, too.

“As a professional living this daily, I expect the mortgage rates to be pretty consistent this year, especially with this being an election year,” Varsek tells Nexstar. “But remember, when rates go down, more buyers will enter the market. More buyers will likely drive prices even higher than where they are today. It’s all about supply and demand.”

In a report released Monday, Zillow noted there has been an influx of sellers, with new listings of existing homes jumping 21% compared to February of last year. That could be especially promising for potential first-time home buyers, the report explains. 

Experts say that while the housing market could be better this year compared to 2023, don’t expect to see the low rates we saw in 2020 and 2021.

The Associated Press and Nexstar’s Alix Martichoux contributed to this report.