Despite Mortgage Rates Increasing, Buying is Cheaper Than Renting

by Natalie Terchek

June 18, 2013

Mortgage rates may have increased by 0.5 percentage points percent in the past month, but buying a home is still less expensive than renting.

Even though there has been a recent increase in mortgage rates (the 30-year fixed rate over the past month increased from 3.4 percent to 3.9 percent), buying a house is still cheaper than renting, according to a recent Trulia report. Mortgage rates continue to be near long-term lows, and prices dropped after the housing bubble burst, which makes buying less expensive compared to renting.

Trulia calculated the costs of buying and renting an identical property, including maintenance, insurance, taxes, closing costs, down payments, sales proceeds and the monthly mortgage payment. They found out that as long as the mortgage rates are below 10.5 percent, then buying will be cheaper than renting.

Here are some of the highlights of the report:

At 3.9 percent, buying is 41 percent cheaper than renting nationally.
With a 5 percent mortgage rate, buying is still 34 percent cheaper than renting nationally.
At 3.9 percent, buying is cheaper than renting in all of the 100 largest metros, which means the tipping point is above 3.9 percent everywhere.
For 78 of the 100 largest metros, the tipping point is 10 percent or higher.
If you don’t itemize, or if the mortgage interest and property tax deductions were eliminated entirely, buying would still be 29 percent cheaper than renting at a mortgage rate of 3.9 percent, and the tipping point when renting becomes cheaper than buying would be 7.5 percent.

Buying is not the right choice for everybody. Some cannot afford a mortgage or the downpayment. And with the tight inventory, many people are struggling trying to find their “dream home” before the rates rise even higher.

However, as of now, it does not appear that rates will be getting higher anytime soon. Jed Kolko, Trulia’s chief economist, said that it will take big rate increases to turn off prospective homebuyers.

“At today’s prices and rents, rates would have to rise to levels we haven’t seen in 20 years before renting is cheaper than buying a home on average across the country,” he said.