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WalletPrep worksheet · Housing

Is it better to rent or buy a home?

Name ____________________ Date __________

Key ideas

  1. Compare full monthly costs, not mortgage versus rent. Add property tax, insurance, any mortgage insurance and upkeep to the mortgage payment before comparing it with rent.
  2. How long you stay matters most. Buying and selling cost thousands. The CFPB warns buying can be risky and expensive if you move within a few years.
  3. Only part of a payment builds equity. Early in a loan, most of each payment is interest. Sam's first payment puts $244 toward the loan out of $1,707.

Vocabulary

Down payment
The cash you pay toward a home's price yourself at closing. A mortgage covers the rest.
Closing costs
The fees and prepaid bills you pay to get a mortgage and transfer a home, on top of the down payment.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
Principal
The amount you borrowed, or the part of your balance that is still owed, not counting interest.

Work it out

Sam pays $1,800 rent. He is looking at a $300,000 home with 10% down and a 30-year loan of $270,000. Assume a 6.5% rate; real rates vary.

  1. Principal and interest
  2. Property tax
  3. Homeowners insurance
  4. Mortgage insurance (PMI)
  5. Upkeep, 1% a year
  6. Monthly cost to own
  7. Principal paid in month 1
  8. Cost that builds no equity
  9. Sam's rent today

Check yourself

  1. Which part of a monthly mortgage payment builds equity?

    • A. Interest
    • B. Property tax
    • C. Principal
    • D. Homeowners insurance

  2. A $250,000 home. Using the 1% rule, how much should you set aside each month for upkeep?

    • A. About $208
    • B. About $125
    • C. About $2,500
    • D. About $250

  3. You may move for work in two years. What does the CFPB suggest?

    • A. Buy now, since home values always rise
    • B. Buying can be risky and expensive if you move within a few years
    • C. It makes no difference how long you stay

Your turn

Pick a home price you would consider. Put it in the mortgage calculator with a local tax estimate and insurance quote, add 1% a year for upkeep, and compare the total with your rent.

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Answer key

Is it better to rent or buy a home?

Work it out

  1. Principal and interest$1,707
  2. Property tax$275
  3. Homeowners insurance$150
  4. Mortgage insurance (PMI)$113
  5. Upkeep, 1% a year$250
  6. Monthly cost to own= $2,495
  7. Principal paid in month 1− $244
  8. Cost that builds no equity= $2,251
  9. Sam's rent today$1,800
  1. $270,000 at 6.5% for 30 years is $1,707 a month. Add tax $275, insurance $150, PMI $113 and upkeep of $3,000 ÷ 12 = $250, for $2,495.
  2. In month 1, interest is $270,000 × 6.5% ÷ 12 = $1,462.50, so about $244 pays down the loan. $2,495 − $244 = $2,251 builds no equity.
  3. $2,251 − $1,800 = $451 more a month than rent, plus $30,000 down and closing costs. Sam keeps renting for now and saves the difference.

Check yourself

  1. C. Principal Principal is the part that pays down the loan, so it becomes equity. Interest, tax and insurance are spent, like rent.
  2. A. About $208 1% of $250,000 is $2,500 a year, and $2,500 ÷ 12 = about $208 a month.
  3. B. Buying can be risky and expensive if you move within a few years Buying and selling cost money, and early payments are mostly interest, so a short stay often leaves you behind renting.