When you buy a home, a lot of the money you spend isn’t going towards your home equity. The cost of homeownership includes the money you spend on fees, taxes and interest. These costs do not increase the value of your home nor do they reduce the principal on your mortgage.
We did some analysis on the cost of home ownership versus the cost of renting. Rental costs are offset by the interest you make on the cash you did not have to put towards a down payment. Homeownership costs are offset by the tax deduction you get on your mortgage interest payments.
The cost of owning a home will typically exceed the cost of renting when the price-to-rent ratio (the cost of buying a home divided by the annual rent of similar property) is greater than 20.
There are a number of other factors that should be considered when deciding whether to rent or buy a home. But start by figuring out if the cost of owning is relatively cheap or expensive based on your specific needs. Go out and do your own research. Find homes for sale and for rent in your ideal neighborhood that are the size you want and that have the amenities you are looking for. Calculate the ratio of sale price to annual rent. If home prices are more than 20 times annual rent it may be time to keep renting.