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If you’re planning to relocate for a new job or move before retirement, you may be facing a dilemma: rent or buy?

Homeownership offers advantages, from equity, to the freedom to stamp a home with your own style. And overall, homeowners outnumber renters across the United States, with the fourth quarter 2019 homeownership rate at close to 65%, according to the U.S. Census Bureau.

But renting continues to gain appeal with younger and older generations alike. According to research from RENTCafe, the percentage of renters at least 60 years old increased more than 40% in the 10 years through 2017. Reasons for the change include impacts from the Great Recession, which led to many people losing their homes; the inability to find affordable homes to purchase; and the desire for a more carefree lifestyle.

As growing numbers of Empty Nesters and retirees seek both convenience and affordability, the question of renting vs. buying is receiving more consideration than ever before.

Here are four key factors to weigh in the rent vs. buy debate.

Cost

A February 2020 survey from Freddie Mac found that an unprecedented number of renters – 84% – believe renting is more affordable than owning. A major reason? With renting, the landlord is responsible for maintenance, from mowing the lawn to keeping all the home systems working.

Rents, though, can and do increase. Of renters surveyed by Freddie Mac, 69% said they’re becoming more concerned about rent increases in the next 12 months. By contrast, monthly mortgage payments are generally more predictable.

Additional research shows many renters are paying a larger chunk of their incomes for rent than they should. A rule of thumb is that housing costs should account for no more than 30% of your income. In the Freddie Mac survey, 42% of renters said they were currently paying more than one-third of their income for rent. This compares to just 24% of homeowner respondents paying more than a third of their income for their mortgage.

Equity

Home equity remains a primary advantage of homeownership. Your home is an asset that will grow over time as you pay down the mortgage, especially if the property value goes up. And you can tap into your home equity as collateral for installment or line of credit loans to pay for home repairs or upgrades, including adaptations for aging in place.

However, buying a home may be less affordable now than it used to be. On average, housing prices have been on the rise, and fewer homes are available for sale. According to Zillow Research, the typical home value increased 3.8% in the last year. And data from the Federal Housing Finance Agency (FHFA) indicates that average housing values in the U.S. increased 5.1% from the fourth quarter of 2018 to the fourth quarter of 2019.

Location

Where you’re looking to buy also makes a difference, because home value increases differ by market. The top five states in annual appreciation were, according to FHFA:

  1. Idaho, 12%
  2. Utah, 8.1%
  3. Arizona, 7%
  4. Washington, 7%
  5. Indiana, 7%

In contrast, the bottom five markets in annual appreciation were:

  1. Alaska, -0.8%
  2. Delaware, -0.4%
  3. North Dakota, 1.4%
  4. Connecticut, 2.4%
  5. Louisiana, 3.2%

Research also shows that renting may be more affordable in many urban areas. A 2019 study by GoBankingRates evaluated 85 of the largest cities in the U.S. based on population and found that renting is more affordable in at least half.

And in early 2019, online loan marketplace LendingTree compared rents with mortgage payments in the 50 largest U.S. metropolitan areas. The results showed that renting is cheaper than buying in 30 of those markets.

Taxes

Tax advantages of owning a home still exist, but the savings are not as attractive as they used to be.

The rehauled Tax Cuts and Jobs Act increased the standard deduction in 2019 to $12,400 for individuals and $24,800 for couples. The law also reduces the amount of housing tax deductions allowed for home mortgage interest and property taxes.

Because the standard deduction applies whether you own or rent, it puts renting on a more level playing field. Under the law, you can write off homeownership expenses as itemized deductions, but only those in excess of your allowable standard deduction.

With housing tax deductions being lower, Americans at certain income levels may find that they can pay higher rents and still reap the same tax benefits as if they owned a home. As this analysis by Urban Institute illustrates, the break-even rent — the level at which it makes more financial sense to buy a home than rent one — increases by 25% for households earning $150,000 a year and 32% for those earning $300,000.

Resources to Help You Decide

It may help to use simple mortgage and rent calculators to estimate your maximum mortgage level or rent payment, based on a number of factors that you provide. Considering your expected tax bill and housing deductions may also help you to calculate rent levels providing the same tax benefits as your mortgage.

You can also consult with a financial advisor to discuss options based on your income, tax picture and expenses. Call us at 1-800-KEY2YOU® to get started.

This information and recommendations contained herein are compiled from sources deemed reliable, but are not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or are offering any tax, accounting, or legal advice.

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