Rent or own? Deciding on the big leap isn’t so simple

Deciding whether to buy or rent a home is not as simple as our parents once made it out to be — an argument that boiled down to investing your money versus throwing it away.

Recent market conditions have shone a light on the benefits of renting. Homes are sitting on the market longer, and prices haven’t fallen enough to make buying a slam dunk for first-timers. On top of that, the foreclosure epidemic has left some banks extra-cautious, making the best mortgage rates elusive to some buyers.

Here are a few basic questions you should ponder before terminating your lease:

How much can you put down?

The larger your down payment, the faster you build equity. Also, a 20 percent down payment typically exempts you from buying private mortgage insurance, an extra monthly cost on top of your loan. Renting might be a waste of money, but so is PMI, some experts say.

If you have very little or nothing at all saved, this should be a no-brainer. Bankrate.com, one of the best clearinghouses of online financial advice, offers a calculator that turns away house hunters who respond that they have no savings and no access to a lump sum of cash.

Would a big enough down payment deplete your savings?

If so, buying might not be right for you. There are plenty of extra expenses you will encounter. Among them: closing costs and real estate agent fees, new furniture and appliances and essential repairs or alterations that you don’t always think about during an open house.

According to the Bankrate.com calculator: “While there are an increasing number of zero-down-payment programs, you will also face closing costs and many other one-time expenses as a homeowner. Insufficient savings may not prevent you from buying a home, but it is a strong indication that you may not be prepared for the ongoing financial requirements.”

How long will you live there?

If you’re young and dreaming and saving for a different neighborhood or geographic location, you might not be ready to sign on the dotted line. Experts recommend staying at least five years. Put simply, the longer you stay, the more equity you build and the more you are likely to profit on a sale, assuming the home’s value appreciates over time.

Recent research by the New York Times, which has its own nifty online calculator (go through tinyurl.com/33p6fu), suggests that for many folks who buy, it will be years before they realize any savings.

Take this example, run through the Times’ formula: After paying $1,000 in monthly rent, you buy a $200,000 home. You put 20 percent down and receive a 6.25 percent mortgage rate ($985 a month). The home’s value appreciates at an annual rate of 2 percent.

While the mortgage payment looks cheaper than rent, the Times calculator factors in all of the other costs and estimates it will be 12 years before buying is better than renting.

What are the other costs?

Don’t forget about utilities, some of which may be baked into your monthly rent. And if you’re moving from an apartment to a larger house, those utility bills surely will be higher.

There’s also weekly trash collection, which, depending on where you live, could be another monthly bill if it’s not already covered by taxes (see below).

The biggest hidden expense: Maintenance. When the dishwasher or toilet breaks, it’s up to you to fix it — or to hire someone who will.

Where do you want to live?

This is an obvious question but one that can be significant to your bottom line. The school district is a consideration for couples with children or for couples who want children. Here, property taxes enter into the equation. It’s always a good idea to check out the recent years’ tax bills for homes before pulling the trigger. Make sure it’s an acceptable expense.

To reach this Plain Dealer reporter: hgomez@plaind.com, 216-999-5405