When it comes to getting shelter, the two basic scenarios are renting vs. buying the roof overhead. Undoubtedly, there are pros and cons to each scheme and calculating the rent ratio when deciding between the options can provide consumers with the most valuable insight for making a decision. A rent ratio is a simple mathematical equation that can provide consumers with the acumen needed to determine if buying or renting makes more financial sense.
How to Calculate Rent Ratio
Calculating a rent ratio is as simple as taking the purchase price of a home and then dividing that number by the annual cost of renting a similar one. Unless the plan is to buy a home nearly identical to the one being rented, current rental expenses are typically not a fair gauge of the equation. Ultimately, the simple arithmetic will level the playing field and allow consumers to easily compare the two options. Once you determine the numerical result, a consumer can gauge the economics of renting versus buying. Once the numbers are thoroughly crunched, the number 20 is the magic digit (NYTimes.com). If the results delivered exceed 20, buying is not the best option, however, when the figure is well below that indicator, it may be a wise move to buy a home now.
In 2010 New York Times implemented the strategy to gauge the buying worthiness throughout a variety of metropolitan areas throughout the nation. According to their calculations, cities including Los Angeles, Chicago, Houston, Dallas, Atlanta and South Florida, experienced rent ratios below 16 points, making the areas a ripe buyers market. The calculations from markets including the Bay Area (30 rent ratio), Seattle (28) and New York City (25) made renting a better choice.
Renting vs. Buying 2011
Due to the instability and uncertainty of the nation's current housing market, renting has made a comeback as the living option of choice. New data released by Moody's Analytics calculates the math for 54 U.S. metropolitan areas. Of those markets, 39 fell were categorized as 'better to rent' (Finance.fortune.cnn.com), and according to additional insight, that scale is set to tip in the favor of buying by years end.
Despite hoping for the best, the housing market has yet to fully recover and further value retractions are looming on the horizon, meaning that it is still a buyers market. Discount prices backed by the lowest mortgage rates in decades make the winning combination of low monthly payments for those entering the market. Those factors will help tilt the rent ratio equation into the favor of buying single family detached homes, condominiums, cooperatives or townhouses.
Other Factors Influence Renting vs. Buying a Home
Although money certainly influences whether the American Dream of home ownership can be bought, it is not the only factor to consider. Aside from calculating the rent ratio or weighing the options on a rent versus buy mortgage calculator other circumstances may affect the final decision. When it comes to buying a home long time commitment is needed to build equity and those without it, may be better off renting.
While time is one factor, the biggest is the overall financial health of an individual. Thanks to stricter guidelines from lenders, only those with stellar credit histories and credit scores over the 680 mark will have the proper credentials needed to qualify for a mortgage and enter the current real estate market.
If after weighing the advantages versus the disadvantages of living options and crunching the numbers to generate a rent ratio signaling 'go', securing a low mortgage rate and tapping into the surplus of highly discounted homes may be for you. Consumers looking to take on the role of borrower, can count on Mortgage Marvel to provide the accurate mortgage rates needed for the task, all without requiring any personal information.