Is It Cheaper to Buy or Rent in DC?

Posted by on Monday, September 23rd, 2013 at 2:20pm.

According to a recent study, it’s 31% less expensive to own a home rather than rent in the DC metro area.

The study examined identical homes for sale and rent to calculate average prices across the metro area. The study also took into account the costs associated with homeownership including closing costs, maintenance, insurance, taxes, and more. For rentals, the study included the cost of renter’s insurance and a security deposit.

The underlying assumptions that make it 31% cheaper to buy than rent in DC are the ability to get a 30-year fixed-rate mortgage at 4.8% with a 20% downpayment, deduction itemization on federal taxes, a 25% tax bracket (income between $72,500 and $146,400 for married joint filers), and plans to stay in the home for seven years. But if you change those assumptions to a lower 3.5% mortgage rate and the higher 35% income tax bracket, it becomes 47% percent cheaper to own rather than rent. However, if your timeline is shorter (3 years in the home), you do not itemize tax deductions, and you are unable to secure a low mortgage rate (30-year fixed-rate loan at 6%), renting is less expensive in our area.

Changes in mortgage rates affect the calculation to buy versus rent. While it’s 31% cheaper to buy than rent in the DC area now, it was 43% cheaper last year when mortgage rates were lower. The mortgage rate tipping point for DC, when renting becomes cheaper than buying, given current sale prices and rents is 9.3%. So when mortgages rise to 9.3% for a 30-year fixed-rate loan, people looking for homes may shift back to renting. But it seems like 9.3% is a long way off for now.

When considering your housing options, always take into account your time horizon and current mortgage rates to make the best decision for your specific circumstances.

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