On the fence about renting or buying a home? A new analysis compares the costs and how long you would have to live in a home to rationalize the upfront expense of buying it.
In the Boston metro area, buying makes more financial sense if you plan to stay put for at least 3.4 years. That's how long it would take to break even — for the cumulative costs of renting the same home to exceed the purchase costs, according to Zillow, a Seattle online real estate database company.
Boston has the fourth longest break-even rate among the top 35 U.S. metro areas, behind Los Angeles, Washington, D.C., and San Diego.
"The break-even horizons are historically very low," said Svenja Gudell, Zillow's senior director of economic research. "The rule of thumb is if you're going to buy a house, stay in it at least five years. A lot of (break-even rates) we're seeing across the country are lower than that."
Of Boston and Cambridge neighborhoods, Roxbury has the shortest break-even rate at one year, compared to 7.2 years in Beacon Hill. In the middle are West Roxbury at 3.7 years and North Cambridge at 4 years.
The current lower break-even rates are driven by home value appreciation rates that, while slowing, are still quite good, and very low mortgage rates and rising rents. Boston area home values appreciated 4 percent in the 12 months ending in February, while rents rose 5.2 percent.
Based on median household incomes and a 30-year fixed mortgage, Boston-area buyers can expect to spend 22 percent of their monthly income on a mortgage. Renters can expect to pay about 34 percent of their income on rent.
"Affordability is quite good on the for-sale side," Gudell said. "It's not looking so good right now for renters."
Home ownership brings a lot of benefits.
"One of the biggest things is being able to collect equity in your house," Gudell said. "It's like a ginormous savings account for you. But it also brings along a lot of responsibility."
Buyers need to determine the monthly payment they can afford for principal, interest, taxes and insurance, said Norwell financial planner Dan Galli, president of the Financial Planning Association of Massachusetts. Keeping those payments to 26 to 28 percent of gross income and keeping total debt to 33 to 34 percent is a good start, he said.
"The challenge is the down-payment and … whether you can get the 20 percent to avoid (private mortgage insurance), or whether you can catch some sort of first-time home buyers program to perhaps let you put a smaller amount down," Galli said.
Dan Walsh, sales manager for William Raveis Real Estate in Boston, advises consulting a qualified mortgage advisor. "A lot of people think if you're buying a $500,000 condo, that they need to put down 20 percent or $100,000," Walsh said. "They might be able to put down 5 percent or less with great credit and still get good rates. And they're also locking in historically low rates, so if they're going to be there for a long time, it's to their advantage."
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