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    Rent in the U.S. now costs twice as much as a mortgage


    New research finds that homeownership is less expensive than renting in any one of the country’s 100 largest metropolitan areas.

    The numbers are eye opening. Nationally, the average cost of homeownership when you factor in the monthly mortgage cost, maintenance, taxes and insurance is 38 percent less than the cost of renting, according to a New York Times report. The gap reflects a 3 percent increase since last year, when homeownership was estimated to be 35 percent cheaper than renting.

    Contributing to the improved climate for homebuyers is the fact that the 30-year fixed interest rate for mortgages is lower this year than it was a year ago. In contrast, strong demand for rentals is driving rent prices to rise faster than home prices.

    Down payments on a home remain a barrier to young adults just moving out of their parents’ house, as it is for may who lost their homes to foreclosure after the 2008 housing crash, and are still recovering financially.

    Although now is a good time to buy, many renters are stuck in place. A national survey sponsored by the Financial Industry Regulatory Authority, an independent securities regulator, found that 74 percent of renters have household incomes below $50,000, compared with 41 percent of homeowners. In addition to struggling with rent payments, an equivalent percentage of renters are having difficulty paying all their bills each month.

    Advantages to be gained by homeownership fluctuate according to the major metropolitan market in question. In the New York City area, homeownership is 24 percent less expensive than renting, while in Toledo, Ohio the discrepancy is just shy of 60 percent.

    The calculations leading to these conclusions are based on the assumption that the homebuyer puts 20 percent down and carries a 30-year fixed mortgage at 4.3 percent. Average rent and sales prices were determined by comparing similar properties in the same market rather than figuring the average for the market as a whole.

    It gets better. For a homebuyer who gets a 15-year mortgage and puts 20 percent down, the national cost advantage of purchasing a home soared to 43 percent. Even though the mortgage payment on this loan would be higher, the rapid equity stockpile more than makes up for the higher mortgage payments. Calculations conclude that the equity in this home would be up to more than half the purchase price after only seven years.

    However, the opposite is true for a typical Federal Housing Administration (FHA) loan with a 3.5 percent down payment. This loan builds equity much more slowly and requires upfront and monthly mortgage insurance premiums. Because of the FHA figures, the homeowner advantage rate dropped nationally to 25 percent, and to less than 10 percent in some metropolitan areas.

    Still, buying a home with an FHA loan is less expensive than renting almost everywhere. The only exception is Honolulu. Homebuyers who plan to stay in the house for at least seven years and can benefit from the mortgage interest tax deduction, but financing an FHA loan can end up being more costly than renting for buyers who move frequently, particularly younger people.

    These numbers reflect a big shift from the years before the real estate bubble, from 1985 to 2000, when rent was typically less expensive than buying in major metro areas. Today, the ability to raise a down payment is the key to ownership and living more affordably.

    Even in Boston, one of the least affordable metro areas in the country, renting was a more affordable option before the real estate market crash. Since then, rent has increased while the cost of buying a home has decreased in many places. Today, renting is the less affordable option, sometimes by a wide margin.

    Even buyers who make smaller down payments and spend slightly more on mortgage payments (generally 17 percent of their incomes) are still better off than they would be if they rented. So, despite rising home values, homeownership remains highly accessible to buyers who can scrape together a down payment, even a modest one.

    2015 is expected to be a breakthrough year for younger buyers just entering the real estate market, many of whom will decide to buy because rent is so unaffordable. At the same time, some renters pay so much on rent that they will struggle to save for a down payment if they want to buy.

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