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The decision to rent or buy a house is one of the most significant financial decisions most people will make. There are pros and cons to both options, and the best choice depends on various factors, including your financial situation, your long-term plans, and the housing market in your area. Here, we introduce the 8.71% rule, a guideline that may help you make this decision.
What is the 8.71% Rule?
The 8.71% rule is a straightforward method to determine the financial feasibility of buying a home compared to renting. It works like this:
- Calculate the 8.71% Monthly Cost of Homeownership: Take the home price, multiply it by 8.71%, and then divide by 12. This gives you an estimated monthly cost of owning that home.
How to Apply the 8.71% Rule:
- Calculate the Monthly Rent: Find out the monthly rent for a comparable property.
- Calculate the Monthly Cost of Homeownership: Multiply the home price by 8.71%, and then divide by 12.
- Compare the Two Costs: If the calculated monthly cost of homeownership is less than or equal to the rent, buying might be the more economical choice. If it’s higher, renting might be more cost-effective.
Example:
Imagine you’re eyeing a home priced at $200,000, and a similar property is available for rent at $1,000 per month.
- Monthly Rent: $1,000
- Monthly Cost of Homeownership: ($200,000 * 8.71%) / 12 = $1,452.50
Since the monthly cost of homeownership ($1,452.50) is higher than the monthly rent ($1,000), renting might be the more cost-effective option in this scenario.
Other Considerations:
While the 8.71% rule offers a simple starting point, remember to factor in other important aspects:
- Additional Homeownership Expenses: Owning a home involves extra costs like maintenance, property taxes, and insurance.
- Flexibility vs. Stability: Renting offers more flexibility to move, while buying can provide long-term stability and the potential for property appreciation.
- Market Dynamics: Real estate market trends in your area can significantly impact the viability of buying a home.
- Personal Financial Health: Your overall financial situation, including savings, credit score, and job stability, should influence your decision.
The 8.71% rule is a handy tool to help you make an initial assessment in the rent vs. buy debate. By comparing the estimated monthly cost of owning a home against renting, you can get a clearer picture of what might suit your budget. However, this rule is just a guide. Always consider the broader financial and lifestyle implications before making your final decision.
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Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
