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 guideline that suggests it is more cost-effective to buy a home if the home’s price is less than or equal to 8.71% of the total rental payments over the life of the mortgage (typically 30 years). If the cost of the home is more than 8.71% of the total rental payments, it may be more cost-effective to rent.
Here’s how it works:
- Calculate the total rental payments: Determine the monthly rent for a similar property and multiply it by 12 to get the annual rent. Then, multiply the annual rent by the number of years of the mortgage (typically 30 years) to get the total rental payments.
- Calculate 8.71% of the total rental payments: Multiply the total rental payments by 0.0871.
- Compare to the home’s price: If the home’s price is less than or equal to 8.71% of the total rental payments, it may be more cost-effective to buy. If the home’s price is more than 8.71% of the total rental payments, it may be more cost-effective to rent.
Let’s say you are considering buying a home for $200,000 or renting a similar property for $1,000 per month. Here’s how you would use the 8.71% rule:
- Calculate the total rental payments: $1,000 per month x 12 months x 30 years = $360,000.
- Calculate 8.71% of the total rental payments: $360,000 x 0.0871 = $31,356.
- Compare to the home’s price: The home’s price ($200,000) is less than 8.71% of the total rental payments ($31,356), so it may be more cost-effective to buy.
Other Factors to Consider
While the 8.71% rule can be a helpful guideline, it is important to consider other factors when deciding whether to rent or buy:
- Homeownership Costs: Owning a home comes with additional costs such as maintenance, property taxes, and homeowners insurance.
- Flexibility: Renting may offer more flexibility if you plan to move in the near future.
- Market Conditions: The housing market in your area may affect the cost-effectiveness of buying vs. renting.
- Financial Situation: Consider your financial situation, including your credit score, debt-to-income ratio, and how much you can afford for a down payment.
The 8.71% rule is a helpful guideline for determining whether it may be more cost-effective to rent or buy a home. However, it is important to consider other factors such as homeownership costs, flexibility, market conditions, and your financial situation. Ultimately, the best decision will depend on your individual circumstances and long-term plans.
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.
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