We know that housing costs in the Northwest can be pricey for families. If you are considering whether it is more cost effective for you to rent or buy in this area, Becca Grady from Zillow has put together these helpful tips and tools for you to use.
Is It More Affordable to Rent or Buy in Seattle?
By Becca Grady
The rent-versus-buy debate continues to be prevalent, with many wondering which is more affordable in their area. Seattle in particular is experiencing a population boom, attracting new residents searching for homes to buy and apartments to rent. With rent prices continually rising and mortgage affordability at an all-time high, the question can be complex and depend on a variety of factors.
In order to make a well-informed decision on the right option for you, it’s important to take a look at the mathematical breakdown, taking into account all factors of buying, and look at future plans and considerations.
Break Down the Numbers
Diving into the formula for finding the monthly cost of owning a home is a good way to compare the cost of renting versus buying. This can seem tricky, but you can calculate the monthly cost of owning using the median home value. From there, you can compare the monthly cost of homeownership to the median rent to find out which is more financially appealing.
Here’s how it works:
Use a mortgage calculator to find the monthly cost of homeownership.
Determine the tax benefits of owning.
Take the tax benefits out of the cost.
Compare the after-tax cost of owning to the monthly cost of renting.
The median home value in Seattle is $530,100. Assuming you put 20 percent down and have a 30-year fixed mortgage at a 3.56 interest rate, a simple mortgage calculator shows the monthly cost of homeownership for a $530,100 Seattle home would be $2,516.
The next step is to determine federal tax benefits that accompany homeownership. The tax benefit is calculated by:
Multiplying the loan amount ($424,080) by the interest rate (3.561 percent), then multiplying the purchase price ($530,100) by the estimated property taxes (1.2 percent) and combining the two amounts.
Next, multiply that total ($21,463) by the income tax rate (23 percent; based on the average income in Seattle), to get a total of $4,936.
Divide by 12 to get the monthly tax benefit of $411.
Based on the median home value in Seattle, the total monthly tax benefits received would be about $411.
The final step in determining the monthly after-tax cost of homeownership is to remove the monthly tax benefits ($411) from the monthly cost of homeownership ($2,516). According to these calculations, the monthly after-tax cost of owning is about $2,105. Given that the median rent price in Seattle is $2,401, buying is currently more affordable than renting.
Another important factor to consider when deciding between renting and owning is the breakeven horizon, or the number of years it takes before it is more financially beneficial to buy over rent. Zillow’s rent versus buy formula accounts for all of the costs and benefits of owning (i.e. down payment, closing costs, mortgage payment, property taxes, insurance, utilities, maintenance and tax benefits, as well as all renting costs for the same home). Factoring in the various costs and benefits, the breakeven horizon in Seattle is 1.7. Meaning, after 1.7 years of living in the city, it becomes more financially advantageous to purchase a home over rent.
In addition to doing the math and looking at the breakeven horizon, there are other factors that come into play when deciding when it’s the right time to buy. Are you planning to expand your family? Do you anticipate a move in the next five years? Do you need the extra square footage or yard space that a house could potentially provide? All of these things are critical to consider when contemplating a home purchase.
While the math shows it’s currently more affordable to own a home in Seattle than rent one, there are a variety of factors to take into consideration when deciding if it’s the correct move for your family. The decision of whether to continue renting or purchase a home will vary depending on the person and family, but having these resources will help you determine what’s best.