How Much Of Your Income Should You Actually Spend On Rent? And When Does It Make Sense To Buy?

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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If you live in Manhattan or the Bay Area, you already know that you’re likely paying through the nose for your apartment. But if you live anywhere else in the U.S. and you don’t have national publications bemoaning the state of your city’s rental market, it can be harder to know if you’re paying a decent amount for your accommodations or not.

But whether your rent is high or low, you might be wondering: how much should I spend on rent? What’s a reasonable sum—and what’s excessive?

And then, of course, there’s the whole “home buying” thing. You might be curious at what point it makes sense to stop paying a landlord and start paying a mortgage instead.

Here’s how to decide these questions for yourself.

What the Experts Say About Rent

First, let’s turn to the financial experts for answers.

Bestselling author Dave Ramsey recommends a monthly payment of 25% or less of your take-home pay. This doesn’t include any extras that might add to the monthly cost.

Popular TV host and author Jean Chatzky advises that your housing costs be no more than 35% of your take-home pay. Her calculation includes not just rent, but associated expenses as well, such as renter’s insurance, utilities, and any repairs you’re responsible for covering.

It seems fair to state that anywhere between 25%–35% of your take-home pay is a reasonable amount to spend on rent and other housing-related costs.

But perhaps more importantly: why this much? It’s because you’ll still need enough breathing room in the rest of your budget for other expenses.

According to Chatzky, for example, 15% of your take-home pay should go towards debt payoff (which sounds eerily similar to the amount you’re probably paying on your student loans). Another 15% will go towards transportation, 10% should go into savings, and you’ll need flexibility with the remaining 25% to cover everything else.

Keeping your housing costs to 35 percent (or less) of your budget will give you that flexibility and breathing room.

Where your personal comfort zone falls within that range depends on your overall financial goals and priorities. If you’re trying to pay down debt, for instance, you’ll want to stick closer to 25% (or less) so you can throw as much money as possible towards your repayment goals.

To do this, you’ll want to use a few tricks to minimize your rent.

How to Keep Rent Down

Whether you live in a city with notoriously high rent or you’re simply looking to slim down your budget, there are several ways to reduce the cost of your rent without having to move to a whole new city.

Of course living with roommates can go a long way towards alleviating rental costs. You’ll have your own private room but share common rooms like the living room and kitchen—and you’ll also share the cost of the monthly rent bill and utilities.

If you prefer to live alone, you can consider moving into a studio rather than a one- or two-bedroom house. Studios often come cheaper than options with bedrooms since they may have less space or a less-desirable layout for some.

Another solution is to find housing a little further away from the “hottest” neighborhoods. For instance, you could live in Queens instead of Manhattan, or in the outer suburbs of Atlanta instead of Midtown. You may have to spend extra time (and gas money) commuting each day, but those costs could be worthwhile when compared with the money you save in rent.

When Does It Make Sense to Buy Instead of Renting?

If you’re a renter, you’ve likely had plenty of people telling you that renting is like “pouring money down the drain” or “putting money in someone else’s pocket.” But buying a home isn’t necessarily the best solution for dealing with the high cost of renting.

There are plenty of other issues to consider when it comes to home ownership beyond the money aspect; you also have to factor in your current life situation and short- and long-term goals.

If you plan on staying in a particular area for at least 5 years, your income is stable, and you’re ready for all the responsibility that comes with home ownership, then buying a home may be right for you.

If you’re comfortable with the commitment of a mortgage—and/or you’re willing to rent out or sell your home if you move away—you might want to start looking at home-buying options.

You may be wondering: why the 5-year rule-of-thumb? When you buy a house, you’ll pay a variety of closing costs, including appraisal fees, loan origination fees, title insurance and more.

In addition, the mortgage payments that you’ll make for the first five years will predominantly be applied towards interest rather than principal. This means it will take roughly 5 years for you to “break even” with the closing costs and interest and start gaining any considerable equity in your house. For a more in-depth look at this issue, though, refer to the calculator below.

If, on the other hand, you think you might like to move in the next few years, your job is uncertain or you simply don’t want the responsibility of repairing the water heater and cleaning the gutters, you may find that the extra convenience and flexibility that renting allows you is worth the extra cost.

That being said, of course, to rent vs. to buy is a massively complex question. From a financial perspective, here are a few of the factors you’ll need to consider:

Total cost of homeownership

As a homeowner, you’ll have more expenses than just a mortgage (plus closing costs). You’ll also pay for the cost of repairs, maintenance, lawn care, and other home-related expenses.

For example, if replacing your roof costs $20,000 and needs to happen every 20 years, think of it as paying $83 per month for your roof. If replacing your windows costs $15,000 and must happen every 18 years, it’s like you’re $70 per month for the windows.

You’ll need to calculate the costs of long-term home maintenance based on the age and condition of the property and the amount of time you plan to own it. (Alternately, if you buy a house in an HOA-governed area, you’ll need to factor in the associated HOA costs).

In addition, the property tax rate in your locality can add several hundred dollars each month to your costs, as does the culture of your area with regard to whether or not landlords typically cover utility costs. (All homeowners must pay for their own utilities; renters may or may not have to cover these bills.)

Total cost of renting

That being said, renting bears its own costs, including the expenses associated with moving more frequently, the cost of security deposit losses, and the higher utilities costs that might stem from energy-inefficient dwellings.

Bear in mind, also, that rent typically rises with inflation, while fixed-rate mortgages stay the same. In other words, you’ll pay a $1,000 per month mortgage payment with increasingly cheaper dollars over time, while your $1,000 rent payment will continually rise. In addition, you don’t receive the tax benefits that homeowners enjoy (mortgage interest is deductible).

Opportunity cost

Finally, consider the opportunity costs associated with tying your down payment into your home equity. If you put $20,000 down on a house, for example, what opportunity costs do you suffer from alternate uses of those funds, such as using that same amount of money to pay off your student loans or investing the money in the stock market? (Bear in mind that there are tradeoffs associated with using home equity to repay loans.)

As you can see, there are substantial variables to consider in deciding whether to buy or rent. To get a better idea of which option is best suited for you, here’s a rent vs. buy calculator that factors in variables many variables you should consider, such as:

  • length of time you’ll live in the property
  • your mortgage rate
  • down payment
  • mortgage length
  • home price appreciation
  • projected rent increases
  • inflation rate
  • growth of alternate investments
  • your personal tax rate
  • property taxes in your area
  • maintenance and fees
  • additional renting costs like rental broker fees (if applicable)

At the end of the day, though, much of this equation is conjecture. You don’t know how much your home will appreciate in value, how much rental costs will rise, or what your alternate investment gains might be. At a certain point, you’ll need to make the decision based on quality-of-life considerations.

As with many things in life, your decision of how much you should spend on rent and whether to buy or not comes down to your priorities.

Did you switch from renting to buying? How did you decide?

Interested in refinancing student loans?

Here are the top 7 lenders of 2019!
LenderVariable APREligible Degrees 
Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.45% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.81% APR (with Auto Pay) to 6.49% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of November 6, 2019, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 11/06/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on our student loan refinance product.

© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 3.46% APR (with AutoPay) to 7.61% APR (without AutoPay). Variable rates currently from 2.31% APR (with AutoPay) to 7.61% (without AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.31% APR assumes current 1 month LIBOR rate of 2.31% plus 0.75% margin minus 0.25% for AutoPay. If approved for a loan, the fixed or variable interest rate offered will depend on your credit history and the term of the loan and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

3 Important Disclosures for Laurel Road.

Laurel Road Disclosures

Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

ANNUAL PERCENTAGE RATE (“APR”)
This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

FEE INFORMATION

There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.

LOAN AMOUNT

For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
For eligible Associates degrees in the healthcare field (see Eligibility & Eligible Loans section below), Lender will refinance up to $50,000 in loans for non-ParentPlus refinance loans. Note, parents who are refinancing loans taken out on behalf of a child who has obtained an associates degrees in an eligible healthcare field are not subject to the $50,000 loan maximum, refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for more information about refinancing ParentPlus loans.

ELIGIBILITY & ELIGIBLE LOANS

Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).

Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.

All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.

For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.

INTEREST RATES

The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.

DISBURSEMENT OPTIONS

The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.

POSTPONING OR REDUCING PAYMENTS

After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.

We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.

We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.

If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of November 8, 2019 and is subject to change.


4 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 1.9299999999999997% effective October 10, 2019.


6 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 11/07/2019 student loan refinancing rates range from 1.90% to 8.65% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.

 


7 Important Disclosures for College Ave.

College Ave Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

1College Ave Refi Education loans are not currently available to residents of Maine.

2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.

4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 09/23/2019. Variable interest rates may increase after consummation.

1.81% – 6.49%1Undergrad
& Graduate

Visit Earnest

2.31% – 7.36%2Undergrad
& Graduate

Visit SoFi

1.99% – 6.65%3Undergrad
& Graduate

Visit Laurel Road

2.43% – 7.60%4Undergrad
& Graduate

Visit Splash

2.02% – 6.30%5Undergrad
& Graduate

Visit CommonBond

1.90% – 8.65%6Undergrad
& Graduate

Visit Lendkey

2.74% – 6.24%7Undergrad
& Graduate

Visit College Ave

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Published in Big Money Decisions, Spend Less

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