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).
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?
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1 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. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.
2 Important Disclosures for Earnest.
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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
3 Important Disclosures for LendKey.
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 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
4 Important Disclosures for SoFi.
5 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. 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. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
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.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
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.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of January 4, 2021. Information and rates are subject to change without notice.