At what point is it better to buy a home vs continue renting? What additional costs of owning a home should we consider?

Question

I know this question has been asked lots of times before. I read this question which tells me at some point it is best to buy instead of continue renting forever. My situation is that I have a sizeable chunk of money saved up already and continue to save a lot.

Houses that interest us in our area are $400,000-$550,000. Preferably we could get a home closer to $400,000. If we wanted a $550,000 home we’d definitely wait to save more, so for the purposes of this question assume a home cost of up to $450,000.

My wife and I are currently renting an apartment for a great deal - only $775 per month for 2 bedrooms and one bathroom! And we pay month to month, so we can leave the apartment at any time. Also, we’ve lived here for 1.5 years and rent has not increased, and our landlord said she does not want to increase rent for tenants that she likes (she likes us).

We were originally planning to save for the next 3 years so that we could put down 20% on a house. However, I just found out that my credit union does not require personal mortgage insurance for loans under 20%. They also offer fixed interest rates of 2.5% for 30-year mortgages. So now I’m wondering would it be better for us to buy a house sooner? I figure that the cost of interest would be more if we spent 10%, but we would be putting everything toward the house (which we will own) instead of paying rent.

We have a detailed budget in google sheets, and we changed some numbers in it to see what it might be like. Wild guesses at per month spending:

$1800 for the mortgage payment - we want the required mortgage payment to be less than this but we would want to put more money than required so we pay it off faster (and therefore pay less interest) $180 on home insurance (I have no idea if this is accurate) $150 on utilities

then we would still save $1500 per month. We could put this $1500 towards emergency savings, investing, the mortgage, whatever.

Question:

• At what point would it be smarter to buy a house than to continue paying rent?
• What additional costs of owning a home should we consider? Higher insurance (our renters insurance is incredibly cheap) Higher utilities (we only pay for electricity and gas right now) Property tax Home maintenance Other costs?

Another consideration is that we’re planning on having children, so that would obviously increase our expenses.

Of course the longer we wait to buy a house, the more money we can save towards a downpayment (over $3000 per month).

Location: mountain west, United States. Specifically, Utah. Housing prices here are crazy and keep going higher, and houses and really hard to buy right now. Of course we can't predict the future but we are concerned about housing prices going up to where we'll never be able to afford them. Or they could go down - who knows?

Additional financial details:

• We currently rent for $775 per month
• We have renters insurance but it’s extremely cheap (I think $30 per year)
• We spend about $50 on utilities - electricity and gas. Our landlord pays for water and sewage.
• We have $45,000 saved up for a house right now
• We have an additional $21,000 that we want to keep for emergency savings
• We spend about $3700 per month (after taxes, including charitable donations)
• We save about $3300 per month (after taxes) towards the house
• We contribute $500 per month to a roth 401k that is matched by my employer
• We max out our HSA each month (and about half of that comes from my employer)
• We have $11,000 in our HSA right now
• My wife is in grad school for the next 2 years and we’ll spend $18,000 over the next 2 years to finish her grad school

Answer 1

The break-even point for renting vs. buying is going to be very situationally dependent on a ton of factors, it would be reckless to try and come up with a hard and fast rule for it that had any useful degree of specificity.

As to the costs of ownership, however, you list some but not all of the additional costs, I'll build a comprehensive list below:

1. Insurance is an obvious cost. Renter's insurance is cheap, homeowner's insurance isn't that much more expensive, per se but you're covering more assets.
2. Maintenance. When you rent, your landlord is legally obligated to maintain the premises to local code. When you own, that leaking pipe or rotting staircase is coming out of your pocket.
3. Property Taxes. When you own, the local municipality will send you the tax bill instead of your landlord.
4. Repairs. While the worst case scenarios are covered by insurance, deductibles are real and so when there's damaging events to your home, you will find yourself shelling out dollars anyway.
5. HOA Fees (Maybe). Depending on where you buy, it's possible the property is subject to a Home Owners' Association. These come with dues-paying responsibilities and usually heightened maintenance costs because they have stricter codes for the development.
6. Asset Risk. This comes with the knock-on benefit of exposure to the opposite, but when you own your home, a collapse in housing prices damages you, directly. When you rent, its your landlord that eats that loss. This is an expected cost instead of a real cost, but if you're still paying a mortgage, you can find yourself trapped unless you pay out more than the property is worth - a nasty surprise to be sure. When you rent, you can just walk away at the end of your lease. It's anyone's guess as to whether or not the potential for gain outweighs the potential for loss, but in the case of individual homeowners, a loss scenario is frequently devastating.

One item that you name, however, that doesn't necessarily go up:

7. Utilities. This depends on the specifics of landlord/tenant law where you live now, and the cost of various utilities where you'd buy. In many cases the utility bills go up - if for no other reason than you're now paying for between 2-5 additional utilities than before. In many jurisdictions landlords are required, by law, to pay for water and trash removal services. In some jurisdictions (such as my own, here in Cambridge, MA) they're even required to cover heat and hot water. Some landlords also choose to pay your electric bill - and in one case I fondly remember, my internet was paid for by my landlord because he had a commercial-grade connection and lived upstairs. At the same time, your utility bills may go down: when you own, you have much more control over the quality of the structure, including and especially when it comes to energy efficiency and the overall energy scheme of the building in general. Many landlords don't care to keep their properties highly energy efficient - ESPECIALLY if the tenants are covering the electricity and heat bills.

Finally, an item that is worth looking at, even if it's not necessarily directly related:

8. Commuting Costs - For many people, rental properties are closer to their places of work. It may seem like a few more miles every day doesn't make much of a difference, but it does add up and it does so silently and often unnoticed. This item will also get worse as fuel prices rise, or if/when taxing authorities get serious about carbon pricing. Your insurance premium will also go up if your regular commute is longer, the insurance company is being exposed to more risk of accident the more vehicle miles you travel every day. That's all before the possibility of needing to buy a second vehicle for the household gets involved. Depending on where you rent vs. where you buy, public transportation and other alternative conveniences to automobile ownership are often a hidden benefit.

There's other things you can factor in if you want to get really into the weeds (mean grocery prices and so on), but those are more about geography than about the fact of owning your own home (whereas commuting costs are implied by the lower mean density of neighborhoods where homes are available for purchase).