With interest rate hiked up from below 3% to 7% in 2024, is it cheaper to buy a house or rent a house? The answer lies in a few factors, and some factors are not quantifiable such as the feeling of owning your own home or the feeling of settling down. But, there are some factors that are quantifiable such as financial impact. Let’s take a look of the below example:
| Scenario | House Price | Down payment | Int Rate | Mortgage | Average Int Payment/Month 1st 2 Years | Rent/Monthly | The Year Int Payment close to Rent payment/month |
| 1 | $1,000,000 | $200,000 | 7% | $5,322 | $4,619 | $4,000 | 10th |
| 2 | $1,000,000 | $200,000 | 2.5% | $3,161 | $1,630 | $4,000 | 1st |
The above two scenario basically are the same except the interest rate for the mortgage. Scenario 1 with 7% interest rate will incur on average of $4,619 interest payment to the bank for the 1st 2 years of the loan, and scenario 2 with 2.5% interest rate will incur on average of $1,630 interest payment for the same period.
The season why we compare interest payment to the rental payment is because the argument people usually have that – when we buy, we pay down equity; but when we rent, we basically throw away money. And, this comparison really compares the two types of “throw away” – the money we pay as interest, to the money we pay as rent. Please see the following for the comparison
| Scenario | Rent vs Int Payment | Buy or Rent |
| 1 | $4,000 vs $4619 | Cheaper to Rent Saved $619/month |
| 2 | $4,000 vs $1630 | Cheaper to Buy Saved $2370/month |
The above comparison shows that when interest rate is 7%, given all other factors being equal, it is cheaper to rent financially. And, when the interest rate is 2.5%, given all other factors being equal, it is cheaper to buy financially.
Whether to buy or rent a house, the financial impact really depends on the house price, interest rate, and the rent payment. So, the answer is not always the same.
Disclaimer: I am not a financial advisor nor a lawyer, so the above is for entertainment purpose only. Please do your own research and due diligence for your investment, and/or tax/financial planning decision.