Should I rent or should I buy a house and how to save money?

Should someone continue renting and enjoy the flexibility of being in a rent? Or should they be buying a house and building an equity through that property. Answering that question has many facets to it, it would really depend on your long-term plans, preference and priorities, and that is personal for each one of us.
Putting away personal preferences aside, and when looking at it purely from a financial cost and gain, then it would be an easier calculation to make, and this is where I can help you.
A big reason why many people decide to buy rather doing a rent is based on monthly cost, and although renting seems like an easy option with a low initial investment, when looking at it over the span of say 5 years, the picture starts to change a bit.

Monthly Rent Costs You More

To start a rent, you would initially need to come up with an amount to cover the security deposit, and pay the first and last rent payment, although this is not as high as a house down payment, but taking the median cost of rent of $1,600, that would still set you back with around $4,800 as an initial cost of renting.
Then for the next 5 years, and a tenant, you only need to worry about doing your monthly payment on time. So, basing it off the median rent cost in the US of $1,600 for 5 years, then after 5 years, your rent would have costed you $97,600.

Buying a house, higher Initial cost, lower overall cost

When it comes to buying a house, it gets a bit more complicated, you will have to worry about securing a down payment, and then you will be paying monthly installments on mortgage.
Although you can pay as much as you like as a down payment, but for the purposes of this calculation, we will assume that you will only be paying the minimum, which is 3%. But you will also need to worry about closing cost, which is another 3%. So, in total you will need to have around 6% of the house value as a down payment.
The US median home price sale for 2019 has been around $237,000, to be able to cover your down payment and closing fees, you will need to have a cash amount of $14,220. This is significantly higher that the initial cost of renting a house, but it does come with long term benefit as we will see in a minute.

Your Monthly Mortgage Payment

Although your monthly mortgage payment is usually a fixed amount that you pay to the bank every month, it does not all go to the bank, it is actually split into: Property taxes to pay off your government property tax, Interest payment that will go the bank, and a principal payment that will reduce your overall mortgage amount and other things like insurance.
Using our example based on the median price of a home, and assuming a 3% down payment, and based on a conservative mortgage rate of 4%, your monthly payment would be $1,264. So over 5 years, that is $90,072, and you already have a saving of roughly $7,000 over rent.

As explained above, your monthly mortgage payment goes partially to your principal loan amount, so think of it as savings or increasing your equity in the house, and over the span of 5 years and based on the example above, your equity increase would be around $21,960 in 5 years, and that is an additional amount of savings that tips the scale for buying vs renting a house.
It is also expected that your newly bought house, and if it is well maintained, then history tells us that it would appreciate in value, and at the same time, you can use your mortgage payment for additional tax savings on your income tax.

Cost over 5 years

Based on the two examples explained above, and as stated earlier, renting a house for 5 years is expected to cost you $97,600. While buying a house, and although your initial cost is higher, but in 5 years, and after taking into consideration the value appreciation of your house, your tax saving and your equity increase, your actual nest cost over years for buying a house would only be $57,006.

The Bottomline

Over 5 years, buying a house has $40,594 savings over renting, and it can be even greater advantage depending on tax and appreciation in your market. The decision to buy is a big one, ut there are also big benefits when compared to renting

rent vs buy intial cost and cost over 5 years