Study the math in rent vs. buy debate

Q. I have accepted a temporary assignment in another town that should last four to five years. My company is buying our current home, which will provide us with about $20,000 from the equity in our home. Now we need to decide if we should rent or buy a place in the other town. We found an apartment we like, and the rent is $980 if we sign a 12-month lease. It is only 900 square feet, which is OK because we don't have children, but is smaller than what we are used to. We also found a townhome we like in the same area listed at $135,000, but we think they'd take $130,000 because it is empty and has been on the market for more than 265 days. It is 1,350 square feet, and we think we would be much happier there, but we've always heard you should only buy if you are going to remain in the house for at least eight years. Our credit is excellent, and we could qualify for a 30-year fixed mortgage at 3.75 percent. If we bought the townhome with 10 percent down, our monthly payment would be $542 plus the $285 homeowner association dues for a total of $827. We are not financial wizards, but if we can own a much larger place for less money than we could rent, why wouldn't we buy even if we may only be there for four to five years?

A. As I've said in a previous column, much of the decision to buy vs. rent is psychological. Kiplinger magazine published a price-rent ratio to determine whether it makes more sense to buy a home or rent an apartment. To do this, you look at the median price of a home that would satisfy your needs and divide that by the average annual rent of apartments with similar features in the same geographical area. If the ratio is 18 or higher, renting makes more sense, and anything below 18 indicates that buying a home may make more sense (15 is the historical norm). If you want to use this as a guideline, find an apartment with similar square footage as the townhome you like for comparison or vice versa.

Another way to analyze the value of renting vs. buying is to compare costs. Assuming a four-year stay, your rented apartment will cost you $47,040 ($980/month for 4 years) plus renters insurance of approximately $200/year for a total of $47,840.

If you purchase the townhome, your total costs over the same period would be about $62,016. This assumes 10 percent down, a 3.75 percent 30-year fixed mortgage, $3,000 in closing costs, property taxes/insurance and private mortgage insurance of $240/month, $285/month for homeowner's dues, standard deduction taken, a 6 percent commission when you sell and no appreciation or depreciation on the property.

I assumed any growth on the money not used for a down payment if you rented offset any equity accumulated if you bought.

Comparing the costs of a 900-square-foot living space to a 1,350-square-foot living space isn't an apple-to-apple comparison, so you need to make this a quality of life as well as a monetary decision. You also need to know whether you can handle the worst-case scenario. If you rent, you can walk away after 12 months if you should need to move for any reason. If this happens and you buy, unless you can sell quickly, you will either need to become a landlord and/or be able to cover the mortgage payments.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question.