Should You Rent or Buy In Boston?

November 4, 2020

With Boston sporting a high rent vs. buy ratio right now, you’ll likely need solid financing and a plan to stay in your next home a few years for buying to be worth it. We dive into the intricacies of Boston’s rent vs. buy debate below.

Deciding whether to rent or buy can be tough no matter where you’re moving. Boston is no exception...

Boston's median "sold home" prices and rentals are among the most expensive in the country. So where do you begin when there’s so much money on the line? And what criteria should you use to make your decision on whether to rent or buy in Boston? Read on to find out.

Rent vs. buy: questions to ask yourself before your Boston move

What’s best for you will hinge on a number of factors unique to your circumstances. With that in mind, here are three important questions you’ll want to be able to answer before you decide to buy or rent in Boston:

1. Do I have enough money saved up to buy in the neighborhood I want to live in?

2. How long will I live in my next home?

3. What do I value most in my living situation: having control over my home (buying) or having maintenance taken care of by a landlord (renting)?

We’ll cover them all as they pertain to life in Beantown below. Let’s start with a (hopefully-less-than) million-dollar question...

The down payment: deal maker or breaker?

When it comes to buying vs. renting in Boston, the hefty down payment required to buy can sometimes make your decision for you. For people who are new to learning about down payments, this section is a good place to start.

A down payment is the money you pay upfront for any big purchase that requires a loan. Since just about everyone can’t afford to pay cash upfront for a house, you’ll likely need to make a down payment, then enter into a mortgage with a bank to cover the rest. You’ll then pay back the money you owe to the bank – plus interest – over time until you own the house outright. The most common mortgage agreement terms are 15 and 30 years, and each come with pros and cons (more on these later).

Generally speaking, the bigger the down payment on your house, the lower your mortgage’s interest rate. And though you may have heard that a 20% down payment is considered ideal by many finance experts when it comes to locking in a low mortgage interest rate, putting down less than 20% is actually quite common these days.

Lending requirements vary bank to bank, but the lowest down payment option for which you could potentially qualify typically bottoms out at 3% – it’s worth noting that a down payment this low is pretty rare and even if you’re able to qualify, it may not be in your best *interest* (more more on interest rates later).

That having been said, let’s look to the numbers for a more likely scenario...

According to a 2018 survey conducted by the National Association of Realtors, the median down payments for first-time and repeat home buyers were 7% and 16% respectively. Considering those numbers, a more plausible situation for you may be putting down anywhere between 7-16%.

Unless you qualify for a special-circumstance loan, putting down anything less than 20% down on your home typically requires private mortgage insurance (PMI). The amount you pay every month depends on the amount of your down payment, your mortgage term, the value of your home, and other factors. PMI can really add up in the long run, so give it your full consideration.

We’ll use the numbers in the median down payment for both first-time and repeat home buyers in the chart below to help you get a sense of a possible scenario for a possible down payment in 10 of Boston’s neighborhoods:

Neighborhood

Median Selling Price

7% Down

16% Down

Beacon Hill

1,300,000

91,000

208,000

South End

$915,000

64,050

146,400

Roxbury

890,000

62,300

142,400

South Boston

799,000

55,930

127,840

North End

798,800

55,916

127,808

Back Bay

720,000

50,400

115,200

Jamaica Plain

710,100

49,707

113,616

Fenway/Kenmore

640,000

44,800

102,400

Brighton

585,000

40,950

93,000

Allston

554,300

38,801

88,688

Dorchester

547,500

38,325

87,600

(Table data sourced from Realtor.com, as of Sept. 2020)

The numbers vary a bit neighborhood to neighborhood, so if you’ve already done some research into which ones would suit you best, then by all means narrow your search criteria to only the neighborhoods you’d actually consider.

"Can I afford the down payment...?"

Once you’ve done narrowed your neighborhood search, find the lowest median home value among the neighborhoods you’re actively moving to, then match it up to the median down payment that’s relevant to you (first-time homebuyer or repeat homebuyer). If you don’t have that amount of cash at your disposal for your down payment, it might be too soon for you to buy in Boston.

That being said, depending on your lender’s requirements – as well as your own circumstances – it’s possible you could qualify for a down payment that’s substantially less than the median amounts listed in the chart above without having to buy PMI. (Note for veterans: VA mortgages – for which only veterans and spouses of veterans can apply – require neither a down payment nor PMI.)

All this to say, make sure you explore the full gamut of mortgage loan types to see if you qualify for a special case scenario like the VA mortgage.

It's also worth noting that there's no guarantee your lender will approve your mortgage at 7% down (at a reasonable interest rate). A number of factors additional to your down payment - including your credit score - factor into any such mortgage agreement for which you might qualify.

Other important rent vs buy considerations Financial pros and cons of buying vs. renting in Boston 

If you can afford buying in Boston right now, the next question you need to ask yourself is whether it’s actually better for you financially than renting.

A number of factors will determine whether buying a home is better than renting, no matter where you’re looking to move. Here are a few of the most important considerations you’ll need to make:

1. If I buy, would I be willing to put some extra money down?

2. Will I take on a 15- or 30-year mortgage?

3. How long will I reside in my next place of residence?

To reiterate, a higher down payment generally means a more favorable interest rate for your mortgage agreement. On top of that, if you can swing a 15-year mortgage instead of a 30-year mortgage, this can help you secure a lower interest rate as well. In the long run, these factors can literally save or cost you hundreds of thousands of dollars...

To make all this a little clearer, imagine that you’re considering closing on a home in a Boston neighborhood of your choice. The median home value in the city across all neighborhoods right now is $659,598, so we’ll go with that as your offer price.

Take a look at the chart below for a breakdown of some different scenarios that could impact the total amount of money you pay in interest over time.

Approximate breakdown for a $659,598 house in Boston, with 20% ($129,000) down

Mortgage Term

Fixed Interest Rate

Monthly Payment

Total Interest Paid

15 years

3%

$4,767

$128,320

15 years

4%

$5,028

$174,988

30 years

3%

$3,340

$273,367

30 years

4%

$3,633

$379,446

(Table data compiled using both NerdWallet’s Massachusetts mortgage calculator and MortgageCalculator.org)

That last column is the one to really pay attention to here. All other things being equal, it shows you that a difference of just 1% in the interest rate you get approved for can make a difference of over $100,000 over the full length of your mortgage agreement.

The moral of the story is this: even if you’re confident you can get approved to buy a home in Boston’s competitive market, you also need to weigh whether renting for a little longer and saving aggressively could help you lock in a lower interest rate with a bigger down payment a few years down the road.

If that’s your situation, consider looking for an affordable rental and doing your best to add to your savings so you can get approved for the best interest rate possible when you buy.

Boston renter’s upfront cost checklist

· First month’s rent

· Last month’s rent

· Security deposit (typically equal to one month’s rent)

· Broker’s fee (sometimes avoidable; typically half- or one-month’s rent when applicable)

“I’m in it for the long haul. That means I should buy, right?”

We’ve yet to entertain a scenario where buying is the better option in Boston. But don’t fret: if you can make a solid down payment and you intend to stay in the home you buy for a while, buying could absolutely be the right choice for you.

In fact, if you’re ready to settle down for a while in your next home, buying is often the best choice when you crunch the numbers (assuming you’re in a strong enough financial position to do so). Generally speaking, buying becomes a better choice the longer you’re able to hold onto your home.

Of course, there are exceptions to generalities. As an example, if you find yourself trying to offload your house in an extremely depressed economy or a poor housing market down the line, you could lose money on your home investment. That’s why, when you’re considering buying a home, it’s always best to have flexibility around when you might one day sell.

As of right now it looks like Boston’s real estate market is only getting more competitive in the near term: Zillow predicts the Boston housing market will rise 6.9% in the next year.

Weathering the storm of homebuying costs in the short term

There’s often a span of a few years where the costs associated with having bought exceed those of renting, but typically there’s a threshold of time beyond which it becomes advantageous to have bought.

This threshold varies depending on the city in which you reside. San Francisco is the most extreme example of a city that’s decidedly not conducive to home buying right now. In other words, even with the exorbitant rent you’d have to pay living in The Golden City, it would still take an extremely long time for a home purchase to justify itself financially.

Fortunately, Boston isn’t as tough on homebuyers as San Francisco (though it’s by no means easy). Usually, after 3-5 years in your new home, you can start to experience the financial advantage of owning a house or condo over renting in Boston. The challenge, as in any expensive housing market, lies in being able to make a down payment you feel comfortable with – and, of course, covering the upfront costs associated with buying.

A reminder about upfront costs

“Earnest money” (money you pay the seller to show them you’re serious about buying) will eventually be factored into your down payment. However, not all upfront costs are like this. You need to factor space into your budget to account for other upfront costs like the inspection fee and the appraisal fee (both around $300-500).

Nerdwallet has a useful rent vs. buy calculator that allows you to compare whether it’s more affordable for you to rent or buy. And it factors in all those things that are easy to forget when it comes to buying a house...closing costs, insurance, interest payments, and other hidden costs like property taxes and home repairs.

Even if you’re not considering buying just yet, it can be fun to plug in different scenarios to get a better sense of Boston’s housing market.

“What’s COVID-19 got to do with it?”

COVID-19 is impacting our economy in ways that are worth paying attention to as you get ready to start to your next chapter in Boston.

CNN reports that mortgage rates have fallen to a record low for the eleventh time this year. Though Boston home values have increased by 3.2% since last year, the record-low mortgage rates could help make home buying worth your while – after all, you’ve already seen what a difference 1% can make when it comes to the interest rate in your mortgage agreement.

On the other hand, prospective tenants in the city of Boston have more negotiating power than they’ve had in a long time because of the pandemic. If you get the right deal on an apartment, you could enjoy big savings, at least for the duration of your next lease.

Other important rent vs buy considerations

While many of these factors lie beyond your control, you can turn to yourself to figure out others as you decide whether renting or buying in Boston is your best bet.

A question like whether you’re willing to take on maintenance problems (either by finding and paying a contractor or doing it yourself) can help to make the decision easier for you: home maintenance issues are typically something a renter never has to worry about, whereas all homeowners have to be ready to take them on.

Whatever your decision, happy shipping up to Boston!

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