Is it cheaper to rent or buy a house in 2025?

Currently, at 2025 interest rates and prices, renting is generally cheaper than buying in all 50 states. Historically, buying becomes more financially advantageous over the long term (10-20 years), but short-term costs make renting more appealing.

What is the 30/33 rule for buying a house?

The 30/33 rule suggests: 1) your total housing costs (mortgage, taxes, insurance) shouldn't exceed 30% of your gross income, 2) you should have at least 30% of the property's value saved (20% down, 10% buffer), and 3) the home's price shouldn't be more than 3 times your annual income.

How important is credit score for getting a mortgage?

Your credit score is a crucial factor for mortgage lenders as it indicates your past creditworthiness and ability to handle debt. A good credit score can lead to lower interest rates and better loan terms, significantly impacting the total cost of your loan.

Can lenders give you more money than the 28% rule suggests?

Yes, lenders often qualify borrowers for more than the 28% rule suggests, primarily based on their debt-to-income ratio (DTI). They may lend more if you have minimal other debts, but this doesn't necessarily mean it's a financially wise decision.

What are the hidden costs of homeownership?

Beyond the mortgage, ownership costs include property taxes, homeowner's insurance, regular maintenance and repairs (estimated at 1-2% of property value annually), potential HOA fees, and other miscellaneous expenses.

When is renting a better financial decision than buying?

Renting is often better if you plan to stay in one place for less than 7 years, if you can achieve significantly higher returns on your capital elsewhere, if you believe the market will decline, or if you value flexibility and minimal responsibility.

How Much Home You Can ACTUALLY Afford (By Income)

Graham Stephan

Education4 min read22 min video

Feb 12, 2025|495,329 views|13,096|1,092

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Key Moments

TL;DR

Understand home affordability in 2025: Renting vs. buying costs, income needs, and lender guidelines.

Key Insights

Renting has predictable monthly costs, while homeownership includes mortgages, property taxes, insurance, and repairs.

The 28% rule suggests spending no more than 28% of gross income on mortgage, taxes, and insurance.

The 3033 rule is a conservative approach: max 30% income for housing, 30% of value saved, and home cost <= 3x income.

Lenders primarily consider income and debt-to-income ratio (DTI) to determine loan amounts, with 45% DTI as a common limit.

In many areas, renting is currently cheaper than buying due to high interest rates and property values.

Long-term, homeownership can be a resilient investment, offering stable core housing costs and psychological benefits.

UNDERSTANDING THE TRUE COST OF HOMEOWNERSHIP

Homeownership involves more than just a mortgage payment, unlike the predictable costs of renting. Beyond principal and interest, homeowners face property taxes (typically 0.4% to 2%+ of assessed value annually), insurance premiums influenced by location and claims history, and repair costs. The widely used '1% rule' suggests 1% of the property's value for annual repairs, while the '$1 rule' estimates $1 per square foot. Additional expenses like HOA fees, landscaping, and maintenance also add up, making the total cost of owning substantially higher than renting.

RENTING AFFORDABILITY GUIDELINES

The traditional rule of thumb suggests rent should not exceed 30% of gross income. However, modern guidelines like the 50/30/20 rule allocate 50% of after-tax income for needs (including housing), 30% for wants, and 20% for savings and debt repayment. A more personalized approach, like backwards budgeting, involves listing all essential fixed costs, adding buffers for savings and wants, and then allocating the remainder to housing. For those prioritizing savings, keeping rent under 20% of gross income is ideal.

THE 28% RULE FOR HOME BUYERS

A common guideline for purchasing a home is the 28% rule, which states that your mortgage payment, including property taxes and insurance, should not exceed 28% of your gross monthly income. For instance, a $60,000 annual income ($5,000 monthly) would limit housing costs to $1,400, potentially affording a $200,000 home with a 20% down payment and a 7% interest rate. This rule highlights how significantly interest rates and down payment requirements impact affordability, as a $60,000 income can now afford less house than when rates were at 3%.

THE CONSERVATIVE 3033 RULE

The 3033 rule offers a more conservative approach to home buying, comprising three key principles. First, no more than 30% of your gross income should cover your mortgage, property taxes, and insurance. Second, you should ideally have at least 30% of the property's value saved, split between a 20% down payment and a 10% emergency fund. Third, the home's cost should not exceed three times your annual income. This strategy aims to prevent overextending financially and ensures a more secure homeownership experience.

LENDER QUALIFICATIONS: INCOME AND DEBT-TO-INCOME RATIO

When qualifying for a mortgage, lenders primarily focus on your income stability and your debt-to-income (DTI) ratio. They assess your monthly income, employment history, and tax returns. Most lenders prefer a DTI ratio no higher than 45%, meaning less than 45% of your gross income should go towards all debt payments, including housing. Having existing debts like car loans or student loans reduces the amount available for your mortgage, significantly impacting the price range a lender will approve.

CURRENT MARKET REALITIES: RENTING VS. BUYING

In the current market, with elevated mortgage rates and property prices, renting is often financially more advantageous nationwide. Buying can be approximately 38% more expensive than renting. The premium for owning is at an all-time high. Renting offers several benefits, especially if staying less than seven years, as selling involves substantial transaction costs. It also allows for higher returns on invested capital elsewhere and provides flexibility, with minimal upfront costs and landlord responsibility for major repairs and taxes.

LONG-TERM ADVANTAGES OF HOMEOWNERSHIP

Despite current economic conditions favoring renters, homeownership holds significant long-term advantages. Historically, housing has proven to be a resilient investment, with appreciation potential over extended periods (10-20 years). Owning allows for locking in a fixed mortgage payment, providing a stable core expense unlike fluctuating rents. Psychologically, the security and stability of owning a home can be a powerful motivator, even if it comes with higher initial and ongoing costs compared to renting.

THE 9.35% RULE FOR ESTIMATING OWNERSHIP COSTS

A practical rule of thumb for quickly estimating the annual cost of homeownership is the 9.35% rule. This formula breaks down potential expenses into approximately 7% for the mortgage, 1.1% for property taxes, 1% for repairs and maintenance, and 0.25% for other associated costs. For example, a $500,000 home would have an estimated annual cost of $46,500, or $3,875 per month. This calculation provides a swift way to compare ownership costs against rental prices in the same area.

STRATEGIES FOR AFFORDABLE HOME PURCHASE

To successfully buy a home, it's crucial to shop around for the lowest interest rates and negotiate effectively with sellers. Performing minor cosmetic repairs yourself can also reduce costs and personalize your space. Importantly, only purchase a property you intend to keep for at least 10 years, allowing sufficient time to recoup costs and benefit from potential appreciation. Diligent saving, thorough research, and patience are key to making homeownership achievable, especially when understanding the total financial commitment involved.

Mentioned in This Episode

●Software & Apps

●Concepts

Home Affordability: Do's and Don'ts

Practical takeaways from this episode

Do This

Keep rent ideally under 20% of gross income before taxes if prioritizing savings.

Follow the 28% rule: spend no more than 28% of gross income on mortgage, property taxes, and insurance.

Consider the 30/33 rule for a safe and conservative approach (30% max PITI, 30% saved, 3x income max price).

Shop around for the lowest interest rate when getting a mortgage.

Negotiate with the seller to get a good deal.

Consider doing cosmetic repairs yourself.

Only purchase a home you plan to keep for at least 10 years.

Avoid This

Exceed 30% of gross income on rent; consider more conservative budgeting.

Rely solely on lender maximums, as they may offer more than you can comfortably afford.

Underestimate the additional costs of homeownership beyond the mortgage (taxes, insurance, repairs, HOA).

Buy a home if you plan to stay for less than 7 years, as renting is often cheaper due to transaction costs.

Tie up significant capital in a down payment if you can achieve higher returns elsewhere (e.g., business, stock market).

Buy if you expect the housing market to stay flat or decrease in the short term.

Assume buying is always financially superior to renting, especially at current high interest rates and prices.

Common Questions

Based on general guidelines like the 28% rule, you would need to earn approximately $171,000 per year to comfortably afford a $400,000 home with a 20% down payment and a 7% interest rate, excluding other ownership costs.

Topics

Income Requirements Debt To Income Ratio Down Payment Property Taxes Home Insurance Home Repairs

Mentioned in this video

concept50/30/20 rule

A budgeting guideline suggesting spending 50% of take-home pay on needs, 30% on wants, and 20% on savings/debt repayment. It's presented as an alternative to the 30% rent rule.

concept30/33 rule

A conservative home buying guideline: no more than 30% of gross income for mortgage, property taxes, and insurance; at least 30% of property value saved (20% down + 10% buffer); and home cost not exceeding three times annual income.

concept9.35% rule

A rule of thumb to estimate total home ownership costs, comprising 7% for mortgage, 1.1% for property tax, 1% for repairs, and 0.25% for other expenses.

softwareKickoff

A credit building tool designed to help users build credit safely and easily with affordable monthly plans. It reports to all three credit bureaus and has shown significant credit score increases for users. It is promoted as a sponsor of the video.

concept28% rule

A guideline stating that no more than 28% of gross income should be spent on mortgage payments, including property taxes and insurance.