One of the most common questions we receive here at CS Bank is whether or not buying a home during high inflation a good idea. With home prices and interest peaking, many individuals are pausing before jumping into home ownership to determine if now really is the right time to buy.
Unfortunately, there is no straightforward answer to this question. That’s because every individual’s financial situation is different, every neighborhood and town has different costs associated with their homes and rentals, and there’s more to consider than finding the lowest monthly payment. Here in Arkansas and Missouri—unlike many other parts of the county—our affordable prices for both homes and rentals can further complicate the question.
So how do you determine which choice makes the most sense for you? In this post we’ll discuss strategies for weighing your options and comparing the cost effectiveness of buying vs. renting, the benefits of both, as well as ways to prepare yourself for the costs associated with homeownership.
The Cost of Renting in Northwest Arkansas and Southwest Missouri
If you are weighing your options of buying a home, you may already be a renter and know what to expect for rental costs in your preferred area. However, it’s important to examine these costs to get a better understanding of the rental market—especially if you plan on moving. Let’s take a look at the rent costs in different parts of our region, as well as additional expenses you’ll need to include in your calculations.
Northwest Arkansas Rental Costs
As of December 2023, average rental for a 4-bedroom unit are:
Southwest Missouri
Cassville and its surrounding areas has one of the lowest costs of living in the US. However, rental inventory is low while 60% of residents own their own homes. If you’re planning to rent a home in the vicinity of Cassville, expect to pay somewhere around the following costs for a four-bedroom rental:
Additional Expenses for Renters
Unlike owning a home, which comes with a number of extra expenses, your additional costs for renting are usually limited to a few major costs.
Up Front Costs
Be sure to factor in a security deposit (usually equal to one month’s rent), last month’s rent, and an application fee of up to $60.
Utilities
Some rentals include certain utilities, including heat, water, and trash removal. This is an important benefit for renters that homebuyers don’t share. However, many rentals do not, and if you plan on moving into a rental home, expect your utility costs to be higher than in an apartment (and you may have to pay for all of them). Utilities include:
- Water/Sewer
- Trash
- Electric
- Gas or propane for cooking or heating
- Cable TV
- Internet
Other Costs
Set aside some extra funds for the following possible expenses:
- Renters Insurance (about $150 per year)
- Laundry if your rental does not have a washer and dryer
- Pet fees or pet deposits, if required
The Cost of Buying a Home in Northwest Arkansas and Southwest Missouri
Homeownership comes in all shapes and sizes—particularly the costs associated with it. When comparing the cost of renting a home or apartment to the cost of buying a home, these calculations can get complicated. Renters often scale up when buying a home, making side-by-side comparisons inaccurate. Additionally, you’ll need to keep in mind that the value in homeownership isn’t simply derived from the amount of money you pay for housing each month. You also need to consider your home’s appreciation, or how its value for you increases as home prices go up and you pay down your mortgage.
With those caveats in mind, let’s examine some general home price trends in our region.
Average Home Prices in Northwest Arkansas
As of December 2023, median home prices in our region include:
Average Home Prices in Southwest Missouri
As of December 2023, median home prices in our region include:
Additional Costs for Homeowners
We discuss many extra costs in our blog post, 8 Expenses for New Homeowners to Prepare for. In brief, here are some of the top ones you may encounter.
Your Mortgage Payment
- Homeowners insurance: This cost depends on your home size as well as its risk factors for fire, natural disaster, and theft. Expect to pay around $1,500 per year.
- Property taxes: Again, property taxes depend on your municipality as well as the size and condition of your home. Oftentimes, these costs will be available on online listings.
Utilities
While some utilities may be included in the price of a rental, when you own your home, you’ll be responsible for all utilities—and if you are getting a larger home, some of these expenses may be higher, especially heating and cooling. Utilities may include:
- Water/Sewer
- Trash
- Electric
- Gas or propane for cooking or heating
- Cable TV
- Internet
Repairs, Maintenance, and Improvements
Unlike renting, when you own your own home, you’re responsible for all repairs and maintenance, as well as improvements you wish to make.
So how much should you budget for these items? While it depends on the size and condition of your home, the 1% rule suggests budgeting at least 1% of your home’s value for upkeep each year.
If you plan on making significant improvements, you’ll need to set aside more. Costs for remodeling key areas of your home range from $5,000-$25,000 for bathrooms and $10,000-$50,000 for kitchens. Read more about how to pay for home renovations.
Upfront Expenses Associated with the Home Buying Process
Beyond your ongoing monthly expenses, there are many upfront costs with purchasing a home that you’ll need to factor into your budget. These include:
- Application Fees: When you apply for a mortgage, your fees can be as high as $500.
- Closing Costs: Closing costs include lender fees, title fee, and appraisal fees, among other costs. While Arkansas has some of the lowest closing costs in the country, averaging $1,785, this will depend on the cost of your home and your loan type. Buying a home in Missouri? Expect to pay $2,061 on average.
- Home Inspection: Usually costs between $300-$500.
- Down Payment: Your down payment size will depend on your type of loan. For conventional loans, you’ll pay 10-20% in order to qualify for your home loan. For FHA loans, you’ll need to put down 3-10% For VA and USDA Rural Development Loans, you may not be required to have a down payment at all.
- Appliances and Furnishings: When moving into a new home you may need to supply your own appliances, which can include a washer/dryer set and refrigerator.
Comparing Costs of Buying and Renting
As we mentioned before, it may be difficult to compare your out-of-pocket expenses and long-term costs to determine which path makes the most financial sense for you today. And keep in mind, your financial circumstances or needs may change in the future. Let’s explore a few ways to compare these costs.
Monthly Housing Cost of Renting vs. Owning A Home
One method is to simply compare straight-forward monthly out-of-pocket costs. This does ignore many of the factors we mentioned above but can give a general idea of how renting vs. homeownership may fit into your budget.
Using a calculator like our Mortgage Loan Calculator, you can determine the approximate out of pocket cost for homes you may be considering. Keep in mind that these costs will not include taxes and insurance, which will need to be added in.
For example, for a conventional 30 year long-term mortgage at a 7% interest rate and 20% down payment, you can expect to make the following base payment each month:
- Eureka Springs, Arkansas: $1,995.91 (Based on home price of $300,000)
- Harrison, Arkansas: $1,330.60 (Based on home price of $200,000)
- Huntsville, Arkansas: $1,496.93 (Based on home price of $225,000)
- Berryville, Arkansas: $1,330.60 (Based on home price of $200,000)
- Cassville, Missouri: $1,330.60 (Based on home price of $200,000)
These figures (plus other monthly costs including taxes and repairs) can be compared to your monthly rent, or to the above-listed monthly rent averages. Note, that interest rates vary month-to-month and by loan product. When interest rates are high, you may want to consider a Variable Rate Mortgage which may offer a lower upfront rate which could possibly decrease should rate go down.
Price-to-Rent Ratio
Considering the long-term financial benefits of renting vs. buying in the current housing market? Consider using a simple formula called the “price-to-rent’ ratio. This ratio is a financial metric that roughly compares the relative cost of buying a home to renting a similar property and is calculated by dividing the home purchase price by the annual rent amount. The ratio is often used as a tool to assess whether it is more financially advantageous to buy or rent a home in a particular market.
- A ratio of about 15 or less is typically considered more favorable for buying.
- A ratio between 16 and 20 suggests a more balanced market, where buying and renting are both competitive options.
- A ratio above 20 often indicates that renting is a more financially wise choice than buying.
For example, if your monthly rent in Cassville is about $13,000 total per year, but the home you are considering is $200,000, you would divide $200,000 by $13,000. The result is just a hair above 15, which leans toward buying being a more sensible housing choice. While in many parts of the country that are suffering from rising home prices, it may be getting harder to purchase a home, in Missouri and Arkansas you may find that in most cases it still makes more financial sense to buy.
Benefits of Renting vs. Buying
With all things being equal in terms of monthly payments, it’s important to also weigh other factors.
Benefits of Renting
- Lower maintenance costs
- No real estate taxes
- Lower upfront costs
- Lower insurance
- Potentially lower utility costs
- More flexibility and less commitment
- Easier housing access
Benefits of Homeownership
- More freedom for how to make improvements and changes
- Consistent payments that stay relatively stable over the life of your loan (no rent increases)
- Build wealth with each monthly payment
- Access to home equity means access to more affordable loans
- Potential for tax benefits
Making the Decision to Buy a Home
Buying a home is a big step. If you’re considering moving up from renting and purchasing your own home, the first thing you’ll need to do is develop a plan to save for it, even if you plan to utilize a lower-down payment loan option. Our Gen Z Guide to Saving for Your First Home can help you create a plan that works for your budget.
As you prepare to navigate the process, you’ll want to take your time to familiarize yourself with the financial aspects of purchasing a home. Our First-Time Homebuyer guide for Northwest Arkansas and Cassville First Time Homebuyer Do's and Don'ts can provide specific advice for our region, as well as general home purchase tips.
Get Help from a Mortgage Expert
Remember, there are many experts who can help you weigh your options, compare your choices, and make the right decision for you, your family, and your financial situation—you don’t have to go it alone.
CS Home Mortgage is a full service mortgage lender. From matching you up with first-time homebuyer programs and incentives to helping you select a home loan that fits your budget, our lending professionals are here to assist. Talk to a lender today to learn about the best home loan options available to you!