House for rent in the middle of winter © David Joel, Photographer

One of the financial cornerstones of many successful retirements is paying off mortgage debt before leaving the workforce. Life on a fixed income is a lot easier if you're not making a big payment every month to your lender.

That's easier said than done in today's market. Still, many people with mortgages seek to sell their homes and live mortgage-free in a smaller, less expensive home during their retirement years. If this transition might be in your future, it makes sense to carefully consider whether you should buy or rent your new home. Renting looks better than you might think.

Of course, you may never actually get to the stage of closely comparing the finances of owning or renting a home. There are major lifestyle, wealth and estate issues that might decisively tilt the decision in favor of either renting or owning:

● Do you like tending your own home, including gardening, lawn work, and home maintenance? Or would you like to get out from under many of these responsibilities?

● Do you like the flexibility of an annual lease that gives you the freedom each year of living wherever you want? Or do you prefer to be a long-term member of a community and stay in the same home for a long time?

Even if your answers to these questions cause you to lean strongly toward being a homeowner or renter, it's still smart to evaluate the financial trade-offs of this decision.

U.S. News Money reviewed nearly a dozen buy-versus-rent calculators at leading personal finance websites. Most of them did not compare buying a new home for cash. None let us figure out the benefits to renters of investing the amount of the new home and using the earnings to help pay the rent.

To help make sense of the trade-offs, we've developed a downsizing case study. It assumes you will be able to sell your home and have $250,000 left over after paying off your mortgage and all closing costs. You can either buy a new home with this amount or put the $250,000 in a safe investment fund and use the fund's earnings to help pay your rental expenses.

Owners of a $250,000 home would need to pay roughly 2% of their home's value each year for property taxes and the amount that home insurance exceeds the cost of renter's insurance. That totals $5,000 a year. Set aside another $5,000 for annual home maintenance expenditures. Utilities -- heating, cooling, water and sewage, cable, Internet, and phone expenses -- would generally be higher for homeowners than renters. To make the comparison easy, tack on $2,000 a year for those higher homeowner utilities. The total of these higher expenses for homeowners is $1,000 a month.

Three other key assumptions:

  • Renters will earn 6% annual returns on their $250,000.
  • State and local taxes will be 20% on investment income.
  • Inflation will affect renters and homeowners equally.

If that $250,000 earns 6% a year, the individual could withdraw $1,250 a month forever and still have $250,000 left in the account. That's $1,000 after paying 20% in taxes. Adding in the $1,000 a month in lower renters' expenses provides renters with a $2,000 break-even rental budget.

So, what kind of home can you get with $2,000 a month in rent? A pretty nice one. Moody's Analytics maintains a set of "buy to rent" ratios for more than 50 metro areas throughout the country. It uses home prices from the National Association of Realtors and rental information from Property and Portfolio Research.

For each metro area, the ratio compares the median price of a single-family home with the annual rental cost of a typical apartment. The higher the ratio, the more expensive homes are relative to apartments. (New York Times economics writer David Leonhardt has used these ratios for several years in annual rent-versus-ownership pieces.)

Moody's emphasizes that its ratios have limitations. They do not, for example, compare the quality of a market's housing stock. Perhaps the median-priced home is nicer than the average apartment, for example. Still, the ratios provide a rough idea of where you'd come out by renting instead of buying.

These ratios are most commonly used in comparisons of homes purchased with a mortgage. In such cases, according to Leonhardt and others, buying beats renting when the ratio is 15 or lower. But the advantages of buying at these ratios decreases in a downsizing scenario when a home is purchased with cash and there is no tax deduction for mortgage-interest expenses.

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Based on the most current set of ratios, the depressed housing market in Cleveland is the only metro area tracked by Moody's where the rental equivalent of a $250,000 home is more than $2,000 a month.

Interestingly, homes outside of these 50 metro markets are even more reasonably priced, with the median U.S. home costing slightly more than 13.8 times an equivalent rental unit. For our case study, this translates into $2,055 in monthly rent on a home equivalent to one selling for $250,000.

Here is the current list of buy-to-rent ratios as of the first quarter of the year. The ratio over the 15-year period from 1989 through 2003 is also listed. It will help provide a view of the long-term relationship of home prices and rental costs. Also, we've calculated the monthly rental in each market for a home equivalent to one costing $250,000.

In nearly all cases, renters would come out ahead, and still have their $250,000 as a retirement nest egg.

Metro areaBuy-to-rent ratio: Q1 2011Buy-to-rent ratio: 1989-2003 average2011 equivalent rent for $250,000 home
Atlanta 12.44 13.47 $1,675
Austin, Texas 20.58 15.19 $1,012
Boston 17.03 15.24 $1,223
Baltimore 15.17 10.14 $1,373
Bridgeport, Conn. 16.48 16.08 $1,264
Charlotte, N.C. 29.39 15.86 $709
Chicago 13.30 16.71 $1,566
Cincinnati 13.17 14.15 $1,582
Cleveland 10.27 13.44 $2,029
Columbus, Ohio 15.00 15.32 $1,389
Dallas-Fort Worth 15.16 15.37 $1,374
Denver 21.54 16.31 $967
Detroit 11.94 13.21 $1,745
East Bay, Calif. 29.59 27.05 $704
Fort Lauderdale, Fla. 13.09 12.23 $1,592
Hartford, Conn. 17.22 13.40 $1,120
Honolulu 30.91 23.37 $674
Houston 15.82 13.18 $1,317
Inland Empire, Calif. 13.95 16.59 $1,493
Jacksonville, Fla. 13.93 12.37 $1,496
Kansas City, Kan. 14.25 13.46 $1,462
Las Vegas 13.51 14.82 $1,542
Long Island, N.Y. 20.71 12.50 $1,006
Los Angeles 12.50 13.99 $1,667
Manhattan, N.Y. 28.52 22.14 $730
Memphis, Tenn. 18.54 16.85 $1,124
Miami 11.98 11.93 $1,739
Milwaukee 20.38 15.38 $1,022
Minneapolis 12.58 13.38 $1,656
Nashville 23.68 18.50 $880
New Orleans 15.37 12.97 $1,355
New York 15.11 9.68 $1,379
Norfolk, Va. 18.04 16.28 $1,155
North-Central New Jersey 22.67 17.07 $919
Oklahoma City 15.26 11.73 $1,365
Orange County, Calif. 28.36 19.60 $735
Orlando, Fla. 12.33 12.32 $1,690
Palm Beach County, Fla. 14.93 13.61 $1,395
Philadelphia 14.76 11.04 $1,411
Phoenix 11.87 11.89 $1,755
Pittsburgh 11.25 10.11 $1,852
Portland, Ore. 23.12 16.74 $901
Raleigh, N.C. 24.64 16.80 $846
Richmond, Va. 21.60 14.31 $965
Sacramento, Calif. 15.15 16.16 $1,375
Salt Lake City 16.69 14.23 $1,248
San Antonio 17.61 12.58 $1,183
San Diego 21.96 17.51 $949
San Francisco 23.97 24.76 $869
San Jose, Calif. 29.57 22.79 $705
Seattle 25.43 17.43 $819
St. Louis 13.49 13.17 $1,544
Tampa, Fla. 11.95 12.35 $1,743
Washington D.C. / Northern Va. / Maryland 17.24 13.40 $1,208
Metropolitan area average13.8312.00$1,506
U.S.10.149.4$2,055