When it comes to renting vs. buying a house, there is always a passionate debate about which makes the most financial sense. Both options have valid points so that it can be confusing. The current tax law changes have also made owning a home less monetarily beneficial, so the rent vs. buy dispute keeps evolving.
A popular argument for buying is why should you pay a monthly rent to a landlord instead of establishing equity in a home for yourself? In actuality, there are many financial reasons why renting might be more compelling. You also need to ensure you understand if you are even in a good position to purchase a house. Your finances are not your only concern, either. If your professional, social, and financial lives are not in order, now is possibly not the right time to be buying a home. Let us break down this buying vs. renting decision.
Owning vs. Renting: An overview
Whether to buy or to rent the place in which you live is a significant decision. It does not just impact how much money you have justify at the end of the month, but it also affects your lifestyle and the savings you accrue over the years. Every day, people purchase homes when financially they would be better off renting since it is essential to have a place to put down roots, and since they view owning a house as an investment that can expand and as a basis of tax deductions. Likewise, people rent all the time for the flexibility and insignificant responsibility it offers, even if they had a mass a more substantial net worth over time if they bought a house.
Of the two choices, the bias often turns toward ownership. It is big business for everyone from real estate agents to mortgage lenders to home improvement stores. So people are bombarded with the message that being a homeowner is vital to happiness and part of the American dream. However, owning is not universally better than renting; neither is always renting easier than owning. To figure out if renting or owning is best for you, consider the pros and cons of each.
Renting pros and cons
Renting means you can move without penalty every time your lease ends; however, it also means you could have to move abruptly if your landlord decides to sell the property, bump up the rent by more than you can manage, or turn your apartment complex into condos.
The biggest misconception about renting is that you are throwing away money every month. This is not true. First, you need a place to stay, which always costs money, in one way or another. Second, while it is true that you are not building equity with monthly rent payments, you are also not establishing equity with much of the money you will put into owning a house.
When you rent a house, you know exactly how much you are going to spend on housing per month. When you own a house per month, you may pay nothing more than your regular bills one month, mortgage, and an extra $12,000 on a new roof the next (which homeowner’s insurance might not fund). However, you will never have to pay to replace your roof when you rent. Your monthly, home-related expenses, like renter’s insurance, tend to be more foreseeable.
As a renter, though, you do experience unpredictable rent increases every time your lease is up for renewal, not unless you live in a city with rent control, and your flat is covered by it. If you stay in a desired part of town, rent increases can be steep, while you get a fixed-rate mortgage, your monthly home payments will never increase (even though insurance premiums and property taxes possibly will).
While homeownership is often touted to build wealth, your home can lose value and lots of value. The desirable neighborhood you moved in could decline. A major employer can leave the area, leading a significant decline and a surplus of housing, or there can be a residential building boom, either of which keeps prices down. Another bit of misleading convention knowledge: get a mortgage to get the tax deduction.
True, the home mortgage interest deduction lowers your out-of-pocket expenses for montage interest early in your loan term (and the property tax deduction lowers property taxes), as far as you are itemizing. Nonetheless, tax deductions are not a reason to purchase a house. First, for every one dollar you spend in interest, you can save 25¢ on your tax bill. In short, you are not coming out ahead. What is more, as you pay down your mortgage and the proportion of your payment that covers interest declines, so will the tax break.
Of course, renters do not get a mortgage tax deduction at all. However, they can take the standard deduction that is available to all taxpayers.
Owning a home pros and cons
Homeownership brings intangible benefits like a sense of belonging to a community, stability, and the pride of ownership. Nonetheless, it is not suitable for nomadic and restless types. Real estate is the original illiquid asset. You may not be able to sell when you want if the housing market is down. Even though it is up, there are major transaction costs when you sell a house.
Changing your mind about the place you want to stay is far more costly when you own. The entire cost of homeownership tends to be higher than the entire cost of renting, even though the monthly mortgage payment is similar to (or lesser than) the monthly cost to rent.
Below are some expenses you will be spending money on as a homeowner that you do not have to pay as a renter:
- Earthquake insurance, in some cities
- Tree trimming
- Pest control
- Maintenance and repair
- Sewer and water service
- Trash pickup
- Property taxes
- Lender-required flood insurance, in some regions
- Pool cleaning (if you have one)
- Homeowners insurance
Maybe the most significant throw-away expense is mortgage interest, which can make up almost all of your monthly payments in the first years of a long-term mortgage. Consider this typical case: You borrow $100,000 at four-percent for thirty years. Your initial monthly payment will be $477.42, where $333.33 is the interest, and $144.08 is principal. It will be about thirteen years before more of your monthly payment goes toward principal than toward interest, and overall, you will lose $71, 869.51 in interest (even though, admittedly, you will recoup some of that in tax deductions).
Even for renovations, projects do not often increase your house’s value by more than what you spend on them. On average, you will get back sixty-six cents for each dollar you shell out on a house improvement project, following Remodeling magazine. Projects that earn the most are not splendid things you will be excited about doing.
After you add up all these costs, you may find that you are better off financially by renting a place and investing the money you would have put into a house into a retirement account.
Factors to consider when choosing whether to rent or own a house
Here are some factors you should consider before moving forward with making one of the essential purchases of your life.
Total housing costs
Buying a house is attractive since it is an investment that can also reduce your expenses. Nonetheless, identifying your monthly housing costs is not simple as comparing your monthly utility and rent payments to a mortgage payment. As mentioned earlier, being a homeowner comes with added expenses such as down payment, utilities that your landlord may cover as a renter (such as water and trash), property taxes, homeowners’ association, and home maintenance. If you need assistance weighing which choice makes the most sense, talk to a financial advisor and not discount rent-to on homes as an option.
Your financial stability
The greatest question is, can you afford that dream house? You do not need a close to perfect credit score and a twenty-percent down payment to purchase a house; however, should you put less than twenty-percent down and endanger your credit by paying for a house that you cannot really afford. If you are rebuilding or building your financial standing, or you do not have sufficient savings for a down payment, you may want to stick to renting while you save, and pay off your debts. When you are financially stable enough to bargain a good deal on a house- or market conditions are too ideal to pass up, purchasing might be the way to go.
Is the market in your favor?
Real estate markets are always on the move, with conditions that are better for sellers, buyers, or balanced on both participants. Not unless you are ready to purchase immediately, you will need to consider current market conditions and trends to strategize the best time to purchase and own a home equation versus renting.
Know where you want to be for the long-term
Putting that money on a home is not only an investment in property but also your decision to stay put. Are you willing to spend the rest of your life in a specific neighborhood, or at least, for the next decade? Whereas the chance to build equity is a strong argument for homeownership, it only makes financial intellect if you plan to stay at least five to seven years. This allows a lot of time for your home’s value to increase and for you to pay that mortgage. If you plan to move within a year or two, renting a house is the wiser decision. However, if you are set on putting down roots, purchasing that house might be the way to go.
