Guide: Renting Versus Buying a Home
The great debate is renting better than buying or vice versa? Both have upsides and drawbacks. Ultimately it depends on your finances, your long-term plans and the real estate market in your city. There are many questions to ask before making a final decision, here are five must-ask questions.
- What can you afford?
- How much in savings do you have?
- Do you plan to stay in the new home or will you be moving in the next couple years?
- Do you want the responsibility that comes with a home, such as maintenance/repairs?
- What are your career, financial and family goals?
Calculating the costs with Renting vs Buying
How much will cost is the first consideration when evaluating whether to rent or buy. When you rent generally speaking your monthly costs are fixed for the term of your lease. Your rent may include utilities such as gas, electric, cable or internet, but many places do not include these costs. In leasing, you will be required to pay first and last month’s rent along with a security deposit. The other thing to keep in mind is that it’s quite typical that your rent could increase each year. Which could increase your monthly expenses considerably and you are subject to the landlord or apartment community’s increased new rental rates.
On the positive side when you are a tenant you landlord is generally responsible for fixing issues with the property. Items such as fixing a leaky room, a broken ac, broken pipe or appliance issues.
How much house can I afford?
To buy a home most mortgage lenders require a down payment ranging from 3 percent to 20 percent of the home’s sales price. There are some loans that have a smaller threshold, but down payments lower than 20 percent require private mortgage insurance and or PMI, which is an additional monthly expense. You will also need to pay closing costs, which are about 2 to 4 percent of the home’s price.
You can use a mortgage calculator to give you a rough estimate on what your monthly payments would be, including your interest and principal outlays. This can help you get a ballpark of what you can afford, but you need to consider other expenses such as utilities, maintenance, and repairs. It’s inevitable that unplanned expenses will arise such as a leaky faucet or broken pipe.
Advantages to Buying
- May build equity and credit
- No landlord to answer to.
- More stability (especially with schools)
- Possible tax benefits
- Can improve or upgrade home to your tastes.
Disadvantages to Buying
- Substantial upfront money and paperwork.
- Could lose money if the home loses its value.
- Extra expenses aside from mortgage (repairs/maintanence)
- Responsible for all repairs.
Advantages to Renting
- Less upfront cost and paperwork.
- Freedom to relocate with ease.
- No repair costs
- No worry of falling home values.
- No property tax bill.
Disadvantages to Renting
- Rent prices can rise or the owner can sell the property.
- Fewer choices on where you can live (dependent on vacancies).
- May have to move multiple times
- No ability to build equity.
- No tax benefits.
Reasons to buy a home
Purchasing a home can be a good investment. If prices in your area have been rising, buying now can help you stay in a neighborhood that you may otherwise not be able to purchase if you wait years to purchase. And if you do not stay in the home long-term the increasing property values may have you earning a sizeable profit when you do decide to sell.
Some factors that it may be time to buy:
You intend to stay in the same place for more than a few years.
You would consider renting our all or part of your home should your plans or finances change.
You are eligible for a prime rate mortgage.
You are willing to do some work in a fixer-upper.
Benefits of renting a home
Although owning your own home comes with a sense of security it also comes back with some drawbacks — remember that roof replacement? Selling a house usually takes longer than getting out of a lease.
Reasons to Rent:
You are not sure how long you will be in your next home because of work or other circumstances.
You can not afford the additional expenses or headaches that come with owning a home.
Your finances vary which can potentially make it more difficult to keep up with mortgages payments.
You want flexibility.
Equity is great when you build it
What is equity? When the home’s value rises while the mortgage debt falls as you repay it, you’re “building equity.”
Home’s value – Mortgage debt = Equity
Historically home ownership is a good investment, however, if home values fall or you have trouble paying your mortgage you stand a chance of losing your money. And your finances and credit would be hurt if you fail to repay your loan.
Let’s compare home appreciation with rent.
Here’s a good rule of thumb. If home values need to increase 3 percent a year above rent and you plan to stay there for five years then you should buy. If you want to get an appreciation of 5 to 6 percent a year than you are better off renting.
Another reason to buy: School
If you have young children it highly likely that you want them to stay at the same school instead of bouncing from school to school.
Us the tax advantage to your favor.
Depending on the tax laws you may be able to deduct your mortgage interest expense. But let’s be clear don’t let your home be your primary investment.
In the end, each person/family needs to decide what is best for them. If you find you have questions or need any real estate help me reach out to me here.