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This article has been reviewed by licensed insurance industry expert, Moshe Fishman.
For many people, homeownership has been a part of the foundation of the American Dream. Buying a home is considered to be a good financial investment while renting a home is seen as throwing away good money. However, this is no longer the case.
For some people, buying isn’t necessarily the better choice. When considering whether to buy or rent, it’s important to consider not only your financial situation and goals but which is best suited to your lifestyle.
Purchasing a home is a great long-term investment. But the keyword here is “long-term.” Building equity in a home takes time.
If you’re buying with the expectation that home prices and values will rise sharply and quickly, don’t hold your breath. A good rule to follow is that if you don’t plan to own your home for more than 5 years, don’t buy.
When you sell your home, you’re responsible for fewer fees than you were as a buyer. The buyer usually pays for the bulk of the closing costs, and they also pay 5 to 6% of the sale price in real estate agent commissions. As you can imagine, these costs add up quickly.
Depending on the market, selling a home after five years of ownership doesn’t necessarily mean a homeowner will profit or break even. Aside from normal housing costs, factors beyond your control can cause house values to plummet such as a recession, inflation, interest rates, location, and supply and demand. Even rent vs buy calculators can't factor in all those contingencies.
In certain markets, the only affordable option may be a condominium as compared to a single-family home. Condominiums don’t appreciate at the same rate as single-family homes and because of this, mortgage lenders will set the mortgage interest rate for a fixed-rate mortgage to be slightly higher for a condominium as compared to a single-family home.
Although renters won’t reap the benefits that can come from a long-term investment such as a home, renters have the freedom to invest in other areas such as stocks, bonds, and mutual funds. They can also choose to contribute more to their retirement accounts.
There are numerous tax benefits for homeowners and virtually none for renters. As a homeowner, your biggest tax benefit is the mortgage interest deduction which allows you to deduct the interest paid on your mortgage. For married couples filing jointly, this deduction is available on loans up to $750,000 and for a single person, up to $350,000.
Other tax benefits available to homeowners include home equity loan interest, discount points, property taxes, home office expenses, mortgage insurance premiums, capital gains, and medically necessary home improvements.
The advantage to a mortgage monthly payment compared to a monthly rent payment is that a mortgage payment tends to stay the same over the course of the loan, especially for a fixed-rate loan. Mortgage applicants with a low credit score will likely pay a higher interest rate, owing to the lender's perception of increased risk.
An increase in property taxes can make a payment amount increase. Adjustable-rate mortgages (ARM) are home loans where the interest rate changes after a specific period. Depending on current interest rates, the mortgage payment will either increase or decrease.
Homebuyers can guard against fluctuating interest rates by choosing a fixed-rate loan. Buyers who put down less than 20% for a down payment may have to pay mortgage interest insurance. But this expense will eventually become unnecessary when enough equity is established.
The disadvantage to rent is that it almost always goes up and never goes down. Rental rates are dependent on the housing market and although some rentals are in areas with rent-control measures or rental-rate caps, not all renters can take advantage of these protections.
As the demand for housing continues to increase, it’s likely rents will continue to rise as well. Some exceptions to this are renters who are on good terms with their landlords and have reached agreements where the landlord doesn’t raise the rent based on market values. However, if the property owner decides to sell the rental property, the tenant will be forced to start over again.
Maintaining a home can be expensive and time-consuming. Unexpected costs can occur at any time. The general rule to follow is to assume that as a homeowner, each year you’ll pay between 1% and 4% of your home’s value for home maintenance costs.
For example, if your house is worth $300,000, you can assume you’ll spend $3K to $12K on home maintenance every year. In addition, if you have a mortgage on your home, you will almost certainly carry homeowners insurance. Aside from protecting you, it covers losses your "partner," the mortgage lender, wants to avoid.
Purchasing a home in a community with a Homeowner’s Association (HOA) usually means the HOA takes care of routine maintenance such as landscaping and potential big expenses like new roofs and painting. However, monthly HOA dues can be very steep. If a major repair is needed, and the HOA is poorly funded, a special assessment may be levied on homeowners. When purchasing a home with an HOA, ask how about the reserves and if they are well funded.
One of the biggest benefits of being a renter is that your landlord is responsible for anything that goes wrong with your home. The cost of renting includes maintenance services.
Not only are you spared the hassle of home maintenance, but you’re also spared the high expense. Although the repairs might not be done as quickly as you’d like, if anything goes wrong in your home, you won’t be responsible for what can be a considerable cost.
As a renter, you don’t have to worry about the time-consuming tasks involved with home maintenance. People who value their free time and those who work long hours or travel frequently will appreciate the freedom that comes from being a renter. However, you’re also not able to personalize your home in any way. Painting the walls, changing the flooring, planting a garden, or making any type of improvement to your home is not possible.
Once you buy a home, you’re tied to the location. If you’re transferred to an office that’s an hour away, you don’t have the ability to move closer unless you sell your home. Renters have the freedom to move if they don’t like where they live or if a lucrative job opportunity comes up in another city or state. Renting allows a level of personal freedom that will always be appealing to certain individuals.
Whether you choose to rent or buy your home is up to you. Examining your long-term goals—not just for your home but for your life—will help you make the decision that best suits your definition of the American Dream.
