The debate continues to rage over whether or buying or renting a home is a better idea. Which side of the discussion you agree with is the result of a unique combination of financial health, time-frame, and personal preferences. The key to when buying a house better than renting is only possible when answered on an individual basis. There are too many unique variables and personal preferences involved to provide a one-size-fits-all solution. Neither option is inherently good or bad – it all comes down to your situation.
How Long Will You Stay in the Same Place?
This is a simple question if you are moving within the next few years because there are very few scenarios where buying a home would be the best option from a financial perspective. The question becomes more difficult as you begin projecting 5-10 years down the road and depends on how long your mortgage will be for. The key is to sit down and determine the financial break-even point. In the short-term, buying a house will always be the more expensive option. Over time, it begins to even out and eventually shifts in favor of owning a home.
Most people can easily decide if they plan to move in a few years or living in the same place for 30+ years. The tricky part is everything in between. Even if you build equity in your home before your move there is an opportunity cost to consider. By making a down payment and paying the additional expenses of closing on and living a home you are necessarily limiting what that money does for you. While it could make sense to buy a home with the intent to live in it for 7 years and then sell it, you could just as easily invest that money into a different asset which will provide a greater return. Not to mention, a lot of people don’t particularly enjoy the stress associated with buying and selling a home so doing it every 5-10 years isn’t right for everyone. The key is looking at your specific situation to decide what is best for you.
Are You Buying a House as an Investment Asset?
The second question to answer is why are you thinking about buying a house. If the only reason you are considering buying a house instead of renting is because you think it is a good investment, then it is time to give residential real estate a second look. Historical housing data shows real estate will keep up with inflation but provide little to no real return. There are always exceptions such as particularly hot housing markets or a housing bubble but generally you should not buy a house solely for investment purposes. The one way to generate income from a house is to rent it but most people deciding between owning and renting are probably not going to rent their home while simultaneously living in a rental.
Can You Afford the Recurring Payments Necessary to Keep a Home?
There are multiple recurring costs associated with owning a home once you have purchased it. Some of these costs will be included in your monthly escrow payment while others will be paid separately.
The first recurring cost is your loan payments. You are required to make monthly principal and interest payments over the lifetime of your mortgage which can range from 7 to 30 years. There are two types of standard mortgages. The first is a fixed-rate mortgage. With this option your loan payment will remain consistent for the entire length of the mortgage. The second is an adjustable-rate mortgage. Using this option, your rate will get tied to a benchmark and your payment will vary as the benchmark changes. This might be a better option in an environment where interest rates are decreasing but can make for expensive, unexpected interest payments if the interest rate is increasing.
Property taxes are often included in your escrow payment however you may need to make an additional payment at the end of the year if property taxes were higher than anticipated. Your city and county will set your property tax rate and it will change from year to year. Generally, you will pay 1/12 of your property tax annual payment every month.
Two Types of Insurance
There are two types of insurance payments which may be incorporated into your home loan payment. The first is homeowner’s insurance which will cost an average of $1000 per year. As with all types of insurance your general homeowner’s insurance premiums will vary based on your houses appraised value, deductible, and coverage amounts. The second type of insurance is private mortgage insurance. This type of insurance is necessary if you have a mortgage on your home and your down payment is less than 20% of the purchase price. Essentially you are paying insurance to protect your lender from financial loss if your home is foreclosed upon and sold at a discount to the remaining amount owed on the mortgage.
Is Maintenance Appealing to You?
One reason many people choose to rent rather than own a home is because maintenance is not appealing to them. When you own a home, you are responsible for everything a landlord is typically responsible for. This includes general maintenance and upkeep costs such as replacing fixtures and appliances, maintaining exterior painting, interior cleaning, and any mechanical maintenance such as your air conditioning system. The general rule of thumb is to pay 1% of your home’s value per year in maintenance and repair costs.
How Much Control Do You Want Over Your Living Space?
A driving force behind many people who prefer to own a home over renting when the monthly payments would be the same is control over the living space. If you are renting there will be certain restrictions placed upon your ability to customize your living space based upon the lease. When you own a home this isn’t an issue. This is particularly important for people who prefer to paint their walls, altar doorways, and change the
3 Most Commonly Reported Benefits of Buying a Home
• Building Equity
One of the most commonly cited reasons people choose to own a home over renting, assuming the payments are similar, is the ability to build equity over time. Mortgage payments include both principal and interest. The principal payment is equivalent to an equity payment because the less you owe on the principal, the more equity you have in your home. Additionally, making improvements to certain living areas can increase the resale value of your home which also boosts equity. The benefit of equity is it provides you with income in the event you sell your home and an asset to borrow against in the future.
• Tax benefits
There are two fundamental tax benefits available to homeowners which are not available to renters the first is a federal tax deduction on any interest paid on your mortgage. This reduces your overall income tax burden. While beneficial to everyone, it is particularly beneficial to those in higher tax brackets. The second benefit is a homestead exemption. Most states will exempt owner-occupied homes from a portion of the property tax burden.
• Sense of Community and Psychological Benefits
[O]wning a house gives you “residual rights of control” to do what you want with it and that kind of ownership creates psychic rewards for many people and it’s also a kind of forced savings that can pay off over the long term. You can paint it, remodel, put in a garden, invest in custom appliances, etc. Owners also often tend to feel more attached to the community.
3 Most Commonly Reported Benefits of Renting
• Less Strict Credit Requirements
While many landlords will do some type of credit or background check the requirements are much less stringent than if you were to apply for a mortgage. Additionally, landlords have greater flexibility in judging potential renters on a case-by-case basis and consider a variety of extenuating circumstances. On the other hand, mortgage lenders require specific credit scores and have very little flexibility in determining who will and will not qualify for a mortgage.
• Included Expenses
Another benefit of renting is many expenses are often included in rent. In many situations, the landlord will cover some, if not all, utilities. At face value this may not seem significant but over the course of a year it could mean thousands of dollars in savings. There are also many expenses renters simply do not have to pay such as mortgage insurance, property taxes, and major maintenance repairs.
• Exposure to Real Estate Market & Increased Liquidity
The final benefit of renting is financial and twofold. The first is renters are not exposed to the fluctuations of a real estate market which can be beneficial in times of economic downturn. The second is renters are not financially committed to owning a home which provides for increased liquidity from an investing perspective. Instead of investing in an asset which may or may not appreciate, they can take that money invested in assets with a more consistent long-term return such as bonds or the stock market.
The Big Picture
When it comes to deciding between buying or renting a home, there is rarely an obvious answer unless you are planning on moving within the next few years. Taking a big picture view of your situation and weighing your individual factors is the only way to decide whether renting or owning a home is best for you. There are significant advantages and drawbacks to each option. The key is identifying your own priorities and making a selection based on your preferences and long-term financial goals.