Rent vs. Buy
Buying a home in order to build equity is one of the main financial reasons prospective buyers jump into the market. What many buyers fail to realize is that the value of housing does not always go up in a straight line. It can be bumpy with ups and downs, just like turbulence on an airplane ride. Homeowners and prospective homeowners must look more closely at the costs and benefits of such a large transaction.
Yet it is not all about the numbers. It’s mostly about freedom: The ability to paint the walls whatever color you want, or know that a landlord is not going to raise your rent or ask you to leave.
There are a few points to consider when deciding whether homeownership or renting makes better sense for you.
Reasons to rent
Flexibility. Renting allows you to explore an area before making the longer-term commitment to homeownership. Unless you are certain about a specific neighborhood, renting allows time for research and discovery.
Career uncertainty. If you think you might need to move in the near future, or are mulling job changes that span several areas of town or are located elsewhere in the country, you might want to rent. Buying ties you down to a greater extent.
Income uncertainty. If you expect a pay hike or cut in the near future, that can change your borrowing ability as well as impact your ability to pay a mortgage.
Bad credit. Creating a history of on-time rental payments can help you build the credit you’ll need to qualify for a mortgage.
No maintenance expenses. When something goes wrong, you call the landlord.
Utilities (sometimes) included. In some instances, the landlord may pay for many utilities such as water, sewer, garbage, and, in some cases, even heat and hot water.
But there is a downside, too: You may have no control over the fluctuation of your rent, a big-budget item that can change often. Long-term budgeting becomes more difficult.
Reasons to buy
Equity. When you pay rent, you are paying your landlord’s mortgage or adding equity to his or her bank account. However, when you have a home mortgage, you increase your degree of ownership in your home with every payment. A general rule is that if you intend to stay in your property for at least five to seven years, the costs of purchasing the home are more likely to be offset by accrued equity and increased housing value. In the event that equity in the home grows to more than a 20-to-80 percent loan-to-value ratio, you will be able to borrow against your equity in the home. This can be cautiously used should you need capital to pay for major purchases. If interest rates drop, you can refinance your mortgage at more favorable rates, or, once you've paid the entire mortgage off, borrow against the equity in your home to fund major purchases such as a second home or your child's education.
Tax deductions. You can deduct mortgage interest as well as your property taxes. Uncle Sam doesn't give renters this bonus. Not only that, but if you meet certain requirements the IRS won't apply a "capital gains" tax on your profits from the sale of your home. You can keep the first $250,000 in profit you make when selling the home if you're single, or the first $500,000 if married. In addition, those who work from home may be eligible to take deductions for their home office and portions of utilities.
Creative control. You like dozens of pictures on the wall? Well, hammer away -- they are your walls now. Go ahead and paint them mango! Wish you had another room? Go ahead and add one.
Maintenance choices. If you live in a house, you can decide how to approach maintenance, either doing it yourself or picking your own contractor. If you live in a condominium or homeowners' association, you may pay a monthly fee to have maintenance work covered by the association's contractors.
While a home is a good investment -- and let's face it, you have to live somewhere -- many financial experts caution against purchasing a home simply as an investment. Historically, real estate market increases have been slow and steady, not the huge spikes seen between 1998 and 2008.
Is renting cheaper?
This is not an inconsequential question. Whether renting or buying is more cost effective depends on your market, where you choose to live and whether you like to do home improvement and maintenance projects yourself.
Homes cost money: Appliances break, roofs leak, and if you own, you are the lucky soul who gets to pay the bill. If you are renting, landlords pay the plumber and roofer.
That is why many homeowners who have taken out a mortgage in order to buy do so in anticipation of the tax breaks that come with homeownership. Depending on your tax bracket, a first-time purchaser's 1040 tax deductions can heavily subsidize many of the expenses you have poured into your new home.
So is renting or buying better for you?
Only you know your own personal circumstances. If you are confused, contact an expert at the Already Home Team for a free analysis. This will help YOU to determine if renting or buying is the better option for you.
And remember, with us, advice is always free. Reach us at [email protected]