Purchasing your first home is one of the biggest life decisions you can make, but is it right for you? When making this decision there are some key pros and cons to both renting and home buying that you may not have heard of yet. If you’re on the fence about whether you should rent or buy, keep reading to find out what you need to consider before taking the plunge.
Renting Pros And Cons
- Mobility/freedom to move around
- Landlord pays for maintenance
- Doesn’t require expensive closing costs
- No fluctuation in monthly housing expenses
- Allows you to test-drive different living spaces
- You don’t build any equity
- Limited ability to customize your living space
- Rent could go up over time
- The landlord might sell or decide to stop renting
- Limited sense of home stability/permanence
Buying Pros And Cons
- You build equity over time
- The home value may increase over time
- You may reap tax benefits
- Unlimited freedom to customize your living space
- Sense of home stability/permanence
- Closing costs can be prohibitive
- Responsibility for maintenance and repairs which requires time and effort
- Less flexibility to move (at greater difficulty/expense)
- The home value may decrease
- Recent tax laws could hamper tax benefits
1. How long do you plan on living in the same location?
In other words, are you planning on putting down roots in your community or are you craving more flexibility with your location? The general rule of thumb is that you should plan on staying in your current location for at least 5 years when purchasing a home. This is a good amount of time for both financial and personal reasons. Buying a home is a big commitment so you will want to put personal touches on your home to make it feel like it is yours.
However, if you prefer to be more nomadic renting may be the better option for you. For example, let’s say you’re really hoping to get that job promotion – but it’s halfway across the country. You don’t want to have to deal with the hassle of selling a home while transitioning to a new position. Or perhaps you’ve moved to a new area and want some time to get to know different neighborhoods before settling down somewhere. In this case, renting makes more sense, sure, you can buy a home and then sell it within a few years, but the costs and hassle are hardly worth it. Aside from initial closing and moving costs, you may be paying more closing costs when selling a home in addition to other costs such as repairs and maintenance that would make the house sell for top dollar.
2. Estimate The Cost Of Renting Vs. Buying
In many cases, renting can be initially cheaper than buying a home because of the upfront costs involved. This includes a down payment, closing costs, moving costs, any renovations, and other home maintenance tasks that you may not see a return on your investment for. Owning a Home Has Distinct Financial Benefits Over Renting
That said, just because you can afford a mortgage payment doesn’t mean you can necessarily afford a home. There are many overlooked expenses and fees that quickly add up. In addition to a monthly payment that’s more than the principal and interest on your mortgage, you’ll also have property taxes, homeowners insurance, and (in many cases) mortgage insurance as well as homeowners association fees as well as maintenance and repair costs. On the other hand, owning a home Has distinct financial benefits over renting. Buying a home can actually be cheaper in the long run and it offers you an opportunity to build equity, given that your home will increase in value when it’s time to sell. In most areas of the U.S., buying a home is actually cheaper in the long run according to a report by the National Association of REALTORS®, after 6 years a homeowner’s mortgage payment is lower than that of a renter. This is assuming the rent has a 5% increase each year and the homeowner is paying a fixed monthly payment.
In addition to this, homeowners are qualified for tax savings in the form of tax exemptions and according to the same report from the National Association of REALTORS®, a homeowner’s payment will be less than a renter’s payment after 3 years.
“Buying a home is cheaper than renting in all of the 100 largest metro areas,” – Trulia.com
3. What is your lifestyle like?
Are you a nomadic person that’s always on the go or do you feel like you are ready to lay down roots? Some overlooked parts of homeownership are not just inside your home but outside in the community. When you lay down roots in one place you also get to know your neighbors, local businesses, and form friendships and a sense of community that is not often in place when you are renting short term.
4. Weigh the risks
As mentioned above, there are risks for both renting and buying a home. Although you can build equity when buying a home, there are some financial risks. For one, you could lose money if there’s a downturn in your local real estate market. Or, if you sell your home sooner than you want, you may not be able to make up for what you spent in closing costs or renovations.
Let’s not forget maintenance costs. These are expenses you’ll need to pay to keep the home in top condition. Think checking air filters and vents, testing fire alarms, landscaping, and fixing plumbing issues, among other things.
If you’re focused on other life goals, like a career that requires you to travel often, or if you have multiple young children to attend to, adding home maintenance to your list of responsibilities may not be the best choice.
On the flip side, renting means you won’t have the opportunity to build equity like you would with buying. Your rent could go up at any given moment. You’re also at the mercy of your landlord, such as being asked to move out or having to deal with maintenance requests being deferred. Having to wait on a third or fourth party to come to fix that leak or window is a major pain, renting does lack a lot of options for freedom and personalization. Many landlords do not want walls to be painting or any decorations hung up because it can cause delays in turnaround time when they need to prepare the space for the next renter.
5. Be realistic about your finances
It’s important to note that you need to be realistic about your financial situation when deciding between renting and buying. Once you estimate the costs of renting versus buying, be honest about whether you can afford other upfront costs like a down payment, repairs, moving costs, and buying new furniture. Consider using a mortgage calculator to estimate your monthly payments as well as how much home you can afford.
In either case, do some careful budgeting right now so no matter what you choose you’ll be able to afford a home or rent. Are you considering taking on a mortgage? Use our Mortgage Calculator and Affordability Calculator today!
Published on 2021-07-15 13:41:08