There are numerous factors to consider as you decide whether homeownership is right for you. Reviewing your goals and putting together a solid list of pros and cons can help you decide whether to pay rent or make a mortgage payment.
Rent Vs. Buy: Pros And Cons Of Each
Maybe you’ve always dreamed of owning a home, or maybe a long-term commitment isn’t for you. Emotional aspects aside, your financial situation plays a big role in your decision-making process. Your current job situation and career aspirations matter, too.
Here’s an overview of pros and cons to consider that apply to most scenarios. Then we’ll take a more in-depth look at how they may impact you.
The Pros Of Buying
Purchasing a home has long been the American dream. It provides stability, a sense of community and hopefully, a nest egg for your future. It requires commitment, but the payoff can be well worth it.
It’s Your Investment
When you buy a home, it’s your investment and you get the benefits. The most significant one is home equity: the difference between what your home is worth and what’s left on the loan. You gain equity in two different ways:
- As you pay off your mortgage, you build equity in your home. That means the portion of your property that you truly own increases. You can tap into that equity for things like home renovations, paying off credit cards, and other expenses. When it’s time to move, that equity can become a down payment on your next home.
- You also gain equity when the market value of your home goes up. If homes in your neighborhood that went for $100,000 five years ago are now selling for $120,000, you’ve made $20,000 on your investment.
Monthly Mortgage Payments Are More Stable
There’s a reason fixed-rate mortgages are so popular: The amount of your monthly mortgage payment that goes toward principal and interest doesn’t change for the life of the loan.
That doesn’t mean your monthly payment won’t change. Most homeowners have an escrow account, an account your mortgage company keeps for you to pay your homeowners insurance and taxes. Part of your mortgage payment goes into your escrow account each month. When your taxes and insurance costs change, that part of your monthly mortgage payment goes up or down as needed.
But because your interest rate is fixed, part of your mortgage payment will stay the same. So you never have to worry about annual rent increases.
Homeownership And Tax Deductions
To encourage homeownership and the benefits it brings to communities, homeowners get tax deductions that renters don’t, like deducting the interest you pay on your mortgage and on property taxes. When you rent, someone else gets those tax breaks because someone else owns the property.
There are several tax deductions available to homeowners, both on federal and state taxes. Check with a tax professional to learn what deductions you may be eligible for.
The Pros Of Renting
The most recent U.S. Census showed that homeowners outnumber renters 2 to 1. Whether you choose to rent or do so out of necessity, you still get these benefits over buying.
You Need Less Money Up Front To Move In
You typically need 2 months of rent payments and a security deposit to move into a rental property. Of course this depends on the cost of rent and the price of homes in the area, but usually that’s less than what you need for a down payment and closing costs to purchase a home.
Fewer Expenses For Maintenance And Repairs
Paying for home maintenance and repairs are a fact of life for homeowners. And it’s not just the work: you also need the equipment, like a lawnmower. But when you rent, someone else cuts the lawn and if the hot water heater fails, you’re not responsible for the bill.
More Flexibility To Move
If you need to move across the country for your job, it’s generally easier to leave behind an apartment or rental home, both logistically and financially.
The Cons Of Buying
Don’t let the cons discourage you. The good news is there are a lot of options available to help you become a homeowner if that’s right for you. Here’s what makes buying more challenging than renting for some people.
You Need More Money Upfront
Times have changed, and you no longer need the traditional 20% down payment saved to get a mortgage if you qualify in other ways. But there’s no getting around it: Buying a home is a significant purchase compared to renting a house or apartment, so there are more fees and costs associated with it.
You Have To Take Care Of Your Investment
Sure, you need to keep your apartment or rental home in good condition, but chances are when the lawn needs mowing, someone else mows it. And when the lawnmower breaks, someone else repairs it because it’s not your lawnmower. Deciding whether you have the budget to maintain and repair your home, and the ability to do it or pay someone else, is a big part of deciding whether buying or renting is for you.
Less Flexibility To Move
In general, you’ll need to live in a home for about 5 years to recoup all the closing costs. And it takes more to sell and pack up a house than to leave an apartment behind. So spend some time thinking about your career and family plans.
The Cons Of Renting
Being able to move easily to a new area and having someone else handle most of the home maintenance are perks of renting. But you pay someone else for those perks, instead of yourself. Here are the cons of renting you should consider.
You’re Someone Else’s Investment
When you buy a home, as you pay off the mortgage you’re not just paying the lender. You’re paying yourself, because you own more and more of your home. And if the home’s market value increases, the profit from your investment is yours.
You can pay rent for months and even years, but when the lease is up, you have nothing to show for it. All your money went into someone else’s pocket.
Your Monthly Payments Aren’t Stable
Get a fixed-rate mortgage, and you know a portion of your mortgage payment stays the same, even after 30 years. Rent an apartment, and you don’t have that same control over your monthly payments. A landlord or property management company decides went rent goes up and by how much.
Fewer Tax Deductions
Just as the apartment, condo or home you rent is another person or company’s investment, they also get most of the tax benefits, like deductions. You may be eligible for a few deductions, even if you rent; ask a tax advisor to see what’s available.
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Should You Rent Or Buy?
Now that you understand the pros and cons of each option, you should have a better of idea of what might work for you. There are a couple of other things to think about that may affect your decision.
You’ve Got Your Eye On A Popular Neighborhood
Many times, the neighborhood matters more than the square footage of a house. Maybe you want a certain school district, or the walkability of the neighborhood attracts you. Chances are that if you want to live there, so do many others.
If it’s a desirable location, renting could be a good way to gain access to a neighborhood and put you in a better position to eventually buy. There’s a reason that location is everything in real estate.
Know The Total Cost Of Homeownership
Many people look only at the rent or mortgage payment each month when they determine which way to go. If monthly costs are comparable, homeownership tends to win. In order to accurately compare the financial impact of renting and buying, look at the total cost of homeownership and the quality of life it affords you.
There are costs to owning a home you don’t pay when renting, such as homeowners insurance, home maintenance and repairs.
There’s no right answer when it comes to renting versus buying. It’s going to boil down to your unique situation. Your financial situation and future plans can help you figure out if buying or renting is right for you.
If you choose the homeownership route, early preparation is key. The earlier you plan for the transition, the better off you’ll be. Rocket Mortgage® by Quicken Loans® can help you when you're ready.
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