Owning your own home might be one of the defining qualities of the “American Dream”.This set of ideals includes the opportunity for prosperity and success. And upward social mobility for the family and children achieved through hard work. Certainly, homeownership is ingrained as one of the strongest representations of that vision. Interestingly, many Americans own a home, and more hope they will or wish they did. In this article you learn which is better – the decision to own vs. rent a home.
Something about homeownership plucks a strong chord with Americans. Perhaps it’s because financial security, permanency, status, and pride are values many of us seek.
But lifestyle plays a big role in the decision to own vs. rent a home. Most times, a household formation like marriage and growing a family drives the decision to buy a house.
Typically, people over 35 years old own homes, more so than people who are under 35 years old. Most young people begin their independent lives by renting an apartment. It allows them to maximize lifestyle flexibility, and minimize the hefty upfront costs associated with purchasing a home.
However, as they build their careers, save money, and start families, they may make the decision to own vs. rent a home. Many choose to buy a home, recognizing that homeownership, as opposed to rental living, is more appropriate to their growing family needs.
But at the other end of the age spectrum are homeowners nearing retirement. These people may decide to sell their homes, downsize, avoid the maintenance and other obligations, and go back to renting.
Read Also: What are the Hidden Costs of Owning a House
The Decision to Own vs. Rent a Home, Which is Best?
Are you still trying to know the decision to own vs. rent a home, which is best? Surprisingly, adults ask themselves this at some point as they form their goals and plan for the years ahead. But before you answer the question, here are some things to ask yourself.
Owning and renting each has its advantages, but what’s best for you depends on your circumstances.
What will be the duration of your stay in the home?
Every market is different. But it’s possible to predict whether you are going to spend enough time in the house. And if you will, buying it would be a great idea.
Generally, it takes four to seven years to break even in a home. That’s when there has been enough appreciation to pay back the cost of the transaction and the cost of ownership.
However, If you’re thinking of buying a home and selling it in two years, buying is very unlikely to be cheaper than renting.
Do you think of or need your house as an investment in your retirement plan?
Americans are used to their homes being a store for wealth to liquidate in retirement when downsizing their lifestyle. However, it’s important to note that even though the prices of homes continue to rise, the value can fall at any time. So, invest in real estate with caution.
Are you financially ready?
Before you start analyzing your decision to own vs rent a home, you should be financially ready. For instance, owning a home is a huge financial commitment. And it requires you to plan how homeownership fits into where your life is headed.
Consider your budget and see whether the decision to own vs. rent a home would require you to stretch your finances.
Crunch all the numbers. A frequent mistake of first-time homebuyers is comparing a month’s rent to a month’s mortgage payment.
Sadly, many people don’t have all the numbers before buying a home. And they end up getting stuck along the line.
There are many additional fees necessary to include in order to make a fair comparison. Some of these are principal, interest, property taxes, property insurance, homeowners’ association (HOA) fees, and ongoing maintenance.
Can you make a down payment?
When making the decision to own vs. rent a home, you should consider whether you can make a down payment.
A down payment is the lump sum payment that funds your equity in the property when making a purchase. It tells you how much of the property you actually own.
Down payments vary; 20% is preferred and gets the best rates. There are some loans that allow down payments as low as 3%.
Sometimes relatives help with the down payment. If you have a choice, take a gift rather than a loan. That’s because lenders will add the loan debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio. And it generally can’t top 43% to qualify for a home loan.
Can you afford the monthly mortgage and its components?
Generally, a mortgage includes loan principal and interest. And this includes both amortized over the life of the loan plus homeowner’s insurance and property taxes (prorated). So, these items can affect the monthly loan-only payment by several hundred dollars.
Are you emotionally ready? Can you handle the stress?
A big factor to consider when buying a home is stress. The Holmes and Rahe Stress Scale, a landmark stress study, ranks many events that go along with buying a home in the top 43 most stressful circumstances in life.
Surprisingly, four events are specifically home-related: change in financial state (No. 16), large mortgage or loan (No. 20), change in living conditions (No. 28), and change in residence (No. 32).
If someone has recently made other life changes, such as marriage (No. 7), switching careers (No. 18), or having a child (No. 14), it might be wise to postpone buying a home.
Unfortunately, stress overload can lead to missed payments, which can result in destroyed credit or even losing your home. So, It’s better to rent if your life is in flux and then buy when your stress levels are lower.
Are you ready for commitment?
Are you ready to make lots of decisions, from picking a real estate agent to picking paint colors?
Do you have enough confidence to choose a neighborhood where you believe home values will continue to appreciate? Also, such a neighborhood should serve your needs (i.e., proximity to schools, shopping, recreation, etc.).
Do you have enough time and attention to maintain a home (i.e., leaf-raking, grass-cutting, appliance maintenance, and home repairs, etc.)?
Taking care of your biggest investment can be gratifying, but only if you’re ready.
ADVANTAGES OF BUYING YOUR HOME
Still struggling with the decision to own vs. rent a home? Well, let’s start with the advantages of buying a home.
Control over housing expenses.
Buying a home gives control over housing expenses. For instance, if a person selects a fixed-rate loan, like a 15, 20, 25, or 30-year mortgage plan, he or she has the assurance that the housing cost won’t increase over time.
In fact, the cost could be eliminated at the end of the term. However, it’s subject to refinancing.
You build equity.
Equity building is another advantage of buying a home. And you should consider it when analyzing the decision to own vs. rent a home.
Some of the monthly mortgage payment goes towards loan interest. However, other portions may go to homeowner’s insurance and county taxes.
And the remainder pays down the loan principal. So, every dollar put toward your loan’s principal represents a dollar of equity — actual ownership of the property.
Furthermore, the property should appreciate in value each year, thus, adding to equity. That’s what the house could be sold for versus what is owed on it.
Discounting certain blip periods, such as the 2006 housing bubble burst, home prices in the U.S. appreciate nationally at an average annual rate between 3% and 5%. But home value appreciation in different metro areas can appreciate at markedly different rates than the national average.
Improvements increase your home’s value.
A homeowner can also increase a home’s value through home improvements, thus making your home more comfortable. It would also make your home enjoyable while growing its loan-to-value (LTV) ratio.
For instance, adding a bathroom or finishing a basement increases the property’s functionality and appeal, while potentially boosting its value.
Tax advantages of homeownership.
There are significant tax benefits associated with buying a house, both at the time of purchase and for the duration of time you own the home.
Current mortgage rates are relatively low.
Interest rates vary through the years. Several years ago, interest rates were higher, and it was more expensive to obtain a mortgage. Since these costs have been reduced, it’s now easier and less expensive to own a house.
Ownership rights and creative freedom.
Your decoration and home-improvement choices are also an advantage. You can choose to improve your home the way you like. But the decoration must not break building codes or violate homeowners’ association rules.
You can paint walls any which way, add fixtures, update or finish your basement, or build a patio or deck. Changing your environment to suit whims is a freeing aspect of homeownership.
A sense of belonging to the community.
Homeowners tend to stay in homes for longer than renters and are more likely to grow roots. They might join a neighborhood association, volunteer at a nearby community center, join a school group, or align with a business improvement district.
However, renters might not do any of those things, particularly if they know their lease is up in a year and they might move.
There’s an intangible pleasant feeling attached to owning your own house. It gives you a sense of freedom and independence. The home you live in belongs to you, and you can do what you want with it.
You aren’t daunted about increases in rent or losing the lease. You’re free to make improvements and changes.
Also, owning your home gives your children the guarantee of attending the schools in the area on a more permanent basis. Of course, you never need to worry about a notice from the landlord to vacate your rented house or apartment.
ADVANTAGES OF RENTING
When analyzing the decision to own vs. rent a home, it’s important to also look at the advantages of renting.
It may seem like a shorter list, but one man’s pro is another man’s con. So, here are some of the advantages of renting a home;
No responsibility for maintenance.
Admittedly, this is a big one. As a renter, you’re not responsible for home maintenance or repair costs.
If a toilet backs up, pipe bursts or an appliance stops working, you don’t have to call an expensive repair person. You just call your landlord or superintendent. Renters in condos, townhouses, or apartments don’t have lawn and grounds care obligations.
Relocating is easier.
When renting, relocating for work is easier. Though a sudden move may require you to break your lease. But you can partially offset the cost by subletting your apartment or talking with your landlord.
On the other hand, selling a home takes time and effort. If you have a short timeline to sell your home, you may be forced to accept a lower price and lose some of your investment.
No real estate market exposure.
Home values fluctuate and can decline over time. But If you’re a renter, that’s not your problem. If you’re an owner trying to sell — it is.
DISADVANTAGES OF OWNING
It’s also important to look at the disadvantages of owning a house when analyzing the decision to own vs. rent a home.
The renter’s largest advantage might just be the homeowner’s major disadvantage. While insurance might be available to protect against expenses from a major catastrophe, usual maintenance items are on the homeowners’ dime.
Maintenance and repair can be as simple as repainting the baseboards. And it can also be as extensive and expensive as replacing an HVAC system or sewer pipe. The expense will vary from year to year.
However, you can expect to pay about 1% of the value of your home annually toward these expenses.
For instance, If you live in a $200,000 home for 10 years, that’s $20,000 over the period. And perhaps more if you must replace a costly, long-lived mechanical item, like a furnace.
Keep in mind the usual homeowner’s chores of lawn care, snow removal, gutter cleaning, and other regular home maintenance needs.
Upfront and closing costs.
Buying a home entails numerous upfront costs. While you can pay some out-of-pocket after the seller accepts your purchase offer, others are paid at closing. These include earnest money, down payment (typically ranging from 3.5% for FHA [Federal Housing Administration] loans to more than 20% of the purchase price), home appraisal, home inspection, property taxes, and first year’s homeowner’s insurance.
Loss of relocation flexibility.
It’s much easier to break a lease and move out of town than to arrange for the sale of a residence. Selling the home from out of town involves special logistics and financial matters, such as dealing with the mortgage while the home is on the market.
Financial loss potential.
When analyzing the decision to own vs. rent a home, you should look at the potential financial loss.
Ordinarily, homeownership builds equity over time. However, equity doesn’t equate to profit. If home values in your area go down or remain stagnant during your time as a homeowner, the appraised value of your home could decrease, putting you at risk of a financial loss when you sell.
DISADVANTAGES OF RENTING
No equity building.
The monthly rent you pay goes to the landlord. It represents the fee you pay for using the property. You gain no ownership in the property, no matter how long you live there.
No tax benefits.
While homeowners can deduct property taxes and mortgage interest on their tax returns, renters aren’t eligible for housing-related federal tax credits or deductions.
Home improvements go to the landlord.
Any structural and decorative home improvements that renters make belong to the building owner and will have to stay behind when you move to a different place. Additionally, approval for desired major redecoration will be necessary.
After all is said and done, the decision to buy vs. rent a home depends on the prospective home buyer’s circumstances. There’s no denying, though, that a home of your own is a good financial and a great emotional investment. An investment in a home can also mean an investment in your future.
There is much to consider when you want to buy a home. Switching from renting to homeownership is highly challenging, but an exciting and amazing decision to make.