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It’s a common debate - should you buy or rent? Some people say renting is like throwing money out the window and others think buying is too expensive. Which makes more financial sense for your situation?
The good news is that it’s not a one-size-fits-all approach. Every person can decide for themselves which is right. The key is to understand the differences, the advantages/disadvantages of each, and the questions to help yourself decide.
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What Does It Mean to Rent?
If you rent, the landlord owns the property, and you pay them to live there. You can move when your lease is up or ask to renew it. You don’t build equity when you rent, but you also don’t have the responsibility for home renovations or taxes.
Landlords set the rent and parameters regarding who they will rent to and what they will allow on their property, such as pets, hanging pictures, etc.
The Advantages of Renting
Renting has its advantages, even though it’s not for everyone. Here are some positives.
- Renters don’t have to worry about the cost of home repairs, maintenance costs, or renovations. If something goes wrong, you call the landlord, and it’s their problem.
- It’s easier to move. You may want to find a location with a lower monthly rent or are moving to a new area. Regardless, if you don’t want to renew your lease, you can pick up and move in as little as a couple of days once your lease is up. As long as you leave the property how you found it, you should get your security deposit back too.
- You don’t pay property taxes. Instead, your landlord is responsible for the property taxes, saving you thousands of dollars a year depending on where you live.
- You know the exact cost of your monthly housing costs. Since repairs and taxes aren’t your responsibility, you are only responsible for the rent, which is fixed, making it easier to budget.
The Disadvantages of Renting
Like any financial decision, there are disadvantages to renting too. Here’s what you should consider before renting.
- You don’t build equity. Your payments go to the landlord, who uses the money to build equity in his home. When you move, you won’t have anything to show for the money you spent on your home.
- Your monthly rent could increase annually. Landlords can increase rent each year, and it can be high. Even if you move to another rental property, you don’t know how much the rent will be, making it hard to budget.
- You don’t get any tax incentives. Homeowners can write off mortgage interest and sometimes home renovations if they are energy-efficient, lowering their tax liability. Renters don’t get any tax breaks.
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What Does It Mean to Buy?
If you buy a property, you set up roots. You become a part of the community, and the house, its upkeep, taxes, and mortgage payments are your responsibility. Anything that goes wrong with the house is on your shoulders, but you get many tax benefits and earn the home's equity.
Unless you pay cash for the home, you’ll have a mortgage that you must keep up with or risk losing the house.
The Advantages of Buying
Buying has plenty of advantages that are worth understanding before choosing between buying and renting.
- Buying a house is an investment. Homes typically appreciate around 3.5% per year, which means your asset increases in value every year without doing anything. If you keep the property for five years, you could have some decent appreciation in your home price if you wish to sell.
- If you get a fixed-rate mortgage, your mortgage payments never change. This makes it easy to budget for the long-term and know that you can afford your housing payment.
- You can write off your mortgage interest and real estate taxes if you itemize your deductions. This can lower your tax liability and keep more money in your pocket.
- Homeowners have pride. When you own a home, you become a part of the community and feel like you can set down your roots and join arms with the community.
The Disadvantages of Buying
Just like renting has its downsides, so does buying a home. Here’s what to consider.
- Upfront costs. When purchasing a home, potential buyers not only have to account for the monthly cost, but save for closing costs, private mortgage insurance or homeowners insurance, and future property taxes.
- It’s a long-term commitment. If you decide you no longer want to live in the home or the area, you have to sell the house. This takes time and money. If you sell when values are down, you risk losing money.
- You’re responsible for everything to do with the property, including repairs, renovations, taxes, and insurance. You don’t have a landlord to call and help you - everything is on you. If you have questions or need counsel, you'll want to seek legal or tax advice from a professional.
- Property values don’t always increase. Certain areas can lose value, especially if something big happens in the area, such as increased crime or the school ratings go down. This could leave you with a loss on your investment if home prices drop.
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Questions to Ask Yourself to Choose Renting or Buying
Ask yourself the following questions before you decide if renting or buying is right for you.
Do I Have Enough Capital?
To buy a home, you need a lot of capital.
First, there’s the down payment. This is the money you put down at the closing to invest in the home. The mortgage makes up the difference between the sales price and your down payment. Some buyers need as much as 20% down, but buyers with good credit may get by with a lower down payment of just 5%.
Next, you must have enough money to cover your debts each month. Your debt-to-income ratio shows lenders how much of your income goes to the monthly debts, including the new mortgage. If your DTI (debts/gross monthly income) is over 43%, you may not qualify.
Finally, you need an emergency fund or reserves. This is money set aside to cover the mortgage payment and/or home maintenance should your income fall or stop. Most lenders like borrowers to have 3 - 6 months of house payments on hand, although many borrowers get approved without it.
Is My Credit Good Enough to Get a Mortgage?
Unless you’re paying cash for the property, you’ll need a mortgage. To get a mortgage, you must have decent credit.
You can pull your free credit reports here to see your credit history, but this won’t show your credit score. Your credit card company or bank may offer free access to your credit score.
It’s important to look at your credit history, though, to see how you could improve your credit score. For example, it could be harder to secure a mortgage if you have late payments, credit lines with over 30% of the balance outstanding, or short credit history.
If you have a low credit score, you may still qualify, but at a higher rate and/or worse terms. This means the mortgage would cost you more money, or you may not qualify at all.
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What Are My Future Plans?
If you don’t have plans to settle down in the area you’re looking to move to, buying might be a mistake. A good rule of thumb is to buy when you’re sure you’ll settle down in an area for at least five years. This gives you enough time to earn equity and walk away with a profit versus a loss.
If you like to move a lot, buying a house probably isn’t the best decision. Selling a house costs money, and it takes time. There’s no guarantee you’ll sell the house in a few weeks or even months.
Also, think about your lifestyle. Are you single now but plan to get married in the next couple of years? Even if you’re married, do you plan to have children or grow your family? How soon would you have to move to make your family comfortable if you buy a starter home?
This can affect your decision to buy or rent. If you know you’ll outgrow what you can afford to buy right now, renting may be the better option until you can afford to buy a house large enough to suit your needs.
There’s no right or wrong answer to should I buy or rent a house? You should do what’s financially smart for you and whatever fits within your plans. Renting doesn’t mean you’re throwing money away, and buying doesn’t make you ‘better.’
So which is the best option, to rent or buy? Do the math, think about your plans, and choose the option that’s right for you and your family.