Buying a home has long been a piece of the American Dream. Not only does it signal security as an investment, but also represents the freedom that comes along with ownership. For many, buying a home is one of the biggest decisions they will make in their life. Home ownership is not for everyone though. For some, renting a house or apartment is a better choice due to affordability or frequent job relocation. With housing prices having dropped drastically in recent years and mortgage rates still at historic lows, now is the time to thoroughly analyze whether buying or renting is the best choice of housing. In general, if you are certain that you will live in the same place for the next five to seven years, buying can have a significant financial and personal advantage to renting. But it’s not always that simple. Let’s take a look at the pros and cons of both alternatives.
Renting can offer a few advantages over buying. These include little to no responsibility for maintenance, ease of relocation (providing one is not in the middle of a lease), and even lower monthly costs than buying a house in the same area. The disadvantages of renting include no tax benefits, no equity buildup, no control over rent increases, and possible eviction.
For many, buying offers more advantages over renting. Instead of paying a landlord once a month for rent, your mortgage payment is paying down your debt of ownership. Owning a home is an investment as the property builds equity over time. A rented property also builds equity, but unfortunately this is only for the owner. Another advantage is that mortgage payments (assuming a fixed rate) remain the same over time while rent increases by an average of 3-5% / year. As a homeowner, you are free to change the décor and landscaping. Ownership also brings about a sense of community, stability, and security. Finally, there are great tax benefits for home ownership. The disadvantages of buying include payment of property taxes, responsibility for maintenance, risk of foreclosure, and less mobility.
After looking at the pros and cons of each. Let’s take a look at the possible savings associated with buying. The chart below shows a cost comparison for a renter and a homeowner over a seven-year period.
- The renter starts out paying $800 per month with annual increases of 5%.
- The homeowner purchases a home for $110,000 and pays a monthly mortgage of $1,000.
- After 6 years, the homeowner’s payment is lower than the renter’s monthly payment.
- With the tax savings of homeownership, the homeowner’s payment is less than the rental payment after 3 years.
Over the last year, there has been an upward trend of renters making the big jump into ownership. This is not surprising considering where home prices were, say, five years ago, and the fact that interest rates are still at historic lows. For many renters, now is the time to consider what was previously simply an unaffordable proposition.