Buying vs Renting a Home
Does it make more sense to rent than to buy? The right answer can vary from person to person.There may be times in your life when it does make more sense to rent. There will also be times when buying is the financially sound decision. The key is to look at your situation and the housing and rental markets before deciding which option is best for you.
It sounds corny, but owning a home largely remains part of the American dream. According to the November 2021 Home Purchase Sentiment Index conducted by Fannie Mae, 74.7 percent of respondents think owning a home makes more sense. They cite protection against rent increases and the long-term investment value of a home purchase as important reasons.
The MarketsThe fortunes of the housing and apartment markets are always in flux. One year, the housing market might see rising prices. The next, apartment rents might increase. Before deciding whether it makes more financial sense for you to own or rent, make sure to consider market factors.
The National Association of Realtors' latest report states that the median sales price of existing homes stood at $356,700 towards the end of 2021. That is a 15.4 percent bump from the prior year. At the same time, mortgage interest rates have continued their moderate rise. According to Mortgage News Daily, the average interest rate on a 30-year fixed-rate mortgage loan was at 3.26 percent at the end of 2021. The prior year rate was 2.80 percent.
Pros and Cons of RentingYou might be better off renting an apartment when you are just entering the workforce or are moving to a new city.
If you haven’t had time to build your savings through a steady paycheck or are working to pay down student loans, you may not have down payment funds available. For a moderately priced house of $200,000, a 5 percent down payment requirement comes out to $10,000. It might make sense to rent until you can save that down payment money.
You may also be new to an area and want to try out different parts of the city before you commit to a home.
Your credit score and debt to income ratio are important factors for both renting and purchasing a home. Lenders depend on your credit score for loan approval and interest rate determinations. If you have a history of missed or late payments and high debt, your credit score might be low. Lenders reserve their best interest rates for those borrowers who have FICO credit scores of 740 or higher.
Renting also makes sense if you prefer the freedom of not having to do lawn work or home maintenance. When the heat goes out when you are renting, you call your landlord. When it goes out when you own a home, you call a contractor and must foot the bill on your own.
There are some disadvantages to renting, however. First, you are at the mercy of the landlord, who can steadily raise your rent each year. You will also never know if the apartment you will be renting will be directly under the noisiest family in your building. You also often have restrictions on how you can paint and decorate your apartment. You will never build up equity when you continuously rent.
Pros and Cons of OwningOwning a home also comes with its pros and cons.
On the pro side, when you own a home, you build up equity as you pay down your mortgage loan. You can borrow some of that equity through a home equity line of credit, or HELOC, to pay down credit card bills, help cover your children's college costs or fund a home renovation. Just remember you have to pay it back.
If you decide to downsize in retirement, you can sell your home and take the profits from the sale to buy either a less expensive, smaller house or condo, or make a trip around the globe. Owning gives you that financial freedom.
Owning also comes with tax benefits. Each year you may be able to deduct the interest you pay on your mortgage loan.1
When you own, you can do with your house what you would like within the bounds of zoning laws and HOA regulations. You can paint your bedroom red, renovate your bathroom or convert the space above your garage into a home office. The choice is yours.
Owning, though, is not all positives. You will have to pay property taxes. You will also be responsible for any repairs that pop up. With the possibility of leaking roofs, burst pipes, and sinking foundations, you it’s a good idea to budget money for potentially expensive repairs.
The decision to buy or rent is a big one. It is essential to look at your own financial and personal situations to make the right choice.