When to Rent, and When to Buy?
Renting and owning are different in almost every aspect of what it means to obtain a place to live. The responsibilities of renters are not the same as owners. The costs are not the same nor are the rewards. Lifestyles, goals, and needs often differ as well. Understanding the cost, and value of each option will help you decide what is best for you and your current situation.
Monthly housing payment
Homeowner. You make a mortgage payment which is a combination of interest and principal on the loan you take out to purchase your home. In most cases, your mortgage payment is set for 30 years and does not change. After 30 years, your loan is paid off and you own the property outright. Besides a conventional 30-year-fixed-rate mortgage, you may want to consider an adjustable-rate mortgage or one of several other types with different terms and features.
Renter. You make a monthly payment, called rent, to your landlord or a rental company to live in a house or apartment. This money helps pay for all the costs the rental company has including repair and maintenance. You don’t own the property. You borrow it for a month at a time. In order to remain where you are, you must continue to pay rent.
Mortgage interest
Homeowner. If interest rates go down you have the option to refinance your original loan and lower your house payment. You can also deduct interest payments on your taxes each year (but only if you itemize rather than taking the standard deduction).
Renter. Not applicable.
Property taxes
Homeowner. You pay local property taxes to the taxing authority which you can deduct when you file your income taxes (up to $10,000). If you fail to pay property taxes, you can have a lien taken on your property and eventually lose the property to foreclosure.
Renter. You don’t typically pay property taxes directly although your landlord may stipulate you do so as part of the lease. If so, you can deduct that amount on your income taxes, just like a homeowner can. Most often what happens is landlords include taxes and other costs when calculating the amount of your rent. Those costs are not deductible by you.
Maintenance
Homeowner. You bear the cost of maintaining the home you own. This could include anything from replacing a roof, buying a new water heater, and repairing a damaged driveway. If something breaks down, as the homeowner you have to fix it.
Renter. You are not responsible for maintaining your house or apartment when it comes to replacing owner-provided appliances, fixing plumbing issues, painting, or remodeling. As with taxes, your rent may include the landlord’s estimate of the cost of maintenance but in the end, the landlord is legally required to maintain the property.
Insurance
Homeowner. Homeowners insurance has to cover the dwelling including damages caused by water or fire and all of your personal belongings. It must also provide liability coverage. Because homeowners insurance has to provide so much more coverage than renters insurance it can cost up to eight times the cost of a renters policy.
Renter. Renters insurance is less expensive than homeowners insurance because it only covers the cost of your personal property, not the building where you reside. It also includes personal liability insurance in the event someone is injured on the property and it is your fault.
Equity
Homeowner. Since you own the home, any appreciation in value (equity) is yours. Most homes rise in value over time though, like all investments, can also fall in value. When you sell the home, you can cash in that equity as profit. You don’t have to wait until you sell to take advantage of equity, however. You can borrow on the equity you have accumulated through a variety of loan options including a home equity loan, home equity line of credit or HELOC, or a cash-out refinance of your mortgage loan.
Renter. Not applicable.
Lifestyle
Homeowner. If you like the area where you live, are generally ready to settle for at least three to five years, put down roots, and keep the same job, being a homeowner may be a good fit for you.
Renter. If you long to live elsewhere, lack job security, are not ready to stay in place for at least three years minimum, renting may make more sense for you right now.
Finances
Homeowner. To buy a home, you need to employ a lot of financial leverage. Your 20% down payment and good credit score become the leverage that gets you a loan for a property worth many times the amount you shell out. To have that leverage your financial house needs to be in order. You need that down payment, good credit, solid employment, and the financial wherewithal to make house payments on time for the foreseeable future.
Renter. The financial standards for renting are not as strict for renters, but they aren’t non-existent. To rent a home, you need the amount of the deposit, good credit, and the ability to make rent payments on time.
Once you understand the difference between these options, ask yourself where you fit. If you are unsure about your current situation, connect with a lender. They can help you understand what and if you qualify to buy, and you can then make an informed decision.
