How to determine when to stop renting and buy a home
If you are planning on moving in the near future, you are likely wondering about the comparative benefits of renting and buying.
Here are a few things that you should consider when trying to determine if you should keep renting — or say “sayonara” to your landlord and purchase your own property.
Benefits of buying
If you are a renter, your landlord could decide to sell the property, raise your rent or change the terms of your lease at the time of renewal. Buying a home, on the other hand, gives you stability in knowing that no unexpected moving situations will be forced on you in the future.
In addition to stability, you also gain a sense of autonomy as a homeowner. You don’t have to ask permission to decorate or renovate, so you can create an atmosphere that matches your style and personality. After years of renting, many people become tired of not having the freedom to decorate as they please, which can be incentive enough to consider buying. Furthermore, you can change the landscaping to suit your taste and needs, even adding a vegetable garden to improve your recipes and reduce your food budget.
In addition to these personal and emotional advantages, there are many financial benefits to buying. New homeowners are often surprised by the size of the tax benefits they receive.
“As a homeowner, you are able to deduct many home-related expenses,” states Taylor Schulte, CFP®, founder and CEO of Define Financial, in an article on Kiplinger.com. “And, unless you owe more than $1 million, all the interest you pay in your mortgage payment is tax-deductible.”
You also build equity as a homeowner as you pay down your mortgage, and paying it off completely is a great way to keep costs reasonable in retirement. Building equity gives you the option to seek a reverse mortgage in the future and can help you get a better loan rate on a personal loan, should you need one for renovations, starting a business or purchasing a car.
Benefits of renting
While buying gives you stability, renting gives you flexibility. If you are considering changing careers, flexibility can allow you to seize the perfect opportunity, without having to wait to sell your home if the commute is too long. Renters can also easily move to a less expensive area or property if they need to cut costs while job searching or starting a business.
While a monthly mortgage payment may be comparable to or less than what you would pay to rent, homeowners quickly discover that purchasing a home includes many more costs and fees, such as those associated with obtaining a mortgage and working with a realtor.
There are also ongoing costs, including property taxes, homeowners’ insurance, and maintenance costs associated with the landscape and physical property. A renter is also not likely to be held responsible for unexpected expenses such as broken pipes, roof repairs, damaged driveways and gutter maintenance, just to name a few.
Another financial benefit of renting is the ability to build credit. So if you aren’t able to qualify for the interest rate you desire, continuing to rent is a great option.
“While renting doesn’t boost credit the same way owning a home often can, creating a history of on-time rental payments can, in some cases, help build your credit to qualify for a mortgage down the road,” states Schulte. “This history can be created when (and if) your landlord reports your payment data to the credit agencies.”
“The arguments in favor of ownership are persuasive, particularly for people who expect to stay in place for at least five to seven years but probably more,” according to Tara Siegel Bernard in a 2016 article for the New York Times. “A mortgage acts like a forced savings plan, even if you’re paying the bank hundreds of thousands of dollars in interest for the privilege of building equity.”
This point was illustrated in a 2014 study from HelloWallet, a unit of Morningstar. It created a financial model for the housing markets of 20 major cities in the United States, projecting how hypothetical families with moderate income levels would fare financially if they bought a house versus if they rented.
“The study projects that median-income families, or those who earn about $50,000, will often end up with more net wealth if they rent versus own over the 10 years from 2013 to 2022,” states Siegel Bernard. “But any number of variables can quickly shift that calculus, including the price of the home relative to the rent, whether the family is affluent enough to benefit from tax savings, and the time spent in the home.”
If you are still stumped, talking to someone at your financial institution can help you assess what type of mortgage you could currently qualify for and what type of home you can expect to find with that mortgage. Comparing that with your current renting situation may help tip the scales in one direction or the other.Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.