Extremely low mortgage rates and rising apartment rents in many cities have led some people to dive into homeownership more quickly than they’d originally planned. However, others are choosing to wait until the housing market recovers, in spite of the incentives to buy. The truth is, there’s no one right answer when it comes to determining whether to rent or buy a house.
There are a number of considerations you must make when making this decision. Renting and buying both present a number of pros and cons, and your own financial situation may be the biggest factor of all.
Pros & Cons of Renting
Despite the fact that you can’t build equity, renting offers you the most freedom and flexibility, especially if you are on a month-to-month lease.
Advantages
· No Maintenance Is Required. If the garbage disposal breaks or you need a plumber, getting maintenance is as easy as calling the superintendent.
· It’s Easier to Move. If you are not settled into your career or could have an opportunity to relocate in the near future, it is much easier to switch to a month-to-month lease or sublet than it is to sell your home.
· You Can Avoid Owning a Depreciating Asset. While home prices have stabilized and are rising in most housing markets, there’s no guarantee that your home will increase in value over time.
Disadvantages
· Your Monthly Payment Can Increase. Rents have been rising in many cities, so you may be facing an increase in your monthly housing payment as soon as your current lease ends.
· You Don’t Build Equity. When you rent, your housing payment provides you with a place to live, but will not provide you with an asset to sell when you are ready to move.
· You Don’t Receive Tax Benefits. Homeowners can deduct their mortgage interest payments and their property taxes from their federal income tax, which reduces the final cost of homeownership. Renters cannot deduct any of their housing expenses
· You Can’t Paint or Remodel Without the Owner’s Approval. While some landlords are kind enough to let you paint your apartment, you’ll have to get their permission and consult on the color. If you want to make other changes or upgrade an appliance you’ll have to put in a request with your landlord or apartment manager.
Pros & Cons of Buying a Home
Homeownership is not for everyone, but there are some financial and emotional advantages that can be enticing.
Advantages
· You Can Build Equity. Historically, homes rise in value anywhere from 4% to 6% per year. Even if your home doesn’t increase in value, though, you’ll be building equity as you pay down your mortgage as long as your home maintains its value.
· You Can Take Advantage of Tax Breaks for Homeowners. Homeowners can deduct their mortgage interest payments and property taxes when they itemize their federal income taxes. These deductions offset the cost of your housing.
· Your Housing Payments Will Stay Stable. If you choose a fixed-rate mortgage, your principal and interest payments remain the same for the duration of the loan. However, your homeowners’ insurance and property taxes can change.
· You May Be Able to Use Your Home as an Investment. If you buy a home and choose to leave it, you can rent it out rather than sell and generate income. This works best if you can cover your mortgage (or more) with rental payments. With this in mind, it pays to choose a home that will make a good rental property in the future.
· You Can Settle in a Community. Once you commit to owning a home, you are more likely to become more involved in your community because you know you’ll be there for years. You can get to know your neighbors, perhaps join a homeowners’ association, or volunteer for projects that benefit the community or the local school.
· You Have the Freedom to Decorate as You Please. One of the joys of homeownership is the ability to change your environment to suit your tastes. Of course, if you live within a development with a homeowners’ association you may have a little less freedom with your home’s exterior, but you can still paint your kitchen purple if you like.
Disadvantages
· You Have to Pay for Your Own Maintenance. As a homeowner, you must spend time and money keeping your home in good repair. You need to set aside funds for unexpected expenses, such as appliances that break, a service contract on your furnace, or the need to replace your windows.
· Your Home Is an Illiquid Asset. If you would need to sell because of a job relocation or change in your circumstances, you may not be able to sell your home as quickly as you would like or for as much money as you want.
· You Must Pay Property Taxes. Property taxes can go up, making your home less affordable.
· Your Home Could Lose Value. As many people have learned the hard way, there’s no guarantee that your home will increase in value over time.
· Buying a Home Requires a Cash Investment. You need to use up your savings for a down payment and closing costs and for other expenses of homeownership. That cash won’t be available for other investments.
· Homeowners’ Insurance Is Mandatory If You Have a Mortgage. As a renter, renter’s insurance is recommended but not required. Your lender requires you to insure your residence, and typically you have to pay those insurance premiums along with your mortgage payment.
