Perhaps the biggest financial decision we make in life is whether to buy or rent a home, be it a house, townhouse, condo, co-op or multi-family dwelling. It is not a decision to be taken lightly and it involves numerous factors, including for new or expecting parents who may need more space and are looking to provide stability for a growing family.
Every family’s situation is unique. There isn’t a one-size-fits-all answer. When deciding between renting vs. buying a home, and the timing, start by asking yourself the following questions:
- How long do I plan to live in this location?
- What are my future plans, both short-term (within the next 5 years) and long-term (five or more years from now)?
- Do I have enough money to buy a home or would I need to get mortgage financing, and do I have enough additional money to cover expected and unexpected expenses?
In addition, consider the following:
Benefits of Home Ownership
- Builds equity. As long as your home maintains its value, you’ll be building equity while you pay down your mortgage.
- Tax deductions. When you itemize Federal income taxes, you may be able to deduct mortgage interest payments and/or property taxes.
- Possibility for stable mortgage payments. If you choose and quality for a fixed-rate mortgage, such as a conventional 30-year fixed, your monthly payment will remain the same for the duration of your mortgage.
- Possible future source of income. Down the road, should your plans change and you need to move, you may decide to rent out your home and receive monthly rental income.
- Greater freedom to remodel. When you own a house, you don’t have to get permission from a landlord in order to paint your walls. If you have the money and are in compliance with building and zoning and other town codes, you have the freedom to knock down walls, add additional rooms, or make other structural or aesthetic changes. If you own a condo or co-op, Board permission may be required and there may be limitations on the kind of changes you can make.
- Pride of ownership. This is a major reason why people buy a home, yet it’s good to remember that home ownership is not for everyone.
Financial Downside of Home Ownership
- Initial cash outlay. To buy a home, you’ll need upfront funds for a down payment, closing costs, insurance, and other homeownership expenses.
- Insurance. Your mortgage lender will require you to have homeowners insurance. Depending how you score for the all-important debt-to-income ratio, you also may have to pay private mortgage insurance premiums in addition to your mortgage payment and homeowners insurance.
- Cost of ongoing maintenance and repairs. Most homeowners will tell you that it’s wise to keep an emergency fund for expected and unexpected expenses, such as for appliance repairs, replacing a water heater, repainting the exterior, or installing a new roof. When you’re a homeowner, keeping your home in shape is your responsibility. Maintenance and repairs that are postponed can become more costly to address later on.
- Property taxes. They can increase, so it’s important to make sure that you have a cushion in your monthly budget to help anticipate any fluctuations.
- Decrease in home value. Many factors contribute to a home’s value. There is no guarantee that your home will increase in value over time. The real estate market is fluid, constantly changing, and cyclical, and can turn on a dime, for better or worse.
Benefits of Renting
- Usually no maintenance costs. In most rental scenarios, if something in your home requires maintenance, it could be as simple as calling your landlord or superintendent to have it repaired.
- Greater flexibility to move. If your future plans are uncertain or could change, it may be easier to depart at the end of a lease or to renegotiate the terms of a rental agreement or, if allowed, to sublet a rental, than it could be to sell your home.
- Getting acquainted with a region, town or area. If you’re new to an area, renting allows you to get to know the area before committing to buy.
- Avoid owning an asset that could depreciate. As noted above, there is no guarantee that a home will increase in value over time.
Financial Downside of Renting
- Inability to control your rent. Rents can go up, even yearly, and sometimes significantly. Once your lease ends and if you decide to renew, your landlord may want to increase your rent.
- Does not build equity. Renting may put a roof over your head, but it’s not an asset that has the potential for increasing in value over time.
- No mortgage or property tax benefits. They’re for property owners, not renters.
- Possible out-of-pocket expense. Renters usually need approval from their landlord to paint or to upgrade appliances. If you want to make changes or upgrades to your rental home, you’ll likely have to get permission from the landlord – who may require that you pay for them yourself.
- Money down the drain. Many people consider rent money as well as any tenant-paid upgrades as “money down the drain.”
- It can be more expensive to rent than to buy. Depending where the real estate market is at a give point in the real estate cycle, you may miss a window of opportunity for buying a home that historically comes only a few times in a lifetime.
To better evaluate your particular situation, consult an accountant and/or an attorney, and subsequently an experienced realtor and a mortgage lender.