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Renting vs buying Pros and cons
Pros Cons Buying May build equity that could be accessible through home equity products No landlord to answer to More stability (especially with schools) Possible tax benefits Can improve or upgrade home to your taste Requires substantial money, paperwork upfront Could lose money if home values decline Extra expenses beyond mortgage payments Rising home prices and low inventory in many markets Responsible for repairs, remodeling Renting Fewer upfront costs and paperwork Freedom to be more mobile Not responsible for maintenance, repairs No need to worry about falling home values Builds credit (if your landlord reports rent payments to the credit bureaus) No property tax bills Landlord could raise rent Might have to relocate on short notice if the landlord decides to sell the property Builds equity for the landlord Limited vacancies in competitive rental markets No tax benefits Less freedom in design choices (paint colors, appliances) Is buying cheaper than renting
The costs associated with renting vs. buying depend heavily on where you live and the local housing market. You can use to help you break down many of these expenses. Most rental properties require a security deposit, which protects the landlord against damage caused by the renter. You’ll usually put down the first and final month’s rent payments when you sign a lease. When evaluating a lease contract, ask whether your monthly rent includes utilities such as water, electric, gas or internet. Also, inquire about how the security deposit will be held and if it will accrue interest. For homebuyers, one of the biggest costs of homeownership is the . It includes principal and interest for the loan and could fluctuate over time if you have a variable interest rate. Your mortgage payment could also go up or down as property taxes or homeowners insurance premiums change. If you’re purchasing a property in a homeowners association, or HOA, you’ll need to factor in monthly . They generally cover landscaping, exterior maintenance and community amenities. Also, be prepared for , like maintenance and repairs, that come with homeownership, and don’t leave yourself without cash in the bank after closing. These costs catch many first-time homebuyers off guard and may lead to buyer’s remorse and financial distress. “During the homebuying process, the buyer will need to pay for a home inspection and for any quotes for repairs needed from contractors. They will also put down at least 1 percent of the sales price for earnest money,” says Michelle Hopson, a Realtor with Compass in Dallas. A — typically anywhere from 3 percent to 20 percent of the home’s purchase price — is another significant cost associated with homeownership. If you put less than 20 percent down, your lender will most likely require you to purchase , which increases your monthly payment. Your interest rate could also be higher with a lower down payment.
Differences between owning and renting
Renting versus isn’t just a matter of ownership. It can be a lifestyle choice as much as a financial one. Here are other key differences between the two options. Building equity
While buying a home to live in shouldn’t be viewed strictly as an investment, homebuyers can (or the home’s value minus what’s owed on the home) that accumulates over time. If your home value goes up, you’ll earn more when you sell. Plus, with a , you won’t have to worry about fluctuating monthly payments (as you could with rising rents). “In Dallas, where rents are high, it can almost be as affordable to purchase as to rent in many parts of the city,” Hopson says. “If you can qualify for a home and build some equity, that ultimately makes more sense than renting.” That said, and home values are starting to cool. A home purchase is a big commitment in any market, and you likely won’t accumulate a large amount of equity right away. Instead, you’ll build equity as you make payments and reduce your outstanding mortgage balance over time. If you decide to sell in the first few years, you likely won’t receive this benefit. In fact, with closing costs, it generally takes several years to recoup your money and see any equity gains. Tax implications
Another factor for prospective buyers to consider is potential tax benefits. If you itemize deductions, you could lower your federal tax liability by taking the mortgage interest deduction. , “you can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million [$500,000 if married filing separately]) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.” Deductions shouldn’t be the sole deciding factor, though, because your rent could end up being the same or less than the after-tax cost of homeownership. Property taxes depend on where you live and the appraised property of the home you buy, but they can be steep. Maintenance costs
Homes need repairs and maintenance over time, and when you’re renting, those costs are generally the landlord’s responsibility. For instance, in an apartment, if the HVAC system or refrigerator breaks, the landlord has to fix it. On the other hand, as a homeowner, you’ll be on the hook for those repairs and , and this can add up fast. Even if you’re handy and plan to do your own upkeep, you might not be able to commit to this maintenance over time. Katie Schanck, a Realtor with Keller Williams in Atlanta, advises her clients to factor in these costs when evaluating whether they can afford to purchase a home. Schanck encourages buyers to carefully review the seller’s disclosure and get a home inspection to be aware of potential red flags.
Should I rent or buy 7 key questions
The answer to the rent vs. buy debate isn’t cut and dried. Here are seven questions to ask when considering renting vs. buying: How much can you afford in monthly housing costs? Are you prepared for a long-term investment? How long do you plan to stay in the home? (One rule of thumb: If it’s less than five years, you might want to rent.) Do you want stability or flexibility? Can you afford home repairs/maintenance costs? What are your financial, career and family goals? (Do you plan to relocate for work? Go back to school? Expand your family?) Is homeownership in the neighborhood you want to live in affordable, or will you need to relocate? If you’re moving to an unfamiliar city, have an unstable job situation or don’t know what neighborhood will feel like home, renting for a period of time can be a great option. “During that rental period, people really get a sense for what they like or don’t like, and we can also start exploring different purchasing options during that time,” Schanck says. In addition, while no one has a crystal ball, it’s important to evaluate your current life situation and how much it’s likely to change in the immediate future. “I recommend clients who are going through life changes, like divorce or downsizing, to rent as a way to decompress before making a large purchase that may not be right for their new lifestyle,” Hopson says. Schanck agrees, urging her clients to think ahead: “I encourage clients who have a changing personal situation, such as getting married or planning to have a child soon, to look at properties they’re not going to outgrow quickly.” Another consideration: Can you afford a home that will fit your lifestyle in the next few years, or will a tight budget limit your options? For many people, renting or buying comes down to what they can afford at the moment. Bottom line
Ultimately, deciding between renting and buying a home is a personal choice. If you haven’t determined which is best, it may be helpful to who can help you weigh your options and make an informed decision. SHARE: Jennifer Bradley Franklin is a multi-platform journalist and author, often covering finance, real estate and more. Michele Petry is a senior editor for Bankrate, leading the site’s real estate content. Jeffrey L. Beal, president of Real Estate Solutions, has 40 years' experience in multiple phases of the real estate industry. Related Articles