Is Owning Better Than Renting A Home?
First time home buyers are often confronted with the question of whether to buy or keep on renting a home. The answer to this question is not straight forward, and it is usually dependent on a number of factors.
Some people base their decision purely on emotions. Individual lifestyle is a very important factor to consider. The desire to have a settled family or the fear of entering into a serious financial commitment are part of the factors that influence some in deciding whether to buy or rent a home. On the other hand, it is a rational decision for others, and they rely on numbers and hard facts in making their decision.
No matter the group you belong to, there are many books, websites, calculators, and blogs providing guidance on how to make this unique and important financial decision of your life. An example is a SmartAsset calculator which will take you on a case by case basis in guiding you to provide answers to the financial questions arising.
However, in order to assist first time buyers in making this important financial decision without having to go through complicated formulas and questions on this subject matter, the following criteria can be assessed before a decision is made:
Your Personal Finances
Your personal finance is the most important factor in making this personal financial decision. You can take advantage of low mortgage rates if you have a good credit score. Owning a home will also enable you to take advantage of great tax benefits if you file your taxes properly.
A great credit score will allow you to take advantage of historically low mortgage rates. How you file your taxes could allow you to take advantage of the great tax benefits that come with owning a home.
With a good credit score, a first-time buyer has the opportunity of assessing a fixed-rate mortgage of an interest rate of 3.0 – 3.8%. You can also considerably increase your savings over renting, particularly if you have access to high-demand real estate markets.
Location is an important factor in real estate, particularly as it relates to a first-time buyer. The price of the property you intend to buy or rent is dependent on the location where the property is situated. Location in this regard has to do with a geographic location such as rural towns, metro areas, or mid-size cities.
The SmartAsset can make use of your financial status and your geographic location to calculate the implication of purchasing or renting a property in a particular location. The cost of living, the taxes, and the value of properties are cardinal factors that determine the cost of home ownership, and consequently the impact of buying vs. renting in any locality. For example, buying a home in Florida will afford you about 50% savings every month, rather than renting. On the other hand, you will only end up with marginal savings in a trendy Los Angeles neighborhood.
A Trulia’s report of September 2012 stated that it is approximately 44% cheaper (by nationwide average) every month to buy than to rent. In that report, it was discovered that prospective homeowners with good credit and steady income, who can secure a fixed-rate mortgage of 3.5%, can actually save 20% – 81% per month by purchasing rather than renting. This savings include the cost of buying and maintenance, by taking advantage of a low-interest rate on fixed-rate mortgages.
However, the reality is that most Americans continue to rent in locations where the values of the property are high, despite the fact that increases in rent have surpassed inflation since 2008, just because many are still in debt.
Apart from the issue of the hard facts of number, which is just one part of the matter, the emotional factor also plays a role in influencing people’s decision as to buying or renting a home.
Invariably, the decision to rent or buy will have to do with your future plan both on the short and long-term basis. The unavoidable changes in your lifestyle and how this relates to your life and career goals must be considered. In a situation where you are still young and not sure that your present location is where you want to live the rest of your life, it is advisable to rent and not subject yourself to the traditional 30 years of a fixed-rate mortgage.
Home ownership involves enormous upfront costs which are only worthwhile with long term savings and benefits. In a situation where you buy a home in an expensive city, only to move out after two years to another city, you will be at the risk of a financial setback.
Advantages And Disadvantages Of Owning A Home
Buying a home is one of the most important and big decisions of a lifetime. Therefore, the pros and cons of the decision must be considered and analyzed before a final decision is made.
Some of the questions to be answered include:
Do I actually need to buy a home? Can my income, both presently and in future sustain it? Am I going to stay long enough in the home to get the benefit of purchase? Do I have enough savings? Am I ready to bear the responsibility that comes along with owning a home?
- Enhanced privacy;
- Increase in capital due to value appreciation;
- Tax deduction from the property tax and interest portion of the mortgage;
- The fixed-rate of mortgage makes the cost of purchase more stable and predictable than renting;
- The prestige of home ownership.
- Long-term financial commitment;
- The added responsibility of home maintenance, including both inexpensive and expensive repairs like replacing a furnace;
- Community(HOA) rules and costs;
- Mortgage payments are usually higher than rent payments despite the fixed nature of the mortgage rate;
- Down payment is required in buying a home, in addition to moving expenses and closing cost;
- The value of the property does not usually increase in the first few years.
Image By: Vecislavas Popa