It’s exciting to find yourself in a position to ask the question “Should I buy or rent?” Although that doesn't make it any less stressful. Many will tell you that renting is throwing money away, and others that buying is putting yourself into a lifelong commitment. And here you are, considering your options, as this decision will significantly impact your future.
Each has their pros, buying a property brings a certain level of stability, while renting allows you to be more flexible with your finances and reduces your maintenance costs. At the end of the day, the choice will reflect your personal goals.
Read on to understand the advantages and disadvantages of renting or buying a house.
Things to Consider before Renting or Buying a Home
The decision between renting or buying a home will come from considering your current situation and future goals. To help you create this picture and avoid skipping any important details, we present you the essential factors to consider in your selection process:
The first step in deciding between renting or buying a home is to analyze your finances in detail to estimate how much you can afford to pay.
It begins with creating a household budget. The budget is a projection of your expected income and expenses that will allow you to calculate the amount of money you'll need to earn to meet the costs of purchasing or renting a home.
Start working on your budget today by following our easy guide to creating a household budget. Even if you’re already an expert, it’s always good to revisit the basics and see if you’re missing something.
Then, knowing how much your family can afford to spend per month on housing, you can start comparing rental or mortgage options that are close to that amount.
Remember that you'll need to have substantial savings to pay the down payment on your loan if you choose to buy a home instead of renting it. You can find mortgage loans with down payments as low as 3-5% of the total value of the house.
Keep in mind: The more you can afford to put down when buying a house, the lower the interest you'll end up paying.
Use of the property
Your plans regarding your kids (schooling) and career/business are another essential aspect to consider when deciding to buy or rent a property. The best option for a newlywed couple looking to establish a long-term home for their family may be very different from that of a single person who wants to see the world.
As Jay Abolofia, a certified financial planner with Lyon Financial, explained in an interview with CNN, "The longer [you stay], the more sense it makes to buy."
Lease agreement terms
The terms of rental or mortgage contracts vary greatly depending on the real estate market situation, your credit score, the value of the property, and the bank or landlord. Therefore, you must consider and compare the rates, commissions, taxes, insurance, and other conditions that come with such contracts.
Before signing a lease, make sure that it covers:
- Cost of the deposit.
- Monthly rent payment.
- Duration of the lease.
- Cost of utilities (which may be included in the rent or paid separately).
- Conditions that could raise the price of the lease.
- Parking lot or external deposit included in the package.
- Responsibility for minor and major repairs during your stay.
Concerning mortgage loan contracts, some of the most important aspects to consider are:
- The total amount of the loan.
- The interest rate.
- Any extra fees such as account set-up fees and other fees.
- The Annual Percentage Rate (APR).
- Whether the interest rate is fixed or variable.
- Term of the mortgage loan.
Keep in mind: Some mortgage lenders establish prepayment penalties to stimulate borrowers to continue paying interests over time. Make sure you read your loan contract carefully and take this into account before committing yourself to it.
Advantages of Buying a House
Buying a home represents a long-term commitment that comes with many responsibilities. However, it's undeniable that owning a property also has many benefits. Among them, the most important are:
As a homeowner, some of the expenses you incur to pay for or improve your residence may be tax-deductible. Some deductible expenses you can deduct from your taxes include property taxes, interest on your mortgage loan (as long as it’s for residential use), and mortgage insurance premium payments.
Increase your net worth
This benefit may seem very obvious, but it's still worth mentioning. When renting, we acquire the right to live in a place for a certain period, but you won't have any additional benefit at the end.
In contrast, buying a house means you can live in it, rent it, sell it, assign it, or pass it on. The choice is yours.
When renting, you’ll be required to provide a great deal of personal information (such as your credit history) to each potential landlord. It’s also common for landlords to make periodic walk-throughs to check the condition of their property. By being a home owner, you won’t need to share your information and property with anyone.
Once you finish paying off your mortgage, your home will provide security for you and your family. If you decide to retire or have financial problems in the future, owning your own home will at least give you the security of having a place to stay without worrying about rent. In cases of extreme urgency, you may even be able to use your property as collateral when applying for a loan.
Disadvantages of Buying a House
At first glance, owning a home seems like an entirely positive thing. However, buying a property comes with many responsibilities and conditions that may not be ideal for everyone. Consider the following points that might make buying a home a less appealing option:
Houses and apartments require a regular maintenance schedule to keep them in good condition. If you own a property, the burden of maintaining the home falls entirely on you. In addition, if any unexpected significant damage occurs, the maintenance and repair bills can be pretty high, so you'll need to pay for insurance or use your savings to protect your investment.
A mortgage loan typically ranges from 10 to 30 years. Your conditions can change drastically during this period, so having this commitment can be a disadvantage in the future.
Some people think that if their plans change, they can quickly sell their home to buy a different one; however, be aware that selling a home also represents an expense and takes time, so changing plans may be less straightforward than it seems.
When you buy a property, you're also taking on financial risks that go hand in hand with the long-term commitment — For example, not being able to pay your mortgage due to some unexpected event. Unfortunately, many people go through this situation and lose years of investment by missing out on their mortgage payments.
Keep in mind: Visit this comprehensive site on housing scams from the U.S. Government and read their tips to protect yourself from scammers. From foreclosure schemes to fraudulent moving companies, this website provides a lot of red flags to watch for when you buy or rent a home.
Benefits of Renting a House
Renting a home is often compared disfavorably to buying a home. However, renting can be an excellent option for many people due to the following reasons:
Lower monthly payments
The monthly cost of renting a property is usually lower than the monthly payments you'd have to pay if you bought it. In addition, the purchase involves charges other than the monthly payment (such as insurance, taxes, and commissions). If you decide to rent, you'll be able to save more money and even get a larger place with a better location.
Some people aren't ready to settle in one place for many years. While properties can be sold or rented to move to another location, these processes take time and money. If you're not sure you want to establish a long-term residence, renting might be your best option.
Lower initial cost
While many rental contracts stipulate an initial deposit, the upfront costs of a mortgage are much higher. In addition to a down payment, which is a minimum of 3 to 5% of the total value of the property, you'll have to cover other expenses such as mortgage insurance, origination fees, and credit investigations — just to name a few.
Reduce unexpected expenses
As mentioned before, your landlord is responsible for keeping the rental property in good condition. Therefore, if you rent a home and there are unforeseen issues, they're responsible for the cost of repairs.
Drawbacks of Renting a House
Renting a house also has some disadvantages that you should take into consideration. Some of them are:
Depending on your lease, even painting the walls of your rental a different color may be complicated. When you own a property, you won't need to ask permission to make any modifications or alterations (as long as they comply with local building standards). However, leases usually prohibit the tenant from making any modifications to the property.
When you own a house, it's yours to live in indefinitely. On the other hand, if the landlord of your rental home decides that they don’t want to renew the lease when it expires, you'll have move out and find a new place to buy or rent.
When Should I Buy a Home?
To make sure that buying a house is your best option, we suggest that you wait until you meet the following conditions to take this big step:
- Have enough money saved to pay the down payment.
- Have job stability (at least one year at your current job).
- Know what type of home you need today and in the future.
- Analyze mortgage loan offers and find an attractive one.
- Be financially solvent beyond covering the monthly mortgage expenses (for contingencies).
- Have sufficient income to pay the monthly mortgage payments (Bank of America suggests that this payment should not exceed 36% of your monthly income).
Buying or Renting a Home Are Both Great Options
This decision means you’re moving forward and taking your chances to improve your life and that of your family. At SABEResPODER, we take great pride in helping inform you on these types of critical life decisions. Do you feel like you now know what you need to take the next step?
If you have any other questions on this subject or need advice on your specific case, don't hesitate to contact us through our chat.