Rent or Buy a House?

Renting Vs Buying a Home - Home Photograph

There is always some debate over the better choice when it comes to renting or buying a home and there are valid arguments to each of them. My feeling has always been that in the long run, it is better to buy a home compared to renting for several reasons.

Although owning a home has its advantages, the choice for buying one versus renting will be dependent on a person’s finances, place in life and their long-term goals. If you are debating over the decision to rent or buy, there are some key details to consider with Pros and Cons on each side.

The Advantages of Owning a Home

Let’s first start with the advantages of buying a home. These may rank higher or lower on your own list depending on your personal priorities and preferences.

• Privacy

Privacy fell on the top of my own list for buying a home. After renting for most of my life, I knew it was time for a change. You can rent a home that is private, but in my own case, most of my living has been in an apartment or condo. With the experience of loud neighbors over the years I knew it was time for a change.

There is no guarantee for privacy or peace and quiet. This depends on the location, but you can select one for this reason.

• Increase in Value

Purchasing a home does not guarantee it will increase in value. However, paying rent there is nothing to show for it once you move. Most homes do increase even just slightly in value. If they depreciate it is typically not drastic. I am not saying it can’t happen, but there should be something to sell at some point.

The value of a home will also depend on the upkeep and the market when it comes time to sell.

• Mortgage Payment

For the most part, when you buy a home the mortgage payment remains the same unless you refinance. Things like taxes and insurance can increase the overall cost, but at least in my case, these have not increased significantly over time.

I always had the best luck renting from an individual rather than an apartment complex. With an apartment, the rent always seemed to increase almost every year. With a mortgage payment, you know what to expect.

• Eventually Paid Off

A home is eventually sold or paid off. Once paid off there is a place to live with just the upkeep, taxes and insurance, which is a lot less expensive than renting in many cases. Also, once paid there is the option to move into another and rent the home. This can produce some income. Yet, this does come with some risk. But at least the option is available.

A home that is owned can also be sold at a later point to downsize in retirement years. This will hopefully be able to provide something that can be completely paid for reducing the monthly expenses for a person on a fixed income.

• Freedom

Unless you buy a home in a deed restricted community, there is a freedom to make any changes you would like. The color of a house can be what you want it to be. Customizing it to a person’s lifestyle and how they want it to look is all possible.

• Taxes

The tax advantages should not be a single reason to purchase a home. The tax laws are changing and they will most likely keep changing in the future. But at this time some tax advantages do still exist.

• Leaving a Home

One of the best gifts to give a child or loved one at the end of a person’s life could possibly be a home. There is some planning involved to minimize the taxes, but being that living expenses are one of the biggest ones it really sets a person up to succeed financially.

Disadvantages of Owning a Home

Just like there are many advantages to home ownership, there are also a number of downfalls. If you currently own a home or do become a homeowner, these will at times question the decision made to buy a house.

• Maintenance

Be prepared after purchasing a home. It is not a matter of when something will break or needs replacement, but what will it cost to be replaced or repaired.

Buying a newly built home or an older one will make no difference. Things break and wear out. Everything from a refrigerator to trees in the yard. Maintenance on a house is unavoidable.

The big ones for a home are most often roofs and ac/heating systems. These can be very expensive to replace and it is important to plan for their expiration. It can be really easy to go into debt as a homeowner. Financing the larger repairs is something most companies will offer, but it is always best to avoid this. Taking a home equity loan is also not a great idea. It is important to be prepared.

Things will even come up that never really enter a person’s mind. There can be plumbing under the foundation of a home that has issues or even pesky termites. There is a cost to all of the issues that can and do come up from owning a home

• Emergency Fund

If you do not have an emergency fund, there needs to be one before purchasing a home. The fund established for things like a job loss now needs to be even a little larger to take care of home repairs and maintenance. Things will happen when least expected.

• Higher Expenses

The expenses of home ownership can be considerably higher than renting. Taxes, insurance, and even higher utility bills could all be a factor. All of this is dependent on what type of home and where it is purchased.

• Potential for Loss

Although it does not happen regularly, losing value on a home is a real possibility. Real estate markets change along with neighborhoods and the economy. If your decision to purchase a home is solely for buying an investment that will appreciate, this could be a real risk.

Some Things to Consider When Purchasing a Home

If the Pros outweigh the Cons of purchasing a home for you, there are some things to consider before buying.

• Debt

A number of people would argue that a person should be completely out of debt before purchasing a home. I would not completely agree with this. It will depend on the person’s income and the cost of the home. Yet, it is best to be as debt free as possible. If there is not a large amount of debt and it is manageable with owning a home, it does not have to be out of the question. The advantage with this is the money spent on a mortgage is going into something that has the potential for sale in he future. With the sale there is an amount of money that a person can walk away with.

• Emergency Funds in Place

There should not be an exception to having some emergency money in place. 3-6 months is what most people will say is adequate, but more than this would be optimal. Home inspections are performed prior to a person purchasing a home on most occasions. However, even with one performed there is a possibility that something either big or small may come up once a person moves in.

• Stable Employment

If you were to sit down with someone and tell them you were going to buy a home, they would probably tell you to make sure your job is secure. Yet, this is really only as stable as a person’s employment can be these days. Nothing seems like it is for sure any longer.

The key is to make certain that not more than 25% of a person’s income is spent on a home. The bank may say someone qualifies for a $500,000 home, but this does not necessarily mean that a person should buy a $500,000 house. If you follow a frugal lifestyle, you will almost always try to live below your means. This is most important when buying a house.

Being house poor is just plain being poor. If you buy a home and at the end of the month once a mortgage payment is made there is no money left, then you are house poor. It does not make financial sense to put everything a person has into their home. Remember, they can depreciate in value or there might not be a big profit when sold.

• Down Payment

In addition to a number of other costs that will be required upfront when purchasing a home, a down payment is most often required. This can range from 10%-20% of the price.

It is best to have at least 20% to put down on a home. This will avoid the PMI or Private Mortgage Insurance that will be required by the lender for someone that puts less than 20% down. The PMI protects the lender if the mortgage is not paid. It is a fee that is paid each month that does not go to paying down the home. It is like throwing money out the window.

I am not always against having exactly 20% to put down on a home. If purchasing a home is going to be equal to or less expensive than renting in the area a person lives and they are able to buy a home, then why not. Just ensure there is no prepayment penalty on the mortgage for paying it down early. Pay the home down to at least what would have been the 20% as fast a possible.

When the loan to value reaches the correct number for at least 20% equity the PMI insurance should be dropped. When this occurs make certain it is dropped by the lender. They do not always do this and they may have to be contacted to have them drop it.

• Staying in the Same Place

If you plan on moving around a lot and not staying in the same place for some time, then buying a home may not be the best decision. The costs involved with owning a home for a short period compared to renting will likely be much higher. Also, if you furnish a home, now it all has to be sold or moved.

With a person that knows they will be changing their living area frequently, buying a home almost never makes sense when it will be the main home.

Is Buying a Home a Better Decision Compared to Renting?

Buying a home is still a big goal for many people. The conclusion to buy or rent will depend on weighing the Pros and Cons. The housing market a person lives in will weigh heavy on the affordability of home ownership.

The costs seem to be on the rise in many housing markets. According to Attom Data Solutions, more than 59% of the housing markets nationwide are currently cheaper to rent than buy. The real issue with buying a home is the prices appear to be rising faster than people are earning. With rising interest rates and wages that do not appear to be going up at the same pace as many housing markets, there are some valid arguments to renting versus buying.

The workplace is also not the same as it once was in the past. People are changing jobs more often and this can sometimes require a location change. It is more challenging to stay in one place. For someone that will be moving around often, homeownership may not be the right choice.

It is really a personal decision if home ownership is right for a person. My opinion has always been that in the long-term buying is a better choice. This preference does not even ultimately weigh on it being a better financial decision, but more of a feeling that I own the place I live in.

If you are currently deciding to buy or keep renting, don’t buy a home solely for the purpose of your main residence being an investment. Hopefully, it will appreciate, but this is not always the case. Also, depending on the money spent on upkeep, maintenance, and updates, this money may never be recovered when it comes time to sell. Yet, in most instances, there should be something at closing when a home is sold if it is held for a long period of time.

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