Renting vs. Owning a Home Image

Renting vs. Owning a Home

Renting vs. Owning

The Coronavirus has had a massive impact on the U.S. housing market. For homeowners, today’s home mortgage interest rates are the lowest they’ve been in decades and are favorable to new home buyers or anyone wanting to refinance their current mortgage.

Below we review some of the basics pros and cons of homeownership vs. renting.

Advantages to Homeownership

For some people, owning a home represents the American Dream. It’s a sense of establishing roots, pride in ownership, community belonging, stability and security. You have the freedom to customize the home and landscaping. You also have the opportunity to save and grow your net worth if your equity increases.

FYI: Equity is the difference between the amount the house is worth and the money you put into it. You build equity as you pay off your mortgage, but you could lose equity if the price of housing declines.

Downsides to Homeownership

The first obstacle is the 10 – 20 percent home down payment. Some home loan programs offer as low as 3.5 percent, but even with today’s rates those can be hard to qualify for. Home down payments are a big opportunity cost and potential homeowners would rather use the money to finance a new business, go back to school, or upgrade their car.

A large down payment also means less flexibility if you need to move. You will also have some additional expenses, including home closing costs, daily maintenance, property taxes, special assessments, utilities and, hazard and homeowners insurance, HOA fees if you buy a condo.

HOA = homeowners association which is common in high-end neighborhoods. The HOA is an annual or monthly fee which helps pays for neighborhood upkeep such as fences, forestry, trails, ponds, etc.

What about renting?

Not having enough money for a down payment is the biggest reason people choose to rent.

The second reason is flexibility. If you want to move, you have the freedom (assuming your lease is up) to relocate without the burden of leaving a home and a mortgage behind. You won’t have the responsibility of maintaining the property, and the landlord will cover most home repair costs.

Renting also leaves the uncertainty of relying on the landlord for repairs. There are no tax benefits to renting and no opportunity to build equity. Another crucial factor is that you have no control over rent increases. This changes, depending on your local market, but is generally 2-9% (per year). You could also risk eviction if the unexpected happens.

Should you buy or rent?

In today’s market, financial advisors advise you to purchase a home if you can afford a 10-20% down payment. Interest rates are at an all-time low.

Even if your mortgage is more than your rent, with tax benefits the overall monthly price can be similar (but it is a change in cash flow throughout the year). If you own, it’s best to set aside money in an account for anticipated repairs and other home owning expenses.

A common rule of thumb is to ask yourself, ” Do I plan on being in the same home for 5 years or more?” If the answer is yes, it’s advised is that you should buy a home, instead of renting.

Everyone’s financial situation is different so there’s no catch-all answer for this.

There are multiple mortgage calculators online that will help you assess the cost of owning vs. renting. Play with the numbers so you can make a more informed decision about what is right for you.

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