Should you rent or should you buy? That is the question. Determining whether buying or renting is a wise decision involves many moving parts and takes into account each individual's situation. For centuries, buying a home has been seen as the ultimate American dream.
However, within the recent years there has been a shift from homeownership towards renting.
To help you make your decision, let's discuss the advantages and disadvantages of buying vs renting and present you with the questions you'll need to ask yourself.
Buying
Ask yourself, "Where do I want to live in the next five, ten or even fifteen years?" If you know you want to live in a specific location for more than 5 years, then buying a home will be to your advantage because, in the long run, your home will accumulate some great equity especially if its values goes up significantly and your interest rate it low. For example, if your home appreciates in value by 2% each year, a $250,000 house could be worth $50,000 more!
Other advantage of purchasing a home is that your monthly payment does not change given that your mortgage is under a fixed rate. There is more financial predictability and you won't have to worry about yearly rising rates! In addition, you could also take advantage of some tax deductions such as your property taxes and your mortgage interest.
Although you can build up home equity, there is however some financial risk and that is the possibility of a crash in the market. Remember 2007? Those who bought at the peak in 2006 lost thousands even millions. House values went underwater and if you were renting, perhaps you were breathing easier.
Another downturn to homeownership is the additional expenses that come with buying and owning a home. These include down payment, closing costs, homeowners' insurance and flood insurance, HOA fees, property taxes, repairs and maintenance costs, higher utility bills. Even though you’ll have a fixed monthly mortgage payment, all these hidden costs will quickly add up. You surely won't be putting your wallet to the side!
Renting
One of the greatest advantages of renting is that it comes with a great deal of flexibility. It is important to look at your current life situation and determine how much do you expect it change within the next few years. Perhaps you'd be getting a better job somewhere else and you have to move. Perhaps you’re a nomad that is a fond of traveling. If you're a person that like to move around, change neighborhoods or even cities, renting is ideal for you.
Another great advantage of renting is that the home maintenance costs are usually the landlord's responsibility. If you end up buying an older home, maintenance repairs can quickly add up. You could end up with multiple things breaking such as your HVAC and water heater. If you need to replace them, it could end up costing you into thousands of dollars. Other hidden costs of ownership that you'll end up saving include annual property taxes, home insurance, closing costs and down payment. These can really add up!
The biggest disadvantage of renting is that your rent payments go to the landlord and you're not building equity into your home that could turn out to be a great investment especially if its price greatly increases over time. Speaking of the rent payments, they tend to significantly go up every year especially if you live in an area where a large number of people move in. In the long run, you can end up paying more on rent than on buying a home!
So, should you buy or rent?
How do you know if you're ready to pull the plug on the house you've been dreaming of or still be renting? Well here are the main questions that you need to ask yourself:
How long are you planning to stay where you are?
Do you enjoy flexibility, or do you want to stay in the same place for many years ahead?
What is your current financial situation? Do you have any debt?
Do you have a stable job, or do you plan on moving in order to find a better paying job?
How much can you afford to spend on a down payment?
Will your monthly payment, including hidden costs and additional expenses be less than 25% of your monthly paycheck?
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